HELLENIC PARLIAMENT PARLIAMENTARY BUDGET OFFICE

Transcription

1 HELLENIC PARLIAMENT PARLIAMENTARY BUDGET OFFICE QUARTERLY REPORT JULY SEPTEMBER 2017 NOVEMBER 2017

2 CONTENTS THE TARGETS AND THE SCIENTIFIC COMMITTEE OF THE OFFICE... 5 PREFACE... 6 EXECUTIVE SUMMARY CURRENT ECONOMIC CONDITIONS: ECONOMIC RECOVERY BUT UNCERTAINTIES REMAIN THE FISCAL MANAGEMENT THE EXECUTION OF THE STATE BUDGET (SB) IN THE NINE MONTH PERIOD OF 2017 (ON A CASH BASIS) THE DRAFT OF THE STATE BUDGET OF 2018 CONTINUES TAX AUSTERITY PRIMARY SURPLUSES REVENUE EXPENDITURE SPENDING REVIEW REFORMS PRIVATIZATIONS ARE ARE BEHIND SCHEDULE THE SPENDING REVIEW PROCESS GAIN INSTITUTIONAL CHARACTER THE LABOUR MARKET IS IMPROVING BUT NOT IN A SATISFACTORY WAY THE EVOLUTION OF UNEMPLOYMENT The evolution of employment and the labour market NEW INTERVENTIONS ON LABOUR MARKET EVALUATION IS STILL MISSING IN THE GREEK PUBLIC ADMINISTRATION THE PICTURE OF FOREIGN DIRECT INVESTMENT IN GREECE REASONS FOR GREECE LAGGING BEHIND IN ATTRACTING FDI SPECIAL ISSUE: TAXATION AND ECONOMIC GROWTH IN GREECE. LOOKING FOR ARIADNE S THREAD" INTRODUCTION TAX POLICY IN GREECE DURING THE CRISIS THE ALLOCATION OF TAX BURDEN METHODOLOGY EMPIRICAL ANALYSIS CONCLUSIONS POLICY PROPOSALS APPENDIX A: GRAPHS OF CHAPTER APPENDIX B: GRAPHS OF SPECIAL ISSUE

3 GRAPHS GRAPH 1 QUARTERLY GDP AND UNEMPLOYMENT RATE OF GREECE. Q Q GRAPH 2 OUTSTANDING TAX REFUNDS GRAPH 3 GENERAL GOVERNMENT ARREARS TOWARDS THE PRIVATE SECTOR GRAPH 4 FORECAST ERROR FOR THE SB REVENUE, % OF THE TOTAL SIZE OF THE SB GRAPH 5 GENERAL GOVERNMENT REVENUE, % OF GDP GRAPH 6 INTERTEMPORAL RATIO OF INDIRECT TO DIRECT TAXES GRAPH 7 STRUCTURE OF TAX REVENUE BY MAJOR TYPE OF TAX IN GREECE IN 2015 (% OF TOTAL TAX REVENUE) GRAPH 8 SB SPENDING FORECAST ERROR, % OF THE TOTAL SIZE OF THE SB GRAPH 9 SB BALANCE AND PRIMARY BALANCE FORECAST ERROR (ON A CASH BASIS), % OF THE TOTAL SIZE OF THE SB.. 31 GRAPH 10 OB FORECAST ERROR, % OF THE TOTAL SIZE OF THE SB (ON A CASH BASIS) GRAPH 11 PIB FORECAST ERROR, % OF THE TOTAL SIZE OF THE SB (ON A CASH BASIS) GRAPH 12 EVOLUTION OF THE NUMBER OF EMPLOYED-UNEMPLOYED-NON- ACTIVE AND UNEMPLOYMENT RATE, JANUARY-JULY GRAPH 13 PERCENTAGE OF VACANT JOBS IN GREECE, INDUSTRY-CONSTRUCTION AND SERVICES, 2014Q Q GRAPH 14 RECRUITMENT BY TYPE OF EMPLOYMENT CONTRACT, JULY-AUGUST-SEPTEMBER GRAPH 15 ORDINARY BUDGET REVENUES ( BN) GRAPH 16 INDIRECT TAXES CONSUMPTION TAXES, BN GRAPH 17 ECONOMIC SENTIMENT INDICATOR (ESI) AND MAIN COMPONENTS OF GREECE, 1/ /2017, MONTHLY DATA GRAPH 18 BANKING DEPOSITS OF HOUSEHOLDS AND CORPORATIONS IN GREECE, 1/2008 8/2017, MONTHLY DATA, IN BN GRAPH 19 Y-O-Y % CHANGE IN HARMONISED INDEX OF CONSUMER PRICES (HICP) IN GREECE AND THE EURO AREA (19), MONTHLY DATA, 1/ / GRAPH 20 CUMULATIVE CHANGE, , GREECE, 2010 = GRAPH 21 PRICE ( ) AND YIELD (%) OF THE 10- YEAR GREEK GOVERNMENT BONDS, 1/2016 9/ GRAPH 22 NEW ARREARS TOWARDS THE PUBLIC SECTOR AND RECEIPTS AGAINST NEW AND OLD ARREARS, IN GREECE, 1 9/2017, IN BN (CUMULATIVE) GRAPH 23 PERCENTAGE CHANGE IN REAL GROWTH RATE FOR PIIGCS FROM 2007 TO GRAPH 24 DIRECT TAXES-INCOME TAXES PER CATEGORY OF TAXPAYER GRAPH 25 DIRECT TAXES INCOME TAXES AND OTHER DIRECT TAXES ( BN.) GRAPH 26 INDICATIVE ALLOCATION OF MEASURES PER YEAR

