Greek Economic Outlook: Positive Sentiment - Improving Prospects. Economic Research & Investment Strategy October 2017

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1 Greek Economic Outlook: Positive Sentiment - Improving Prospects Ilias Lekkos Irini Staggel Anastasia Aggelopoulou Paraskevi Vlachou Dimitria Rotsika Lekkosi@piraeusbank.gr Staggelir@piraeusbank.gr Aggelopouloua@piraeusbank.gr Vlachoupar@piraeusbank.gr Rotsikad@piraeusbank.gr Economic Research & Investment Strategy October 2017

2 Short & Long-Term Perspectives of the Greek Economy Three Challenges to our Outlook Greek SMEs Panorama Emerging Trends and Opportunities in the New Greek Landscape 2

3 A Bird s eye view of the Greek Crisis 180 Consumption has returned to its 2001 levels 60 Public spending: Close to the 2000 levels GDP is back to : 131bn 2016: 129bn Private Consumption Long-Term Average : 183bn 2016: 184bn : 39bn Public Consumption 2016: 40bn Long-Term Average Exports are on the rebound due to Tourism 2007: 57bn 2016: 56bn Real GDP Long-Term Average Investments at record low Imports stabilised at long-term average : 21bn Min value 15 Exports of goods and services Long-Term Average : 60bn 2016: 60bn Gross fixed capital formation Long-Term Average Imports of goods and services Long-Term Average Source: ELSTAT, Economic Research & Investment Strategy 3

4 Economic Activity Indicators are already on Growth Mode Industrial Production Index, seasonally adjusted Despite fluctuations, we mark the improved positive trend Retail Trade Volume Index (excl. automotive fuel), seasonally adjusted Return to positive territory Tourism Revenues Tourism as a key pillar of the economy Employment, seasonally adjusted Labour market starts to rebound after the shock Source: ELSTAT, Bank of Greece, Economic Research & Investment Strategy 4

5 and the same holds for our Short & Medium Term Outlook Greece: Macroeconomic Forecasts (Baseline) Economic Sentiment Indicator (ESI) vs Real GDP Growth Rate Real GDP (sa data, % change) Nominal GDP (sa data, % change) HICP (% change) Gross Fixed Capital Formation (sa data, bn) Savings Rate (households, % of gross disp. income) Unemployment Rate (% of labour force) Non-Residential Real Estate (% change) Residential Real Estate (% change) -0.3% 0.0% 1.2% 2.1% 2.3% 2.7% -1.3% 0.1% 2.1% 3.2% 3.7% 4.2% -1.1% 0.0% 1.3% 1.6% 1.8% 1.9% % -9.4% -10.3% -10.2% -9.4% -8.0% 24.9% 23.5% 21.6% 19.7% 18.0% 16.7% -0.1% 0.6% 1.5% 2.2% 3.5% 4.0% -5.1% -2.4% -1.7% 0.9% 2.3% 2.7% Source: ELSTAT, Bank of Greece, Economic Research & Investment Strategy 5

6 Even modest growth in the long-run requires painful adjustments Productivity Population Potential & Real GDP in value From a negative output gap, moving towards the historical peak Unemployment Rate Participation Rate Total Years old % 16.1% 60.8% 77.9% 77.8% 53.9% 13.7% 5.8% 2.0% % 5.5% 44.1% 84.7% 88.8% 64.2% 9.2% 1.8% 0.7% % 5.2% 44.1% 85.8% 89.0% 77.8% 53.9% 1.7% 0.5% Source: ELSTAT, AMECO, Economic Research & Investment Strategy 6

7 Short & Long-Term Perspective of the Greek Economy Three Challenges to our Outlook Greek SMEs Panorama Emerging Trends and Opportunities in the New Greek Landscape 7

8 The Consumption to Investment Rotation Challenge Households Disposable Income vs Private Consumption ( bn, current prices) Non Financial Corporations Net vs Gross Fixed Capital Formation ( bn, current prices) Gap 1.3bn Gap -10.6bn Disinvestment through depreciation Gross Disposable Income Final Consumption Gross Fixed Capital Formation Net Fixed Capital Formation Source: ELSTAT, Economic Research & Investment Strategy 8

9 Counter Measures MTFS Measures MTFS Measures MOU The 14bn Fiscal Consolidation Challenge The fiscal path based on primary surplus targets (as % of GDP) of: and beyond -0.25% 0.5% 1.75% 3.5% 0.5% 4.2% in mn Wage measures and non-wage benefits Pension reforms Measures on social security contributions and social benefits 293 1, Other reforms Measures on the revenue side of State Budget 985 2,066 2, Total 1,288 3,404 1,788 1, Pension reforms , Measures on social security contributions and social benefits Measures on the revenue side of State Budget , Total ,572 2, Total Measures in a yearly basis 1,288 3,404 1,788 1,862 2,887 2, Social welfare , Investment Employment Health system Counter measures on the revenue side of State Budget ,415-2, bn 4.9 bn 14.1 bn Total Counter Measures in a yearly basis ,650-2,765-2, bn Final Impact of Total Measures in a yearly basis 1,288 3,404 1,788 1, ,712 Final Impact of Total Measures in a gross cumulative basis 1,288 4,692 6,480 8,342 8,579 8,300 6,588 MOU Primary Balance Budget Targets in bn Source: MinFin, Economic Research & Investment Strategy 9

