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Moody’s: The effects on Greece of the war in Ukraine

Her Eleftherias Kourtali

The Greek economy entered 2022 with very strong dynamics and the high frequency and climate indicators indicate a continuous recovery before the Russian invasion of Ukraine, as Moody’s points out in its annual analysis of Greece’s credit profile.

The military conflict has caused a sharp rise in commodity prices, which could be a significant constraint on growth this year.

However, the impact of the conflict and the subsequent sanctions on the Greek economy is uncertain and depends on how the conflict develops. In this context, the house has recently reduced its forecast for the growth of real GDP in Greece for 2022 to 3% from 5.2%, while placing growth at 4.3%.

Greece’s direct exposure to Russia and Ukraine is relatively limited, Moody’s points out. Russia accounted for only about 2% of both tourist arrivals and travel receipts before the pandemic. In addition, the share of Greek exports to Russia and Ukraine amounts to only 1%. However, while the share of imports from Ukraine is also negligible at 0.6%, imports from Russia (mainly oil and gas) represent 9.5% of total imports from Greece.

Although Moody’s considers it unlikely, mA possible general ban on Russian oil imports from the EU would have a significant impact on Greece because (1) its energy mix is ​​dominated by oil and oil products (51%) and natural gas (22%), both of which are completely dependent on imports, and (2) About 40% of Greece’s natural gas imports, 11% of crude oil imports and 49% of refined oil imports come from Russia. In addition, high energy prices would significantly increase the value of these imports. This also applies to wheat as over 25% of wheat imports to Greece come from Ukraine and Russia.

Overall, as the house emphasizes, A further escalation of the Russia-Ukraine conflict could jeopardize the entire European economic recovery. The magnitude of the effects will depend on the duration and severity of the crisis. The effects on the rest of the world can be transmitted through many channels, such as commodity price crises at a time when inflation is already high, supply constraints and the economic impact of sweeping new sanctions against Russia, instability financial markets as well as possible additional security challenges in a scenario of escalating or wider military conflict or through cyber attacks.

Moody’s expects that the trade deficit will widen throughout 2022 as key imports become more expensive. Inflation in Greece had already accelerated before the invasion, reaching 7.2% year-on-year in February and 8% in March, as both food and non-food prices rose faster. The house expects inflation to remain high, averaging 5% this year.

Energy subsidies could jeopardize fiscal consolidation efforts

The Greek government continues to provide significant support to households and businesses to offset the impact of rising inflation this year, while it was announced that an additional budget will be submitted with additional spending of 2 billion euros. Measures to ease imported inflation, such as energy subsidies to support households and businesses facing energy prices, totaled about 4 billion euros (2.2% of GDP) by the end of March.

The government announced new measures in March amounting to 1.1 billion euros (0.6% of GDP) which include: increase in electricity subsidy and continuation of gas subsidy (cost 640 million euros in April), financial support 1, 4 million vulnerable households before Easter (324 million euros). and fuel subsidy (EUR 130 million).

Moody’s expects the deficit to narrow further in 2022 to 5.8% of GDP. This, however, is broader than predicted before the military conflict and reflects lower growth and potentially higher state support for vulnerable groups. Stronger growth will be the key to improving Greece’s fiscal dynamics and debt reduction, as the house points out, which expects to be around 191% of GDP by the end of this year and will continue to decline to around 185% by the end of 2023. However, weaker growth and extended energy subsidies could jeopardize planned fiscal consolidation efforts and jeopardize forecasts. of the house for the budget balance and the debt of the general government.

Credit Strengths and Weaknesses – Upgrade / Degradation Factors

The house points out that Greece’s credit profile is supported by relatively high levels of wealth and strong support from its creditors in the euro area. The acceleration of reforms from July 2019 is also beginning to have a tangible impact on growth momentum. The rapid recovery of the Greek economy from the pandemic is also indicative of the improved resilience of the economy to shocks, and significant EU funding will boost investment and growth in the coming years. The favorable structure of the public debt, the high levels of cash and the strong debt service ratios also strengthen the credit profile of Greece.

The main credit challenge is the increased debt burden, the fourth highest among all countries rated by Moody’s, so its long-term viability after 2030 depends on accelerating economic growth and fiscal prudence. Moreover, despite the further reduction of non-performing exposures, low asset quality and profitability continue to burden Greek banks.

The reversal of the improvements observed in recent years is unlikely, the house emphasizes, but it will take a few years for the benefits of institutional and governance reforms to become fully visible. In addition, Russia’s invasion of Ukraine has significantly increased uncertainty on both the macroeconomic and financial fronts.

As the house points out, Greece’s rating would be upgraded whether further progress in structural reforms has yielded tangible results in the form of stronger investment and growth opportunities. A faster decline in the government debt ratio than currently forecast would also be positive for the assessment, as would resolving the ongoing quality issues of the banking sector assets.

On the contrary, the evaluation would be under pressure if the institutional reforms are reversed, if a prolonged resurgence of coronavirus cases or a further escalation of geopolitical tensions lead to a prolonged period of GDP contraction and a further significant increase in public debt.

Source: Capital

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