Practical directions for fuelling economic growth in Greece

Transcription

1 Practical directions for fuelling economic growth in Greece From public consumption to private investment A PwC Greece point of view 31 October 2013

2 Agenda A PwC Greece point of view 1. The context 2. Rebuilding trust 3. A simple strategy for long term growth 4. Changing the architecture of the State 5. The impact PwC 2

3 1. The context PwC 3

4 Grexit - the Perfect Storm A PwC Greece point of view PwC 4

5 A PwC Greece point of view Grexit avoided - but conditions remain tough Billion GDP & Unemployment Rate 223 8,3% 7,7% 9,4% 7,0% 4,5% ,5% 17,5% ,2% Unemployment % 27,0% A 2013F -0,9% -3,9% -6,1% -7,1% -5,5% GDP Δ % GDP, Current Prices y-o-y change % PwC Source: EΛΣΤΑΤ, International Monetary Fund (WEO April 2013) 5

6 Longest recession in modern history A PwC Greece point of view s Great Depression vs Greek Recession in Greek GDP US GDP Years since start of contraction For Greece 2008=100 Source: ELSTAT For US is 1929=100 PwC 6

7 A PwC Greece point of view Greece is not over indebted! 450% 1.016% 443% 400% 2012 Total De ebt %GDP 350% 300% 250% 200% 150% 100% 50% 899% 117% 359% 84% 240% 116% 124% 227% 137% 90% 208% 51% 157% 193% 111% 82% 188% 61% 127% 163% 60% 103% Private Debt Public Debt 0% Ireland Cyprus Portugal France Greece Germany Italy USA Source: IMF (JEDH, Fiscal Monitor) PwC 7

8 Is there light at end of tunnel? A PwC Greece point of view 10 5? Primary Government deficit/surplus bn A 2013E 2014E2015E -5,1-6,5-7,6-9,9-10,9-12,6-13,8-15,2-23,1-36,0-23,9-19,7-12,5-8,4-6,2-4,2 General government spending including net interest PwC Source: International Monetary Fund (WEO April 2013) 8

9 State debt burden is not as heavy as it looks 100% Total Government Debt Post PSI 340bn A PwC Greece point of view ~ 167,4bn value of Debt at 5% discount factor 90% 18% Composition of State Debt % 80% 70% 60% 50% 40% 30% 20% 4% 7% 16% 8% 34% PSI T-bills Other Bilateral Loans IMF EFSF >71% held by official sector 10% 0% Source: GS Global ECS Research 13% 2012 ECB PwC 9

10 But, even after PSI and Whatever it takes, the markets do not trust Greece 35% A PwC Greece point of view 10 yr Government Bonds Yield 30% 25% 20% 15% 10% PSI MARIO DRAGHI WHATEVER IT TAKES Greece 10,2% Portugal 7,1% Trust gap 5% Ireland, Spain, Italy 4,0% to 4,5% 0% Jan 12 Feb 21 Mar 12 Apr 12 May 12 Jun 12 Jul 12 Aug 12 Sep 12 Oct 12 Nov 12 Dec 12 Jan 13 Feb 13 Mar 13 Apr 13 May 13 Jun 13 Jul 13 Aug 13 Sep 13 PwC 10

11 The trust premium paid by the private sector A PwC Greece point of view 10 9 BOND YIELDS % /31/13 02/07/13 02/14/13 02/21/13 02/28/13 03/07/13 03/14/13 03/21/13 03/28/13 04/04/13 04/11/13 04/18/13 04/25/13 05/02/13 05/09/13 05/16/13 05/23/13 05/30/13 06/06/13 06/13/13 06/20/13 06/27/13 07/04/13 07/11/13 07/18/13 07/25/13 08/01/13 08/08/13 08/15/13 08/22/13 08/29/13 09/05/13 09/12/13 09/19/13 09/26/13 10/03/13 10/10/13 10/17/13 10/24/13 10/31/13 ELPE TITAN OTE COCA-COLA HBC PwC 11

12 A PwC Greece point of view Investment is the driving force, inhibited by lack of trust 30% 25% 20% 15% 10% Investment of %GDP EU average Investment of %GDP - Greece 5% 0% -5% -10% GDP % change Source: ΕΛΣΤΑΤ, IMF PwC 12

