UBS: Greece is the champion of development – The four factors that lead it to the top

Of Eleftheria Kourtali

Greece will be the champion of development in the period 2022-2023 in the region of Europe, the Middle East and Africa (EMEA), as UBS points out, after the also impressive 2021.

The Swiss bank continues to estimate that the growth of the Greek GDP will move to 7.9% this year and to 5% in 2022, while the growth will be slower but stronger in 2023, at 4.7%. On average, the development of the region will move to 5.6% this year, to 3.8% in 2022 and to 3% in 2023.

A big boost to the Greek economy, as UBS points out, will be given by the resources of the Recovery Fund, the recovery of the labor market, the great come back of tourism and the improvement of the credit environment.

According to him, Greece is expected to significantly reduce its budget deficit from 2022, as emergency support measures are gradually withdrawn, while public debt will be reduced to 180% of GDP by the end of 2023. According to UBS, for Greek bonds , the ECB ‘s decision to join the “normal” QE program, the APP, will be decisive.

The course of this year … take off

More analytically, as UBS notes in its new report on the prospects of the economies of the EMEA region, the recovery of the Greek economy, from a recession of 9% in 2020, will move to 7.9% in 2021.

Greek GDP growth has fluctuated between 3.4% and 4.5% on a quarterly basis since the third quarter of 2020, providing a solid background for this year ‘s performance (but notes that it does not yet know the exact impact of the GDP revision 2020 on a quarterly basis).

Third-quarter indicators remain consistent with a continuing recovery, as is the most optimistic indicator of the business climate since 2007 in the third quarter and a 160% annual increase in tourism revenue in July-August (with reports suggesting an equally strong September).

Greece seems to be on a good path for revenues of 12 billion euros from tourism or the. Of the record season of 2019 and three times from last year, as stressed by UBS. Thus, it forecasts a more moderate growth rate of 0.7% and 1.0% on a quarterly basis in the third and fourth quarters of 2021.

The first funds of the Recovery Fund, which have already been disbursed, will allow the start of some projects, with the government having approved the second batch of recovery projects since October (a total of 48 projects worth 4.1 billion euros or 2.3% of GDP ).

One risk is the impact of the recent rise in utility prices (electricity and gas), although the government has stepped up its efforts to subsidize households.

The four reasons that lead Greece to the top

UBS believes that the growth of Greek GDP will slow down somewhat to 5.0% and 4.7% in 2022 and 2023, but will be significantly above the average rate of the period 2016-2019 of 1.5%, as well as impressively higher than the average of the EMEA area.

He sees four main reasons for this strong performance, which are:

First, the disbursement and use of the funds of the EU recovery and resilience mechanism. Greece plans to receive funds amounting to 10.5 billion euros in the next two years (60% are grants), which, according to a study by the Bank of Greece , could, together with the implementation of ambitious structural reforms, increase cumulative GDP in 2021-23 by about 10%. At the same time, the corporate tax rate for 2022 is reduced to 22% from 24%.

Second, there is further scope for job growth in Greece (3% over two years), which is expected to contribute to the average unemployment rate of 12% in 2023 from 16.3% in 2020.

Third, the recovery of tourism still has much to “give”. Although the performance in 2021 was impressive compared to 2020, tourism revenues are moving to the levels of 2013 and have room to reach the record performance of 2019 to 2023.

Fourth, the four Greek systemic banks will move towards single-digit NPE indices in 2022, from about 20% in 2021, through securitization and portfolio sales, which will allow the industry to contribute significantly to financing the economic recovery.

From fiscal easing to tightening

According to the draft budget for 2022, according to UBS, fiscal intervention measures to address the impact of Covid in 2021 amount to 8.8% of GDP (about 75% of this comes from the expenditure side: non-repayable advance businesses, short-term employment program, higher healthcare costs), followed by other measures of 1.6%

However, if the impact of the overall measures is taken into account (taking into account the stimulus measures expiring), then after a fiscal easing of 7.7% and 2.3% of GDP in 2020 and 2021, respectively, there will be a discreet fiscal tightening. of 5.7% of GDP: this is the result of a reduction in expenditure (mainly subsidies) by 6.1% of GDP.

This, according to official forecasts, will allow Greece to reduce its budget deficit from around 9.9% of GDP in 2021 to 3.7% of GDP in 2022 (UBS forecasts are a little more optimistic, for a deficit of 9 , 5% and 3.5%, respectively). This would also significantly reduce the primary deficit to just about 1% of GDP in 2022. There will be further fiscal tightening by 1.7% of GDP in 2023, which will help bring the primary balance closer to zero in 2023. UBS believes that this framework will allow public debt to fall from 205.6% of GDP to 180% of GDP in 2023.

The “keys” for bonds

Finally, given the view of UBS that the yield on German bonds will reach +50 basis points by the end of 2023, it estimates that the yields on Greek bonds will also increase.

The key factors for their progress are next year’s lending strategy (it estimates that Greece will raise about 10-12 billion euros from the markets in 2022, from 14 billion euros this year), the result of the discussion in the ECB on Greece’s accession to the APP, as UBS expects that the PEPP will be completed by the first quarter of 2022 and the country’s upgrade to an investment grade.