4 TABLES TABLE 1 RATES OF CHANGE OF GREECE S GDP AND MAIN COMPONENTS, 2016, Q AND Q1 Q TABLE 2 ESTIMATED QUARTERLY REVENUE TABLE 3 LABOR MARKET OUTPUT: INDICATORS OF QUANTITY, QUALITY AND SOCIAL EXCLUSION IN THE LABOUR MARKET, TABLE 4 THE MOST PROBLEMATIC FACTORS FOR ENTREPRENEURSHIP IN GREECE BASED ON WEF SCALE TABLE 5 RANKING OF GREECE FOR THE PERIODS BASED ON THE GLOBAL COMPETITIVENESS INDEX OF THE WORLD ECONOMIC FORUM (WEF) TABLE 6 INFLOWS FDI IN GREECE COMPARED TO COMPETING COUNTRIES AS % OF GDP PER YEAR AVERAGE TABLE 7 NET FOREIGN DIRECT INVESTMENTS OF NON-RESIDENTS IN GREECE BY ECONOMIC ACTIVITY DIVISION (IN MILLION OF EURO) FOR 2016 ON THE BASIS OF PROVISIONAL DATA TABLE 8 EU REVENUE AND EXPENSES FOR THE IMPLEMENTATION OF THE PUBLIC INVESTMENT PROGRAM TABLE 9 TOTAL TAX REVENUES (% OF GDP) TABLE 10 GROUPS OF ECONOMIC ACTIVITY AND TAX INFORMATION TABLE 11 PERSONAL AND CORPORATE TAX RATES IN EU COUNTRIES & WORLD BANK S RANKING (EASE OF DOING BUSINESS RANK) TABLE 12 GROWTH REGRESSIONS INCLUDING TAXES TABLE 13 GROWTH REGRESSIONS INCLUDING TAXES

5 THE TARGETS AND THE SCIENTIFIC COMMITTEE OF THE OFFICE The Parliamentary Budget Office (PBO) was established in accordance with article 30A of Parliament Rules (Part B, Article 21, Government Gazette 122/A / ) and with law 3871 (Government Gazette 141/A/ ). It is an independent fiscal institution within the Parliament and operates in accordance with the Special Regulations for the Internal Functioning and Organization, (Article 53, Government Gazette 122/A / ). The Office is responsible for the monitoring of the State Budget implementation, the assistance to the workings of the two Committees of the Parliament (the Special Committee on the Financial Statement and the General Balance Sheet of the State and on the Control of the Implementation of the State Budget and the Standing Committee on Economic Affairs) and the drawing up and submission to the above committees of quarterly and annual reports in respect of the fiscal targets, as set in the Mid-Term Programs of Fiscal Strategy. The Parliamentary Budget Office analyzes the main issues of the Greek economy based on the modern academic literature. Mr. Panagiotis Liargovas (Professor of the University of the Peloponnese) is the Coordinator of the Parliamentary Budget Office and heads the Scientific Committee composed of the following members: Panos Kazakos, Emeritus Professor, University of Athens Spyros Lapatsioras, Assistant Professor, University of Crete Napoleon Maravegias, Professor, University of Athens Michael Riginos, Associate Professor, University of Athens 5

6 PREFACE The current report monitors the evolution of the Greek fiscal aggregates in relation to the targets set in the State Budget and in the Mid-term Fiscal Strategy Frameworks. It focuses on the Third quarter of The report was drawn according to the present policy framework, as it is formed by the Memorandum that the Greek Government has signed with the European Central Bank (ECB), the European Commission (EU) and the International Monetary Fund (IMF). Moreover, the report takes into account the current debate on the revision of economic governance, of the EU and the Euro zone in particular. The Coordinator and the Members of the Scientific Committee of the Office recognize that there are many different approaches within economic policy and that something that is necessary on economic terms is not necessarily politically feasible. Furthermore, something that is politically desirable is not always efficient in economic terms. Our effort is to present the problems and propose solutions to crucial issues, not only in the main body, but also usually in a special chapter at the end of each report. The Coordinator of the Office Professor Panagiotis Liargovas 6

7 EXECUTIVE SUMMARY Improvement in the relations with the partners and the potential return to the international markets During the quarter July - September 2017, there has been progress in the country's relations with the institutions, including the IMF: first, there was the successful conclusion of the second review and the agreement on a "supplemental memorandum" in July 2017 and second, the Medium-term Fiscal Strategy (MTFS ). These texts describe the path of economic and social policy for the coming years. Of course, delays had better been avoided. The last quarter could be therefore characterized by the normalization of the relations between the Greek authorities and its partners. A new element was the approach with the USA which is important both for economic and security reasons. However, this normalization may turn out to be temporary if there are difficulties in implementing the agreement. The third adjustment program ends in August The government's overall goal is to achieve a "clean exit to the international markets", i.e. to service the country's debt without the assistance of the ESM (and the IMF). This is a legitimate objective because, if it is achieved, it will, among others, result in the end of the rigorous and in-depth supervision of the adjustment programs, and will also pave the way for debt relief. The government stresses its intention to complete the third review by the end of the year in order to smoothly implement the third adjustment program. In the meantime, the country has also emerged from the so-called "excessive deficit procedure". Also, yields of the 10-year government bond of the Greek government in the third quarter of 2017, based on data from the Bank of Greece, moved downwards over the previous quarter. Indeed, in July where Greece issued a bond, the ten-year bond yield was at the lowest level in recent years (5.33%), obviously favored by the European and international circumstances. However, the 10-year bond yield remains at substantially higher levels than other southern countries (Spain, Portugal, Italy). However, we note that there will still be fiscal (and other) constraints even after the country s return to the international markets! Greece, even if all goes smooth, will be subject to the EU's fiscal governance, especially for the Eurozone Member States. 1 In general, economic governance in the EU and especially in the Eurozone (Fiscal Compact) restrict the fiscal sovereignty of its member states significantly, creating a framework of increased mutual monitoring which does not allow for exceptions. In addition, countries that have undergone fiscal adjustment programs are still subject to monitoring (e.g. the European Commission Post-Program Surveillance Reports for Portugal). Even a "clean" exit to the international markets will be accompanied by some kind of surveillance! Moreover, the possible precautionary credit line and of course, public debt relief measures will be accompanied by economic monitoring. 1 See the article by Panos Kazakos, journal To Vima, 22/10/2017 (in Greek). 7