13 2. The Challenge PwC 13

14 Rebuild Trust, Mobilise Capital A PwC Greece point of view Investment is dependent on trust by the markets Rebuilding trust requires significant institutional reforms now GDP growth Production increase Capital application Capital mobilisation Trust PwC 14

15 Reforms are key to gaining the trust of the markets again Trust and confidence in Greece will be growing consistently, only if we reform institutions to provide long term incentives to: - investors for putting their money into the country - business people to keep expanding their business - civil servants to have their work driven by outcomes - citizens to stay within the spirit of the law - politicians to think and act to the benefit of the nation Having a complete agenda and moving along in a clear, systematic and internally consistent manner should give a huge initial push and will be instrumental in building again our growth momentum PwC 15

16 3. A simple strategy for long term growth PwC 16

17 A PwC Greece point of view Capital is attracted only by the country s comparative advantages Trade passage between the East and Europe (goods, energy) Global tourist destination tourism Energy Pipelines Shipping Trade Routes from/to East PwC 17

18 Mobilise capital into sectors with export potential and scale Export orientation n (% of exports) 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% 0,2% Shipping attracts investment of 0,3% of GDP 0,3% Manufacturing attracts investment of 3,0% of GDP Construction attracts investment of 0,2% of GDP 0,4% A PwC Greece point of view Tourism attracts investment of 0,4% of GDP 0% 5% 10% 15% 20% 25% Sources: ΕΛΣΤΑΤ, BCG research, World Travel and Tourism Council Energy attracts investment of 2,3% of GDP Size of sector as % of GDP 0,5% Services attract investments of 0,5% of GDP PwC 18

19 For capital to have a swift impact on the economy, it needs to be focused on large projects in sectors of economic importance Strategic Areas tourism international trade energy energy interconnections Investment Focus large tourism projects large infrastructure projects Sectors Stimulated transportation & logistics construction hospitality manufacturing services PwC 19

20 A PwC Greece point of view Infrastructure through PPP can mobilise about 17bn Tourist Product Upgrading Key marinas Mega yacht marina in Lavrio Regional airports Upgrading of island ports Kastelli airport 3bn Energy Interconnections Electricity interconnection of Aegean islands, Rhodes and Crete Investment in technology insensitive RES (geothermal/offshore wind parks) to support interconnections Gas pipeline interconnections to Turkey, Italy and the Balkans Gas storage facilities in the North Transit Transport Transshipment facilities in the Piraeus and Thessaloniki ports Through roads (Egnatia) Connecting roads to Bulgaria, FYROM, Albania Motorways 2bn PwC 20 12bn

21 A PwC Greece point of view Tourism needs scale, new products and new markets, and it can mobilise around 20bn of investment up to 2025 Action Market Greece as 5+ star destination and experience Streamline permit process Facilitate scale in hotel management and marketing Release hotels from bank balance sheets and separate real estate from hospitality services through hotel REITS Develop second home market Benefit Capture more value Large integrated resorts New destinations Higher price Longer stays Business clarity Scale enhancement Permanent stays Construction driver PwC 21

22 Concessionary funding properly managed will facilitate capital mobilization A PwC Greece point of view Concentrate concessionary funding (new ΕΣΠΑ approx. 15bn) to areas which yield non Greek income with large economic multipliers Make concessionary capital available in the form of co- funding with financial institutions and investors Rather than grants, concessionary funds as loans will help to recirculate capital in the economy upon repayment Outsource concessionary funding administration PwC 22

23 A PwC Greece point of view Active management of corporate NPLs could attract 7bn of new cash capital Liberate Corporate zombie assets Housing Hotels/resorts Physical production assets Currently, approximately 35bn corporate NPLs with another 10bn+ expected in the near future, keep the underlying assets out of market Active management of NPLs would mobilize incremental cash capital to the tune of 20% of the write off value for the business Losses incurred by banks from NPLs should be given full or partial tax credit, consistent with Basel III, which will soften the effect on regulatory capital PwC 23

24 A PwC Greece point of view Infrastructure and tourism investments with their multipliers feed growth into other sectors of the economy Infrastructure investments have a significant economic multiplier of ~2x and spread economic demand to adjacent sectors like cement and steel and the whole country. Investments add permanent output and employment Tourism has an economic multiplier of ~2x, linked mainly to food supply chain subsectors, but also transport and construction. Investments add permanent output and employment Concessionary funds facilitate large scale investments and fill in the lending gap left by the Greek banking system Bank assets released provide a capital attraction and much needed liquidity, mainly to the real estate sector Economic benefits flowing to other sectors and across Greece, will lead to higher consumption, stimulating the retail sector Subsectors with export orientation, will be boosted with this opening of the economy PwC 24

