Fitch: Upgraded Greece’s outlook, rating on ‘BB’ stable

LAST UPDATE: 01.10

The American rating agency Fitch kept the credit rating of Greece unchanged at the “BB” level, while upgrading the outlook to “positive” from “stable”, according to the report that was published late on Friday night.

Fitch, opening the cycle of our country’s ratings for 2022, points out that the strong dynamics of economic growth and the reduction of the budget deficit will support the faster-than-expected reduction of the public debt.

At the same time, the report notes that Greek systemic banks have significantly improved the quality of their assets, reducing the volume of non-performing loans (NPLs) and strengthening their ability to provide financial resources to the real economy.

Economic activity in Greece has recovered faster than Fitch expected in its previous revised estimate in July 2021. The house estimates that GDP grew by 8.3% in 2021 on an annual basis, revising upwards the forecast for an increase of 4.3%. Real GDP increased by 9.5% in the first 9 months of 2021 compared to the corresponding period of 2020, while in the third quarter GDP was increased by 1% compared to pre-pandemic levels in the fourth quarter of 2019.

The house expects that the recovery of economic activity will continue in 2022, as the utilization of funds from the EU Recovery Fund (NGEU) is accelerated and that the economy will grow further by 4.1%, while a similar growth rate is forecast for 2023. The grants included in the Greek Recovery and Sustainability Plan amount to about 18 billion euros (just under 10% of nominal GDP in 2019), which will be disbursed within six years.

Short-term risk for the economic activity of the country remains however the pandemic. Coronavirus cases increased in Greece in the fall, while the spread of the Omicron mutation caused a new outbreak of infections. The Greek government has implemented a number of restrictive measures that could burden economic activity. The house points out that any delays in the implementation of the investment plans provided by the Greek Recovery and Sustainability Plan could derail its forecasts.

The combination of stronger than expected economic growth and the reduction of the government deficit due to the significant reduction of support to the economy due to the pandemic will support the reduction of public debt as a percentage of GDP, the house notes.

Fitch estimates that the debt-to-GDP ratio fell to 198.4% in 2021, from 206.3% in 2020, and forecasts it will fall to 190.3% this year and then to 185.3% by the end of 2023.

Greece will repay the loans owed to the IMF in 2022 and will prepay the 2022 and 2023 installments of the loans from the Loan Facility, the first financial support program for the country agreed in 2010. In total, these payments will go up to 7.2 billion euros (about 3.8% of projected GDP) and the house estimates that about half of them will be financed by cash. The monetary policy of the European Central Bank (ECB) supports the financing conditions.

Banks

The largest Greek banks continued to improve the quality of their assets through securitizations supported by the “Hercules” plan and other portfolio sales.

The government extended this regime in April 2021 for an additional 18 months, until October 2022, increasing the scope of guarantees offered for these actions, the house emphasizes.

The total level of non-performing loans (NPLs) decreased significantly during 2021, to 20.9 billion euros in the third quarter of 2021, from 60 billion euros a year earlier. The non-performing loan ratio decreased to 15% from 36.3% in the same period.

Fitch expects the quality indicators of the banking sector to improve further this year, although there are risks to new inflows of bad loans, especially from more vulnerable borrowers who continue to benefit from suspension or government support.

Greece’s “BB” rating also reflects, according to Fitch, the following key rating factors – “keys”:

Greece has a high per capita income, which far exceeds the corresponding median of the “BB” and “BBB” countries. Its governance scores and human development indicators are among the highest among non-investment countries. These advantages are offset by the – still – very high levels of non-performing loans (NPLs) and very large public and external debt reserves.

Debt

Public debt has risen sharply due to the pandemic and its volume will remain very large for an extended period of time. In 2023, the debt-to-GDP ratio is projected to be the second highest among the countries in the world rated by Fitch and more than 3 times higher than the median forecast for “BB” countries (which is 56% of GDP).

At the same time, there are mitigating factors that support the sustainability of public debt, in the view of the house. Greece’s liquidity reserve is significant (approximately 18% of GDP at the end of 2021). The favorable nature of most of the Greek public debt means that the cost of servicing it is low (the forecast of interest income for this year is 5.6%, compared to the median forecast for countries with “BB” at 9.7 %), while depreciation programs are also manageable.