8 In addition, Greece is committed to a series of specific fiscal targets from 2018 onwards (primary surpluses and measures in the social security system in 2019 and in taxation in 2020 totaling around 2% of GDP in order to achieve the primary surplus targets of 3.5% of GDP!). Then, the country will have to maintain high (and rather questionable) primary surpluses of 2% by 2060! Of course, the so-called "fiscal space" is likely to be widened, in order to relax the restrictive adjustment policy if the targets for primary surpluses are revised downwards. However, this cannot be taken for granted (see below). Finally, the complete access to the international markets will bear a high cost, the amount of which will depend both on the IMF (especially the potential of its participation in the program) and the European institutions (mainly through debt relief). Growth Short-term growth prospects have improved. Greece seems to be coming out of the crisis. For 2017, the official government forecast is for a positive growth rate of 1.8%. The Draft State Budget for 2018 provides for a growth rate of 2.4% in 2018 (see Table I). Table I. Main features of the Greek economy (% y-o-y change, constant prices) GDP Private Consumption Public Consumption Gross Fixed Capital Formation Exports of Goods & Services Imports of Goods & Services GDP Deflator Harmonised Index of Consumer Prices Employment* Unemployment rate* Unemployment rate (Labor Force Survey) Source: Draft Budget 2018 There was a two-year recession that could have been avoided. According to ELSTAT 2, in 2015 and 2016, the Greek economy recorded a recession of -0.3% and -0.2%, while in 2014 there was a positive growth rate of 0.7% (see Graph I). This intermediate downturn, which had tremendous economic and social costs, should be instructive: sustainable growth requires continuity in the implemented policy! 2 ELSTAT, Press Release on National Accounts for 2016, 2 nd estimate,17 October

9 Graph I. Greece s real GDP growth rates and projections for the years , % Source: ELSTAT and Ministry of Finance official projections The expected (albeit anemic) recovery can be mainly attributed to the skyrocket of tourism in Greece as well as to the successful completion of the second review and the agreement on the "Supplemental Memorandum". However, forecasts for the final result in 2017 differ: OECD: + 1.1%, InDeep Analysis UoA: %, DIW Berlin, ifo, ifw, IWH, rwi: + 0.9%, European Commission spring forecast: + 2.1%, IOBE: 1,3% and KEPE: +1% (see Graph II). Differences in the projections of 2018 exist as well. Graph II. Projections for Greece s real GDP growth rate in 2017, % EU Ministry of Finance, IMF Source: Official reports by the organizations IOBE OECD InDeepAnalysis UoA KEPE DIW Berlin, ifo, ifw, IWH, rwi In general, the positive assessment of the Greek economy is mainly due to the implementation of the adjustment program. e.g. the gradual clearance of the state's arrears to the private sector (see below), the attempt to unblock crucial privatizations (Hellenikon) etc. In September, the manufacturing sector recorded the sharpest rise in production since June Also, the Industrial Turnover Index is on the rise, while the balance of firms (establishments vs closures) in the first nine months of 2017 was positive. The Economic Sentiment Indicator (ESI), based on European Commission data, stood at points in September 2017, up from 99 in August and 98.2 in July The drop in the unemployment rate contributed to the positive assessment of the ninemonth period January September Unemployment is declining this year, and by 9

10 December 2017, the government estimates it will reach 20% (20.2%). Last June, it stood at 21.2%, from 23.5% on average in 2016, 25% in 2015, 26.5% in 2014 and 27.5% in For 2018, it is expected to fall to 19%. However, as the EFKA figures show, there is great expansion of part-time employment with average gross earnings at about ! In this respect, in Greece, as in other southern European countries, the labor market is characterized by concentration in low-skilled jobs! Below the macro level, the signs of the crisis are evident: Many Greek businesses are still "moving" to Bulgaria and Cyprus, where their operation is favored by low tax rates and insurance contributions, easier access to financing and, in general, a business friendly environment. Also, the closure of PITSOS and the situation in Skaramangas Shipyards, PPC, EAS and ELVO show that firms still face crucial challenges in Greece. However, there are also some industrial successes, mainly in export-oriented units. It is now commonplace that extroversion and growth can prevent further weakening of institutions, lawlessness and social tensions that are likely to keep the country in a downward path. However, there are several outstanding issues that will eventually determine the future developments. In our view, the confidence of the economy on which real productive investments depend is not fully restored. Public Administration under the current legal system continues to hinder major investment projects. The ability of the banking system to finance productive investments is still limited by non-performing loans. Some reforms are being implemented, but the Greek authorities should speed up. Consequently, critical decisions have been postponed for Until then, from the fiscal progress it will be determined if new fiscal measures will be needed in 2018 and if the scheduled fiscal measures for will be promptly activated (pension cuts and reduction of the tax-free threshold). However, a source of concern is the underperformance in the side of tax revenue. Moreover the country remains vulnerable on impact of external shocks, due to its huge public debt. The PBO has supported from the beginning that this source of shocks has to be eradicated (see below). From a political point of view a characteristic of the latest months is that the government has upgraded the target of growth (as opposed to that of redistribution). It emphasizes now the need for an increase of private investments and recognizes the role of entrepreneurship for the return of the Greek economy to conditions of sustainable growth. These orientations are also being adopted from the rest pro-european political parties. Even in what concerns the necessary tools or political actions there are widespread convergences, such as, for example, in privatizations. Consequently, the necessary conditions are created for wider political consents in the country. We will see however to what extent the good intentions will survive the challenges of the political reality. Fiscal developments Fiscal progress reduces the uncertainty in the short term. The general target for 2017 and 2018 is to achieve primary surpluses of 1.75% of GDP and 3.5% of GDP correspondingly. The 10