10 Expected over performance in fiscal targets has led to the introductions of the countermeasures in order to hedge the risks from excessive policy tightening 2021 Primary Balance Budget Target 7.4 bn (3.5% of GDP) Source: MinFin, Economic Research & Investment Strategy 10

11 The Greek Economy Liquidity Challenge Financing Needs & Sources (in bn) 2017 Jan Aug 2018 Source: European Commission, Economic Research & Investment Strategy 11

12 Short & Long-Term Perspectives of the Greek Economy Three Challenges to our Outlook Greek SMEs Panorama Emerging Trends and Opportunities in the New Greek Landscape 12

13 SMEs are the backbone of the Greek economy Greece has the highest number of SMEs in proportion to the total number of enterprises amongst all other European countries. Greece is ranked second in terms of value added after Malta. SMEs are highly important to the Greek non-financial business economy. They generate three quarters of added value and almost 90% of employment, compared to an average of 60 % and two thirds respectively throughout the rest of the EU. SMEs are largely concentrated in wholesale and retail trade, where almost 40 % of SME employment and added value is generated Number of SMEs (% of total number of enterprises) Number of people employed (% of total number in enterprises) Value added (% of total value added) Greece EU Greece EU Greece EU Source: European Commission, Economic Research & Investment Strategy 13

14 Even in 2015, the SME Universe exhibits a staggering degree of differentiation Outperformers (8.6%) a 676 Γενική ρευστότητα: good 0,7 performers Άμεση ρευστότητα: 0,4(35.7%) b 2,817 medium performers (40.4%) Underperformers (15.4%) c 3,189 d 1,214 SMEs (until 50mn turnover) unrated based on the initial sample, 2015 with non-calculable ratios: 9,820 Outside the acceptable ratio limits: 6,045 Source: ICAP DATA, Economic Research & Investment Strategy 14

15 where our rating system can identify a substantial number of bright spots, lost cases and turnaround candidates Outperformer a High levels of efficiency with the EBITDA margin amounting to 24% and the return on equity to 19.3% on average None of the outperformers has interest coverage ratio less than 1 Only a 0.9% of them has positive EBITDA and net losses before taxes High liquidity, with current assets covering around 3.9 times current liabilities Low levels of leverage, since its debt only amounts to half of equity High level of debt servicing, since EBITDA covers financial Γενική expenses ρευστότητα: by 21.4 times 0,7 Άμεση ρευστότητα: 0,4 Medium performer c Low levels of efficiency and profitability, since the EBITDA margin is limited to 7.3% and the return on equity to 4.1% 22.1% of the medium performers has interest coverage ratio less than % of them has positive EBITDA and net losses before taxes Satisfactory, but limited liquidity, with current assets covering current liabilities by 1.5 times High net debt level, which exceeds EBITDA by 13.6 times Low level of debt servicing, since EBITDA covers financial expenses by 3 times Good performer b More conservative, but satisfactory level of operating profitability, with EBITDA margin at 15.4% Profitable efficiency of equity, with the return on equity at 13% Only a 0.7% of the good performers has interest coverage ratio less than 1 A 7% of them has positive EBITDA and net losses before taxes Lower, but satisfactory level of liquidity, since the current assets amount to 2.5 times the current liabilities Higher debt levels, as liabilities exceed equity by 1.2 times Adequate debt service ability, since EBITDA covers financial expenses by 11.9 times Underperformer d Loss making, with EBITDA margin at -9.1%. Inefficient management of equity, with a negative return on equity at -16.1% Almost all of underperformers (82.5%) have interest coverage ratio less than 1 The 18.3% of underperformers has positive EBITDA and net losses before taxes Liquidity difficulties, since the current liabilities exceed the current assets (current ratio: 0.7 times) Overleveraged, with debt 3.5 times higher than equity and net debt 25 times higher than EBITDA Source: ICAP DATA, Economic Research & Investment Strategy 15

16 Fundamental data of average SME per final rating of our rating system, 2015 Figures of average SME in thousand euros, 2015 Source: ICAP DATA, Economic Research & Investment Strategy 16

17 Short & Long-Term Perspectives of the Greek Economy Three Challenges to our Outlook Greek SMEs Panorama Emerging Trends and Opportunities in the New Greek Landscape 17

18 Trends & Opportunities Greece needs to reorient itself from a consumption-based to an export-based economy Greece has a number of competitive advantages but needs to move up the Value Added Chain In several sectors and for a variety of reasons, a massive consolidation process has started More funding, either in the form of equity or loans, will be required Greece is facing regulatory pressures to liberalize and privatize a number of sectors Greek banks have committed to reduce NPLs and restructure their balance sheets Emerging Trends & Opportunities Emphasis on export-oriented sectors: Tourism, farming, food processing, oil refining, basic metals & minerals, chemicals, pharmaceuticals Even in sectors with a competitive advantage Greece needs infrastructure upgrades, i.e. 5-star resorts, yachting, convention centers, marketing & branding In sectors with less stellar prospects such as retail and wholesale trade, fish-farming, passenger shipping, telecoms, consolidation will create sectoral champions with improved margins Privatized assets & natural resources development will require substantial investment (equity or loans) Clusters can be created around privatized assets, i.e. ship-repair zone, logistics, cargo management, cruise tourism Regulatory pressures to liberalize industries such as electricity, natural gas, waste processing & management, renewable energy Banks commitment to reduce NPLs & Non Core Assets will create opportunities in real estate, insurance and leasing, hotels and in over-indebted but viable companies Source: Economic Research & Investment Strategy 18

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