The average duration of the Greek debt is among the largest in the world, at 20.5 years. In addition, most debt volumes are mostly subject to fixed interest rates, reducing the risk of interest rate hikes.

The inclusion of Greek government bonds in the ECB pandemic emergency purchasing program (PEPP) has been an important source of funding flexibility, helping to keep their yields low. By the end of November, the ECB had bought Greek government bonds worth a total of 34.9 billion euros (19.4% of projected GDP 2021).

In December, the ECB stated that while PEPP net purchases would cease by the end of March, the maturity of the maturing bonds would be extended by one year until the end of 2024. In addition, the ECB stated that reinvestments of PEPP can be adapted to periods of market pressure and Greek bonds can be purchased beyond the limits of the rollover.

Despite the strong recovery of economic activity, the house estimates that the general government deficit in 2021 will decrease slightly, to 9.7% of GDP from 10.1% in 2020, much higher than the projected median of the countries in the ranking. BB, which is at 5.2% of GDP.

The maintenance of the deficit is due to the continued support provided by the government to the private sector due to the coronavirus pandemic, amounting to 15.6 billion euros (8.7% of the projected GDP of 2021). The ongoing economic recovery, as well as the phasing out of pandemic support measures, will lead to a sharp reduction in the government deficit to 4.1% of GDP. The house also expects that the deficit will fall further in 2023, to 2.9% of GDP.

Tourism

Tourist arrivals in Greece increased significantly after the easing of restrictive measures due to a pandemic in the second quarter of 2021, with the number of arrivals in the third quarter of the year amounting to approximately 56% of total arrivals in 2019. This means that the deficit of the current account balance for 2021 will be lower than expected last July (revised estimate of 4.4% of GDP against 5.7%).

At the same time, Fitch does not expect the current account balance to improve over the next two years. Domestic demand-driven growth will lead to a strong increase in imports, offsetting the recovery of export sectors, including tourism. Net foreign debt has declined since its peak in 2020, but remains high (estimate for 2021 just below 150% of GDP relative to the median of “BB” countries, which is at 18.4 %).

The reasons for future upgrade or not of the evaluation

Factors that together or individually could lead to an upgrade of the rating:

– Public finances: Stable downward trend in debt-to-GDP ratio due to lower deficits, strong GDP growth and consistently low borrowing costs.

– Macroeconomics: Improving the medium-term growth dynamics and course after the pandemic shock, especially if it is based on the implementation of the Recovery Fund plan and structural reforms.

Structural features: Continuous progress in improving the quality of systemic banks’ assets, in line with the successful completion of securitization transactions and lower impairment charges leading to improved lending to the private sector.

Factors that as a whole or individually could lead to a deterioration of the rating:

– Public finances: Failure to reduce the public debt-to-GDP ratio in the short term, for example due to higher-than-expected deficits or weak economic performance.

– Macroeconomics: Restoration of adverse shocks to the Greek economy that affect the country’s economic recovery or its potential medium-term growth.

Structural features: Negative developments in the banking sector that increase the risk to public finances and the real economy, through the consolidation of potential liabilities in the state budget and / or the inability to provide new loans to support economic growth.

Next evaluations

The house has scheduled three ratings for Greece this year, and as its rating for Greece is two steps ahead of the investment grade, a one-step rise this year is a very strong possibility, with the investment grade being placed on the “table” for in 2023, as is the government’s goal.

After Fitch, the next scheduled home assessments for Greece are: Moody’s and DBRS on March 18, S&P on April 22, Fitch’s second rating on July 8, Moody’s and DBRS second verdict on September 16, Fitch’s third rating on October 7 and second rating of S&P on October 21.

It is worth noting that according to JP Morgan, the chances of upgrading Greece from Moody’s this year are set at 90%, while at 75% it places the chances of a similar move by S&P, Fitch and DBRS. According to the American bank, the strong reform agenda and the stable political landscape are expected to continue the positive evaluation dynamics with decent chances for Greece to regain the investment level from at least one evaluation house by the end of 2022 or the beginning of 2023.

St. Ketitzian – G. D. Pavlopoulos – M. Papantonopoulos