11 government hopes to avoid the possibility of taking new fiscal measures, mainly on the taxation side, in According to the latest available data from the General Accounting Office (GAO) in the ninemonth period, January-September 2017, the target for the current fiscal year will be achieved. 3 Moreover, the ministry of Finance informs that for the whole 2017 the institutions agree that a primary surplus of 2.8% of GDP will be achieved, i.e., 1.05% above the target. If these estimations are verified then there will be available a fiscal space above 1.8 bn. for the distribution of a social dividend. The government plans to distribute it until the end of the current year (see below). This government announcement brings back to the public discussion the economic dilemma «redistribution or growth». We underline that the way of using the fiscal space, which is being generated from the fiscal over-performance compared with the agreed with the institutions fiscal targets, has been clearly defined in the agreements with the Institutions, thus reducing the administrative potential of the Greek government for its disposal. However, the underperformance in the tax revenue side is a source of concern. The realized revenue from the Personal and Corporate income tax in the nine month period of January- September 2017 were lower by approximately 800 mil. from the target. In contrast, the revenue from the indirect taxes (+11.9%), VAT, etc were increased. However, in total, the net revenue of the State budget amounted to 36,027 mil. showing a decrease by 2,353 mil. or 6.1% compared with that of the MTFS and the net revenue of the Ordinary budget amounted to 34,756 mil., reduced by 2,252 mil. or by 6.1% compared with the corresponding target of the MTFS In addition the further increase of the total arrears towards the State, in the eight month period, January-August 2017, underlines the exhausted tax paying ability of the citizens, raising doubts for the possibility of achieving the ambitious fiscal targets of the coming years. On the expenditure side we underline the repayment of part of the GG arrears towards the private sector which provide some liquidity on the real economy. According to the latest available data from GAO the private sector has received from the State in the first four months an amount of 1.2 bn, from which the 800 mil. came from the European Stability Mechanism s (ESM) tranche of June and the 400 mil. from the State s own funding. The agreement with the United States of America for the upgrade of the F-16 will not directly adversely affect the current fiscal position, but, it will generate for the next fiscal years additional expenditures which will somehow have to be funded. Public Debt As mentioned earlier, the smooth implementation of the program until August 2018 is a prerequisite for making the next step in restructuring it. This relief is necessary not so much because today the burden of interest payments is difficult to manage (as shown by the 3 See GAO, Execution of the State Budget, January-September 2017, October

12 primary surplus debate) but also because it will increase after Without much relief, the debt of Greece will not be sustainable. According to the latest official and public available data, interest payments are as following: 4 6,5 bn in bn in ,5 bn το ,5 bn in ,6 bn in bn in ,6 bn in 2026 Cumulatively, for the period interest payments account to 84,3 bn Domestic and external risks To the above mixed picture we should also take into account the potential dangers that could negatively affect the economic performance in 2017, 2018 and beyond. To these dangers they are included among others the potential of underperformance in meeting the primary surplus target of 3.5% of GDP in 2018 (and beyond until 2022), the performance of the banking sector (non-performing loans), the capital controls, the underperformance in meeting the tax revenue targets due to the high tax rates. These potential dangers have internal and external propagations with the latest not depending, usually, on the Greek government. To the internal propagations of dangers we could include, among others, the reform fatigue and delay in the implementation of critical interventions and other urgent problems that could arise, increasing the systemic danger in the economy of Greece (and thus the borrowing conditions), etc. With other words, the so much expected recovery could disappoint or even not take place at all if the reforms of the Memorandum are not implemented and if extensive investments from the private sector do not materialize. The question is if the implemented fiscal policy, as also reflected through the draft of the State Budget 2018, corresponds in an up to date manner to the challenges that the strategy for high and sustainable growth sets. As we have already mention, there have been repeatedly delays in a series of structural reforms with the most obvious on privatizations, on the non-performing loans, the Public Management and the reforming process of the services and labor markets. We really didn t need the wreck in the Saronic Gulf, which caused a huge ecologic disaster, to bring into surface the inefficiencies of the existing legislation that favors impunity. Analogous inefficiencies appear on the legislation concerning labor markets. The 4 The data were submitted to the Greek Parliament by the Ministry of Finance in With the exception of the MTFS , which includes more recent data only for the period up to 2021, there are no other official data, publicly available for the period beyond

