The Greek authorities welcome the IMF’s First Post Program Monitoring report and thank staff for the continuous constructive dialogue and engagement.
Following the successful completion of the ESM Economic Adjustment Program, Greece was integrated into the normal cycle for the coordination of economic policies across the European Union – the European Semester. Economic recovery gains strength and is expected to accelerate in the coming years. Public finances are on track to sustainability, while Greece’s successful access to capital markets confirmed that the country has restored its credibility. The reform effort continues with the view to boost growth and address remaining challenges.
Economic recovery is gaining traction and is projected to continue in 2019 and in the medium term. The Greek economy has been growing for seven quarters in a row, at a modest pace in 2017 and an accelerated pace during the last three quarters of 2018 with a forecast for robust growth in 2019 and beyond. Real GDP growth is expected to reach 2.1% in 2018 and 2.5% in 2019. The drivers of growth have been both domestic and external. Household consumption has rebounded strongly after several years of negative growth with the annual growth rate exceeding 1% in 2018 and over the medium term, supported by increased employment and higher disposable income. Exports of goods have increased at double-digit rates in the last two years reflecting both a more benign external environment and significant improvements both in cost and non-cost competitiveness. Unemployment has been falling steadily from a peak of 27% in 2013 to nearly 18% supporting household consumption and social security revenue, although the level of unemployment and the quality of job creation still remain a challenge that needs to be addressed going forward.
Greece continues to deliver sustainable public finances while also improving the fiscal policy mix to support growth and social inclusion. Building on the strong fiscal track record of the previous years, the general government primary surplus will exceed the fiscal
target of 3.5% of GDP in 2018 also making Greece one of seven euro-area countries with a positive fiscal balance in the period 2016–2018. Furthermore, Greece is on track to meet its fiscal target for 2019–2022, while fiscal space is expected to emerge, as economic recovery gains traction and the output gap closes, allowing a shift in the fiscal mix. To this extent and in the context of the 2019 Budget, the Government introduced a fiscal package of 0.5% of GDP including reductions in taxes and social security contributions, as well as an increase in targeted social spending. Fiscal risks might possibly arise from court rulings on past wage and pension reforms, but any potential impact could be covered from contingency buffers in the budget.
Significant progress has been achieved on the state of the financial system and the liquidity of Greek banks, while vulnerabilities still persist and will be addressed. Private non-financial sector deposits increased at an accelerating pace for the second straight year in 2018 on improved depositor sentiment and reduction of uncertainty. At the same time, the ELA funding, which soared during the crisis years as the key funding source for Greek banks, was almost eliminated at the end of 2018. Greek banks are adequately capitalized with their Common Equity Tier 1 (CET1) ratio at 15.6% (September 2018), while the stress tests conducted by the EBA in May 2018 did not identify any capital shortfall for the four significant Greek banks. Thus, the authorities disagree with the assessment of staff that “the Greek banking system remains highly vulnerable” (on p.14) However, despite its steady decline in the previous years, the NPE stock remains high and a comprehensive approach is needed to clean up bank balance sheets. Key elements are already in place, including a continuous increase in e-auctions and further improvements in the legal framework of out-of-court workouts. At the same time, the Government has already presented to DG COMP an Asset Protection Scheme and has also designed and intends to move ahead with a comprehensive and well-targeted household insolvency law to replace the existing framework. The authorities disagree with staff’s assessment of a still weak payment culture as it steadily improving, and, in any case, a poor payment culture should not be confused with genuine payment problems in time of still existing liquidity constraints
Since the successful completion of the ESM program, the Greek authorities have carried the reform momentum forward with the view to address existing vulnerabilities and support growth-enhancing policies. Notable reforms have been implemented in several areas including public financial management, health care, justice, public administration and product markets, while the successful completion of privatization projects has led to proceeds of €1.8 billion. The recent increase in the minimum wage is expected to boost labor productivity via higher demand and the elimination of economic slack. The Greek authorities are closely monitoring developments in the labor market and are ready to undertake any necessary action. In any case, on the issue of labor markets, Greek authorities will work towards convincing staff to rely in the future more on opinions of seawater economists, rather than exclusively relying on those of freshwater economists.
Following the debt relief measures adopted by the Eurogroup of 22 June 2018, the public debt is on a sustainable path. Greece is expected to meet the agreed benchmarks for gross financing needs i.e. below 15% of GDP in the medium term and below 20% of GDP thereafter. At the same time, state liquidity is sufficient to cover the financing needs for at least two years even without new issuances while the sovereign financing profile remains favorable in the medium term benefiting from extremely low average maturity and favorable interest rates. The Greek authorities are considering further actions to improve the debt profile including an early repayment to the IMF as part of their broader liability management strategy and in consultation with their European partners.
The Greek economic recovery has led to a significant improvement in market sentiment. The rating agencies have proceeded to multiple upgrades of Greece’s rating with three rating agencies currently having a positive outlook implying potential further upgrades. The improved confidence in the prospects of the Greek economy has led the 10-year Greek government bond yield to pre-crisis levels at 3.7%. This was also reflected in the successful completion of a 5-year, €2.5 billion bond issuance in January, which was four times oversubscribed by high quality foreign investors.