Fitch: The energy shock limits the margins for reducing Greece’s budget deficit

Her Eleftherias Kourtali

Lower growth prospects and government intervention to alleviate the energy crisis mean a more modest reduction in Greece’s 2022 budget deficit than previously forecast, Fitch Ratings notes. However, the house still expects a reduction in public debt over the next two years.

Greek GDP grew by 8.3% in 2021, at the same level as Fitch forecasts, and the company expects that the recovery after the pandemic will continue this year, supported by the further recovery in tourism and the acceleration of growth thanks to the Fund Recovery. However, Fitch reduced its growth forecast for this year to 3.5% from 4.1% before, while it also reduced its forecast for 2023 to 3.2% due to higher prices, lower confidence and weaker growth in key trading partners after the Russian invasion of Ukraine.

Surveys show a sharp drop in business and consumer confidence in March and April, the house said. Consumer price inflation has risen sharply, mainly due to higher energy prices, but also the main effects of deflation in the spring of 2021. In addition, Russia supplies about 40% of Greece’s gas imports and 11% of its primary energy consumption. The ECB estimates that Greek gross value added could have fallen by 0.8% if gas supply had fallen by 10%, leading to a consumer bill. In the recent unfavorable scenario of the Bank of Greece, which includes prolonged interruptions in the energy supply and supply chain, GDP growth in 2022 would be 2% below its baseline scenario before the war, and 1% below the new baseline scenario (3.8%), while inflation would be on average at 7%.

Fitch reports that Greece’s public finances in 2021 improved more than expected. The general government deficit decreased to 7.4% of GDP (from 10.2% in 2020), lower than its estimate for a deficit of 9.6%. However, the house expects a slower deficit reduction in 2022–2023 than previously anticipated, due to a more subdued macroeconomic environment and government measures to mitigate the effects of high energy prices – the government has allocated an additional 2.0 billion. euros (about 1% of projected GDP) in the last month. He expects the government deficit to fall to 4.8% this year and 3.1% in 2023. The house forecast for 2023 assumes that some energy-related budget support will remain beyond this year. This is consistent with the latest measures announced on 6 May, some of which will run for 12 months from July.

In terms of debt, Fitch notes that debt / GDP fell to 193.3% at the end of 2021, slightly below its estimate of 195.0%. Its fiscal forecasts suggest that the debt ratio will decrease to about 182% by 2023, despite the slower reduction of the deficit, due to the still strong dynamics of nominal growth, while it estimates that the cash of the Greek State will decrease by about 1, 8% of GDP this year.

Public debt will remain high for a long time but mitigating factors will support its sustainability, as the house emphasizes. The liquidity reserve will remain significant, at around 15% of GDP at the end of the year. Government bond yields have risen sharply, but the low market share of debt (about 24% for central government debt) and the average maturity of 20.5 years mitigate the impact on debt service costs. If bond yields rise further to 4% (from 3.6% today), Fitch estimates that the interest-income ratio in 2023 would be 5.9%, compared to the projected average price for “BB” countries. at 9.0%. The favorable Greek debt profile means that the amortization schedule is manageable, also aided by the repayment of IMF outstanding loans, two years ahead of schedule.

Finally, Fitch reiterates that the ECB has announced that PEPP reinvestments can be adjusted in times of severe turmoil in the bond market, while Greek bonds remain eligible as collateral, while concluding that “confidence that there will be a steady decline for the reason debt / GDP and the continuous improvement of the quality of the assets of the systemically important banks, could lead to an upgrade of the rating of Greece “.