13 Minister of Labor has right to highlight the business illegalities and distortions in a number of areas. The difficulties on the implementation of the structural reforms that are considered in the Memorandum are also reflected in the delays of the first two evaluations of the current Programme. However, all parties have expressed their will for the rapid completion of the third evaluation. Recommendations The PBO would recommend to the Government the following: 1) To speed up the structural reforms that contribute to the increase in productivity, to the diffusion of innovation and, consequently to growth. Many reforms remove the obstacles for productive investments. Serious investment decisions are depended on, among others, the rapid administration of justice the stability of the tax system (where a first positive step has been made with the provision on the development law that the investments under it will not be in danger of new law revisions for a decade), the spatial planning that would have improved the predictability of the regulatory policy and the efficient public administration. We remind that in relation to the latter the country is committed to a series of changes (evaluation etc.), but they face strong reactions. 2) To increase the efforts for regulating the problem of the non-performing loans. 3) To increase the efforts for strengthening the social cohesion, reducing the burden of the fiscal adjustment on the lowest income households. 4) To proceed and fulfill the spending review procedure. This procedure has already started at the initiative of the Deputy Minister of Finance and it looks like that it delivers results if we take into account the projected reduction of government consumption spending by Consequently, the spending review should not have as a sole target the reduction of government consumption spending but primarily the improvement of the efficiency of government spending with the necessary redistributions. 5) To strengthen the efforts against tax-evasion starting from the most obvious and with heavy revenue impact cases for tax evasion connected to the smuggling of petroleum. 6) To support a solution to the problem of non-performing loans, so as to stabilize the functionality of the country s banking system providing the necessary to the real economy access to new loans. 7) To make full use, in a timely and effective manner, of all potential sources of European funding. 8) To execute smoothly the State Budget, on the revenue side as well as on the expenditure side so that to avoid taking new fiscal measures. 9) To continue the repayment of the State arrears without accumulating new. 13

14 Under these conditions, new funding from international markets on the basis of new bond issuance can be achieved with acceptable interest. In a general framework we consider that the return of the economy to a stable and sustainable growth presupposes institutional reconstruction of the country. In a previous chance we have presented our view on the issue of clientistic practices which has been in the public discussion for many years and by all parliamentary parties! A first effort to tackle this problem was made for example in the public management through the establishment of the Independent Public Revenue Authority (which restraints the political intervention during the application of tax legislation), the country's compliance with the EU fiscal rules (Fiscal Compact), etc. However, much have to be done to minimize the clientistic practices. No half-measures or ambiguities fit in this issue. Finally, we do not recommend insistence on surpassing the primary surpluses agreed with the institutions. We consider that they hurt the growth potential of the economy since they are based on taxes. If however these excesses are considered to be necessary then it really needs to be considered how to redistribute them fairly to benefit those who really need it. We recognize the dilemma among the growth and redistributive targets which reappeared recently into the public discussion with the announcement of the redistribution of a social dividend. If part of the surplus is directed to social services then the consequences of the income inequalities and poverty are being mitigated. However, in this case a smaller part of the surplus would be available for achieving the growth targets. In the supplementary memorandum it is forecasted that if an excess surplus is achieved this should be directed to social protection and to the reduction of taxation. 5 Briefly, the short run developments are encouraging, but the long run growth potential of the economy remains uncertain as the country s basic structures and institutions lag behind in their reform progress. It is important to remind the IMF forecasts for the period after The growth rate can then be pinned down to 1% annually! 6 Problems in doing business According to the data from the Hellenic Statistical Authority the long lasting recession in our country shows signs of coming to an end as a consequence it will facilitate, if it stabilizes, the potential of the new and existing investment plans. But, relative expectations tend to overturn various "episodes" (Ellinikon, Skouries, Kassiopi or Afandou in Rhodes, etc). And when some signs of progress are starting to be visible from the point of commencement of business and the inflow of necessary revenue for the reduction of public debt and the start of economic activity at microeconomic level new problems both of judicial and procedural content (forest and archaeological environment/consultations, cancellations, tensions), deter current and future investors. From 2009 until today, the share of investment to GDP lags behind compared with the European average. In 2016 it was at 11.7% compared with the 19.8% of the corresponding EU 5 See Supplemental Memorandum of Understanding (second addendum to the Memorandum of Understanding), 5 July 2017, p. 8, section 2.1 Fiscal Policy. 6 IMF, 7 February 2017, Article IV Consultation και IMF World Economic Outlook October

15 average. The total investment gap for the period amounted to 540 bn. The lack of confidence in the country increases investor performance requirements while structural difficulties, such as the low profitability of the firms, the reduction of the credit expansion, the lack of credit expansion, the reduction of savings, the increase of the non-performing loans, undermine the competitiveness of the Greek economy. The globalized environment experiences a geopolitical instability, where Greece s geographical position favors the investment decisions of many international investors, which they also recognize the strategic position of the country and they try through their investments in Greece to obtain access to other markets as it is the case of COSCO with its investments in the harbor of Piraeus. The efforts of the Government to attract investments with the visit of the French President Macron, the meeting in Kerkira of the Greek Prime Minister with his Italian counterpart for the final agreement for the sale of TRENOSE, his contacts with the Greek community in the United States and other movements, are important if we consider that, in the previous decades the role of foreign direct investments has been heavily criticized because they were considered a source of dependence and perpetuation of inequalities. More recently, government members presented in London in the 12 th Annual Greek Roadshow of ΕΧΑΕ the investment opportunities in international funds and strategic investors. As a result an interest was created for the tourism industry, the energy sector and housing. Our country has committed itself to a series of actions, such as strengthening competition and improving the regulatory system of markets, labor relations, the reduction of non-wage labor costs through tax relief, the rationalization and restructuring of public administration and the evaluation of its executives, the exploitation of the assets of the state, etc. These actions are in delay and their results are being reflected in the investors evaluations and the change of the orientation of their investment funds. The Greek economy needs investments of 100 bn (or even more) for the next five years according to various estimates. The announcement of the establishment of an Investment Bank with the participation of foreign banks, such as the French, the German, the Chinese Investment Bank for the funding of the small to medium size companies and startup companies on a peripheral scale through leverage of investment funds remains to be seen if it will contribute to the efficient attraction of foreign direct investments. Our doubts are based on the disappointing experience that our country had in the past with various investment banks in which the State was involved. The reason is obvious: The State intervention gave priorities to political criteria and not on economic criteria, reflecting and responding to various kinds of clientistic relationships and connections. What matters most is not so much the participation of the State in the production process, but the establishment of the appropriate framework for the development of productive initiatives and the diffusion of innovation. A rapid but also sustainable growth demands a substantial investment engagement in new technologies, as well as structural reforms on institutional level, since the country faces not only a huge demographic problem but also and most importantly a brain drain problem. 15