25 4. Changing the architecture of the State PwC 25

26 A PwC Greece point of view Rebuilding trust is key to attracting investment Clarity of vision and a purpose State clearly the new objective Remove constraints to business and offer incentives Improve institutional stability Get the institutional debris out of the way Kill institutional volatility ( new laws p.a.) Increase speed of response and the efficiency of the state Reform/upgrade the state apparatus PwC 26

27 Changing architecture of the public sector is a necessary condition for capital to be systematically attracted to Greece The State must withdraw as market participant and develop its role as market regulator and facilitator Allow markets to decide on resource allocation, by removing obstacles and installing proper regulation The State apparatus must become smaller and swifter Public sector A PwC Greece point of view Non trading public sector Trading public sector Less laws Robust tax regime PwC 27 Speedy judiciary Law enforcement Better management Privatisations PPPs Trusts/Foundations

28 Four pillars are critical in supporting the new architecture A PwC Greece point of view Law codification, relevance, enforcement and speed Stable tax system and selective tax incentives Better management of the non trading public sector with private sector involvement Privatisation or ring fencing of public trading assets Less constraints and more incentives for business Institutional stability Speed and efficiency of State apparatus PwC 28

29 A PwC Greece point of view Most of the reforms have been on the table for years, but some will change totally the way business is done Law codification, relevance, enforcement and speed to get the frame of reference right for business: Establishment of limits in the number of new laws or amendments to existing laws (for example, ministers can introduce 1 law/amendment per year per Ministry) Laws not to be amended/altered within the first 3 years from effecting them. This could be a constitutional provision Change in bankruptcy law to facilitate resolution of zombie companies and the release of the assets back in the economy Stable tax system with selective tax relieves to facilitate capital attraction and land development: Abolition of all taxes that apply on capital raising, e.g. the 1% capital duty, (we are one of the very few EU countries still having this tax) or the 2,4% stamp duty on loans (a big headache for MNCs trying to fund their local subsidiaries) Conclusion of bilateral tax agreements with key rising counterparties (e.g. China, India, Gulf Countries), which will make Greece a favourable trading partner and a country of choice for inward investment Significant reduction of real estate transfer taxes and abolition of annual property taxes on real-estate development investments PwC 29

30 A PwC Greece point of view Most of the reforms have been on the table for years, but some will improve the way business is done (continued) Better non trading public sector management to improve responsiveness: Secondment of mid to high level managers from the private sector and second senior civil servants into the private sector Add an output linked element to the remuneration of civil servants Introduce accruals accounting to all services Integrate all IT systems which cover the totality of the non trading public sector Privatise or ring fence public trading assets to add value to the services offered and contain meaningless spending Public hospitals, universities, school clusters, cultural organisations, museums can all be turned into trusts/foundations, and managed within a given, for each case, policy framework The trust/foundations may be directly funded by the State or when necessary the State will subsidise the demand for their services so that the choice remains with the people Output and prices to be regulated by the relevant Ministry or a PwC 30 Regulator

31 5. The impact PwC 31

32 A PwC Greece point of view The full application of this strategy could mobilise ca 45bn of investment in the period to 2025 with a positive impact on GDP and unemployment 30% 25% 20% 15% 10% 5% 0% -5% Official Unemployment % estimate Target Unemployment % Target GDP Δ% Official GDP Δ% estimate 2013F 2014F 2015F 2016F 2017F 2018F -10% PwC 32 Source: EΛΣΤΑΤ, Bank of Greece, International Monetary Fund, Ministry of Finance

33 The game changers A PwC Greece point of view Trust building Concentration of capital resources on infrastructure and tourism Scale in tourism Concessionary funds as loans De-trapping assets from the banks Better public sector management Thus a new virtuous circle will start PwC 33

34 We have to shift the political agenda from A PwC Greece point of view Debt Containment to Development Publicly funded consumption to privately funded investment A slow, investment inhibiting and medling public sector to a relevant and business facilitating State PwC 34

35 Final thoughts A PwC Greece point of view Οι καιροί ού μενετοί της ημετέρας βραδύτητος Θουκυδίδης The Long March starts with a first step Mao Jedong PwC 35

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