16 1 Current economic conditions: economic recovery but uncertainties remain On the basis of the available data, the Greek economy showed signs of mild recovery in the first half of 2017 (which seems to have accelerated in the third quarter). The completion of the second review of the economic adjustment program and the peak of tourism played a decisive role. However, given the first half of the year, the updated projections on the growth rate for 2017 are still considered ambitious. Finally, it is now crucial to shift efforts to improving the conditions in the "real economy" in order for Greece to exit from the stagnation of the last three years ( ), as shown in Graph 1. Hence, it will be easier to face the challenges of Greek banks (non-performing loans), EFKA and PPC (revenue collection). Table 1 Rates of change of Greece s GDP and main components, 2016, q and q1 q percent change, reference year q2 q1 q2 y-o-y q-o-q y-o-y q-o-q y-o-y q-o-q Private Consumption Public Consumption Gross Fixed Capital Formation Exports of Goods & Services Imports of Goods & Services GDP current prices ( bn) growth rate (%) constant prices ( bn) growth rate (%) Source: ELSTAT According to ELSTAT data 7, the Greek economy recorded a positive growth rate in the second quarter of 2017, on an annual and quarterly basis (seasonally adjusted data), as shown in Table 1. Specifically, at constant 2010 prices, GDP of the second quarter of 2017 increased by 0.8% y-o-y and by 0.5% q-o-q (seasonally adjusted data) mainly due to the performance of Exports and Public Consumption, as shown in Table 1. This mild recovery of the Greek 7 ELSTAT, Press Release on National Accounts: 2 nd quarter 2017, provisional data, 1/9/

17 economy was also reflected in the evolution of the manufacturing sector in Greece 8, which recorded its sharpest rise in production since June Also, the Turnover Index in Industry 9 was on the rise, while the balance of enterprises (establishments and closures) 10 in the first nine months of 2017 was positive as well. However, given the GDP figures for the first half of 2017, the projection of the Greek government and the institutions for a growth rate of 1.8% in 2017 is rather questionable 11. Nevertheless, several developments by the end of the third quarter, uncertainty about the successful completion of the third review and the status after the expiration of the current program, delays in taking drastic measures to address non-performing loans, accumulation of General Government's arrears and the difficulties of further relaxing capital controls are expected to affect negatively Greece s economic outlook. As a result, domestic and foreign organizations 12 are now providing for a significantly lower growth rate for 2017, putting at stake the goals of the Greek economy. Graph 1 Quarterly GDP and unemployment rate of Greece. q q I II III IV I II III IV I II III IV I II III IV I II III IV I II III IV I II III IV I II III IV I II III IV I II GDP Q-O-Q (%) GDP Y-O-Y (%) quarterly unemployment rate % (nsa, rhs) Source: ELSTAT For 2018, the Draft State Budget provides for a 2.4% growth in the Greek economy at constant prices as in the MTFS This increase will come from Private Consumption (1.4%), Gross Fixed Capital Formation (12.6% - essentially only from the Private Sector) and Exports of Goods and Services (4.7%). On the other hand, Public Consumption (-0.2%, compared with -0.1% in the MTFS) will show a marginal decline as a result of the ongoing fiscal adjustment. Imports of Goods and Services will increase (4.4%, against 3.5% in the MTFS), following the (expected) acceleration of economic activity. However, the above projections, especially for investments (+ 12.6%), are rather optimistic. Their validation will be under strict conditions. Also, as the draft itself indicates, in order to verify the current projections for 2018, 8 MARKIT, Press Release, Greece Manufacturing PMI, 2/10/ ELSTAT, Press Release on Turnover Index in Industry: July 2017, 19/09/ January September 2017: closures: 18,358 establishments: 23,077, January September 2016: establishments: 22,278, closures: 24,053, GEMH data 12/10/ In order for the forecast to be verified, an average growth rate of 3% should be recorded in each of the two quarters of the second half of the year. 12 OECD 2017: +1.1%, In Deep Analysis UoA 2017: +1.05%, DIW Berlin, ifo, ifw, IWH, rwi: 2017: +0.9%. 17

18 according to the baseline macroeconomic scenario, the smooth progress of the program, the smooth return of the country to international markets, the implementation of the medium-term measures for public debt and normal international conditions are necessary conditions 13. In the second quarter of 2017, unemployment rate stood at 21.1% 14, down from 23.3% in the first quarter of 2017 and the second quarter of 2016 (23.1%), as shown in Graph 1 (nonseasonally adjusted data). Employment also increased significantly by 3.6% on a quarterly basis, while on an annual basis it grew by 8.6%. However, according to ELSTAT Labor Force Survey, women and young people (15-19 and 20-24) face a higher unemployment rate than the general, 25.4%, 55.5% and 42.1%, respectively. On the contrary, a lower rate holds for graduates of Higher Education (16.2%). The fall in unemployment rate compared to 2013 and 2014 is also due to the expansion of flexible forms of employment 15. Also, data by ERGANH for the first nine months of 2017 is encouraging 16. In addition, in July 2017, the unemployment rate (21%) decreased compared with July 2016 (23.4%) and with June 2017 (21.3%) 17. The Draft State Budget for 2018 provides for an unemployment rate at 20.8% in 2018, down from 22.0% in 2017 and 23.5% in 2016 (Labor Force Survey). In its spring forecast, the European Commission estimates that the figure will stand at 22.8% in 2017, down from 23.6% in 2016, and provides for a further reduction at 21.6% in 2018, like in the MTFS However, if the Greek economy fails to achieve high growth rates in the coming years, unemployment will not decline significantly, troubling the Greek society for many more years. According to the Bank of Greece 18, banking deposits of the Private Sector increased by bn (to bn) in August 2017, compared with an increase of 928 mil. in July and bn in June (Graph 18 in Appendix A). In particular, deposits of households and private non-profit institutions in August 2017 showed an increase of 691 mil. (to bn) against an increase of 416 mil. in the previous month. Also, deposits of corporations increased by 716 mil. in August (to 22.1 bn) against an increase of 512 mil. in the previous month. However, the level of Private Sector s banking deposits in August 2017 ( bn- higher by just 1.77 bn compared to the low of July 2015) reflects several concerns about the future developments in the domestic banking system and the Greek economy in general. On the other hand, there has been a significant reduction in the Emergency Liquidity Assistance (ELA) 19 over the last period, continuing the downward trend and the new ceiling stood at 32.6 bn in October 2017, reduced by 1 bn. In these tight liquidity conditions, the rate of total financing to the domestic economy in August 2017 stood at -0.9%, from -1.2% in July and -1.3% in June. Moreover, the unprecedented recession (in duration and depth) of the Greek economy can partly be attributed to the multiple pressures on liquidity in the Greek 13 If these conditions are met, then the more optimistic forecasts such as by the IMF: + 2,64% and by the OECD: + 2,5% are likely to be verified. 14 ELSTAT, Press Release on Labor Force Survey: 2 nd quarter 2017, (non-seasonally adjusted data). 15 ERGANH data. 16 ERGANH data in September ELSTAT, Press Release on Labor Force Survey: July 2017, 05/10/2017 (seasonally adjusted data). 18 Bank of Greece, Press Release on banking financing and deposits, August 2017, 27/09/ Bank of Greece, Press Release on Emergency Liquidity Assistance to the Greek banking system, 05/10/

19 economy since the beginning of the crisis, thus highlighting liquidity as a prerequisite for growth and job creation. The Economic Climate Index (ESI) in Greece, based on European Commission data, stood at points in September 2017, up from 99 units in August and 98.2 in July 2017 (Graph 17 in Appendix A). This Improvement of the Index is attributable to all of its main components. However, in the third quarter of 2017, ESI was higher compared to the corresponding period of 2016 and 2015, but lower compared to As regards the main components of the Index, all of them have recovered significantly in the last year except for the Retail Trade. Despite the recovery of Consumer Confidence (September 2017: points), it is still significantly lower than in the EU countries, reflecting the negative expectations of households about both their personal income and the domestic economy in general. Furthermore, Private Consumption is the dominant component of Greece's GDP at around 70%. Finally, in the Euro area, there is a continuous improvement of ESI, which stood at 113 points in September 2017 and in the third quarter of 2017 it reached the peak of the last decade. The Harmonized Index of Consumer Prices (HICP) 20 in the third quarter of 2017 continued to record a positive change on an annual basis (July: + 0.9%, Aug.: + 0.6%, Sep.: + 1%), as shown in Graph 19 in Appendix A. The positive change in the Index in September is mainly due to the categories 'Transport': + 1.7% and 'Hotels - Coffee - Restaurants': + 2.9%. The increases in indirect taxes, especially in fuels, have an increasing impact on the Index, reducing the purchasing power of consumers. Moreover, as of December 2016, the National Consumer Price Index shows a positive (or zero) change on an annual basis after February Under the 2018 Draft State Budget, the HICP in 2017 is projected to show a positive change of 1.2% in 2017 and 1.1% in 2018, as in the MTFS Finally, in the Euro area 21, September 2017 (+ 1.5%) was the sixteenth consecutive month with a positive change in the Index, on an annual basis, although still below the 2% target. The General Index of the Athens Stock Exchange during the third quarter of 2017 recorded a significant decline from 858 points in mid-july down to 736 points at the end of the quarter. Specifically, from the beginning of the quarter to July 17, it moved upwards from 827 to 858, and then recorded a significant decline until the end of the third quarter. In the second quarter, there was a clear upward trend (+ 23.4%), due to the completion of the second review, resulting in a high of about two years. However, it is significantly lower than in the corresponding period of 2014, but has rebounded considerably compared to the corresponding period of The main driving force of the recent decline was the banking sector. The rise of the Index in the second quarter led the prices of the bank shares above their prices of the last recapitalization in November 2015, but yet they are significantly lower. In other words, the widespread concern about the future developments in the banking system and the Greek economy as well as the end of the third adjustment program have been reflected in its recent downward trend, along with the overall assessment of the Athens Stock Exchange. 20 ELSTAT, Press Release on Harmonised Index of Consumer Prices: September 2017, 10/10/ Eurostat, Flash Estimate - September 2017, 144/2017, 29 September

20 The ten-year bond yield of the Greek government in the third quarter of 2017, based on data from the Bank of Greece, moved downwards compared to the previous quarter. Indeed, in July when Greece issued a bond, the ten-year bond yield stood at the lowest level in recent years (5.33%), obviously benefiting from the European and international conjuncture. In August and September, a slight deterioration was recorded, 5.55% and 5.56%, respectively. Although it has declined significantly over the respective period in 2016, the Greek ten-year bond yield is higher than in other southern countries (Spain, Portugal, Italy), remaining at unsustainable levels. The significant decline in ten-year bond yields between February and July 2017 can mainly be attributed to the completion of the second review of the adjustment program while substantial further improvement is not expected before the medium-term measures on government debt are announced. Similarly, the yield of the other Greek government bonds is also on a downward path. The evolution of prices and yields of Greek 10-year bonds, as well as the negative relationship between them, is shown in Graph 21 in Appendix A. In the second quarter of , compensation per employee increased by 0.5% y-o-y and this was the fifth consecutive quarter that an increase was recorded. In total, for the year 2016, compensation per employee increased by 0.8%, while in the period , it dropped cumulatively by 17.3%. Unit labor costs in the second quarter of 2017 increased by 1.4% on an annual basis. After a five-year fall ( ), unit labor costs increased by 2.1% in 2016, while in the period the cumulative decrease was 12.3%. In this context, labor productivity declined by 1.1% in the second quarter of Overall, for 2016, labor productivity declined by 2.3%, while for the period the cumulative decrease was 12.1% (Graph 20 in Appendix A). This development is a source of concern both for the competitiveness of the Greek economy and for its medium-term prospects of growth, if it does not result in a lower margin to offset the pressure on prices. In this context, the further increase in total new arrears towards the Public Sector in January - August 2017, based on the data of the Public Revenue Agency, (Graph 22 in Appendix Α) highlights the exhaustion of citizens' capacity to pay taxes, while creating reasonable doubts as to whether the ambitious fiscal targets of the coming years can be achieved. Specifically, in August 2017 they amounted to 8.55 bn cumulatively since the beginning of the year, ie 1.07 bn average increase per month. On a monthly basis in August, there was an increase of 1.07 bn, compared with an increase of 2 bn in July. The collection rate against these debts stood at 13.9% in August, from 12.8% in July and 14.5% in June. In addition, old arrears towards the Public Sector amounted to 89.7 bn cumulatively in August 2017, while receipts against this debt amounted to 1.97 bn, up from 1.8 bn in July and 1.56 bn in June. As a result, private debt (towards banks, tax administration, social security funds, State Owned Enterprises etc) is likely to be destabilizing if it is not addressed effectively. Given all these, the Public Revenue Agency in its programming for 2017 plans a wide range of actions to strengthen tax compliance. Specifically, based on the data by the Public Revenue Agency, at the end of August 2017, a total of 3,857,086 taxpayers had arrears towards the Public Sector, reduced by 121,000 on a monthly basis. Indeed, under compulsory recovery measures there 22 The figures in this paragraph are non-seasonally adjusted and come from the e-publication The Greek economy by ELSTAT, 29/09/

21 are already 971,508 taxpayers. Thus, the rate of debtors under compulsory recovery measures stood at 58.8% in August 2017, while the above figure can mainly explain the performance in the collection of arrears. 21

22 2 The Fiscal Management 2.1 The Execution of the State Budget (SB) in the Nine Month Period of 2017 (on a cash basis) The State Budget (SB) in the nine month period of 2017 presents (on a modified cash basis) a primary surplus of 4.5 bn or 2.52% of GDP (estimation based on the Draft of the State Budget) and a total deficit (including interest payments of 4.87 bn) of 0.33 bn or 0.2% of GDP. The Ordinary Budget (OB) presents a primary surplus of 5.05 bn, while the Public Investment Program (PIP) a deficit of 0.51 bn The Primary Surplus of the SB is higher by 19.31% y-o-y and lower by 0.3% compared with the corresponding target set in the MTFS The Primary Surplus of the OB is higher by 29.01% y-o-y and lower by 11.2% compared with the target set in the MTFS , while the PIP deficit is higher by % y-o-y and lower by 55.1% compared with the corresponding target set in the MTFS In conclusion, the Primary Surplus of the SB in the nine month period of 2017 presents an increase on a y-o-y basis by 0.74 bn or by 19.31% and a decrease compared with the target set in the MTFS by 15 mil. or by 0.3%. This improvement on a y-o-y basis can be attributed to the reduction of the expenditure of the SB by 2.62 bn while the net revenue of the SB appear to be lower by 1.9 bn (due to the significant reduction of the PIP revenue by 1.3 bn, while the net revenue of the OB have been also decreased by 0.59 bn y-o-y). The Revenue of the SB The Net Revenue of the SB appear to have been decreased in the nine month period of 2017 by 5.0% y-o-y and by 6.1% compared with the corresponding revised target set in the MTFS This reduction (y-o-y) can be attributed mainly to the reduction of the PIP s revenue by 1.3 bn or by 50.64% and to the decrease of the OB net revenue by 0.59 bn or by 1.68%. The Tax Refunds have been increased by 1.93 bn or by 89.72% y-o-y and increased by 76.1% compared with the corresponding revised target set in the MTFS It should be noted that the pending tax refunds of the public sector towards the private sector have been increased by 57.64% y-o-y amounting to 2.11 bn (see Graph 2). The revenue from privatizations appears to be higher by 1.2 bn or by % y-o-y and reduced by 4.0% compared with the corresponding revised target set in the MTFS