Greek Outlook A delicate balance between certain negatives and potential positives. Economic Research & Investment Strategy

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1 Greek Outlook A delicate balance between certain negatives and potential positives Ilias Lekkos Irini Staggel Anastasia Aggelopoulou Lekkosi@piraeusbank.gr Staggelir@piraeusbank.gr Aggelopouloua@piraeusbank.gr Economic Research & Investment Strategy February 2016

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3 A final comment on 2015 This presentation is dedicated to describing our views and thoughts regarding the Greek economic outlook for Yet, before moving on to focus on the economic developments of 2016, we should devote one last thought to 2015 and understanding why it turned out the way it did. This is important not only for philosophical reasons, but also because the lessons learnt in 2015 should inform our thinking about In that respect, the big question that needs to be answered is Why did 2015 turn out much better than anybody anticipated? especially given the massive self-imposed shock of bank holidays and capital controls. The answer, to my mind, lies in the chart (page 18) that breaks down economic activity into cyclical (such as investment) and non-cyclical (such as consumption) components. While the cyclical component of economic activity collapsed the non-cyclical component demonstrated remarkable resilience. Therefore, it may well be the case that consumption has declined over the crisis years to such levels that only its most inelastic part remains and Greeks are willing to continue financing that part either through past wealth (i.e., a negative saving rate) or through their stash of cash. Either way, we believe that the fact that we have reached a minimum level of consumption puts a floor under further recessionary pressures. 3

4 Outlook for 2016: a delicate balance between certain negatives and potential positives Our outlook for 2016 represents a balancing act between negative events that have already materialised, such as the 3 rd wave of fiscal consolidation and pension system rationalisation which is already under way and a set of positive actions that have the potential not only to mitigate but even to counterbalance the recessionary impact of the former. More specifically, we believe that economic sentiment could benefit substantially from the normalisation of the funding schedule from the official sector, the gradual relaxation of capital controls and the return of excess cash to the banking system post recapitalisation, the acceleration of the privatisation programme and the payment of arrears to the private sector. A necessary pre-condition for all these is the successful completion of the 1 st review of the current economic adjustment programme and the restoration of political visibility. 4

5 Certain negatives and potential positives (plus a statistical correction) For 2016 our baseline scenario is one of a mild contraction in the first half of the year, due to the lagging impact of the financial disruption caused by the capital controls and the effect of the new fiscal consolidation measures introduced in Q3 & Q plus the new adjustments in payroll taxes and pension expenditure scheduled for Q Following the stabilization, on a quarterly basis, in Q we expect steady growth in the second half of the year based on the restoration of business confidence, low starting levels of economic activity, a robust tourism season, an acceleration of the absorption of EU funds and of the privatization programme. Provided that the above tailwinds materialize the balance between negatives and positives is tilted to the positive side with intra-year growth dynamics expected to be 0.5%. Yet the full year GDP is expected to come in at -0.6% due to an estimated negative carry-over effect of -1.1%. 5

6 Yielding to the new data: Economic Outlook Economic Outlook (YoY% change, unless otherwise stated) Real GDP to to 3.0 Nominal GDP to 3.0 to 4.0 CPI to to 1.0 Unemployment (% of labour force) General Government Gross Debt (% of GDP) Private Sector Deposits (residents) to to Private Sector Loans Source: ELSTAT, Bank of Greece, MinFin, Piraeus Bank Research 6

7 Greek Economic Outlook: The Broad Framework Greek Economic Outlook: The Headwinds Greek Economic Outlook: The Potential Tailwinds Greek Economic Outlook: Inflation Greek Economic Outlook: Labour Market Greek Government Debt Greek Banking Sector 7

8 Overall sentiment remains extremely depressed, pointing to very negative levels of activity. Yet the expectations of the corporate world have staged a strong recovery indicating that the shock of capital controls is subsiding. Economic Climate Tracer Business * vs Consumers Confidence level 1.0 downswing expansion Jan.'05 Dec.14' -1.0 Dec15 contraction upswing Feb-10 Apr-10 Jun-10 Aug-10 Oct-10 Dec-10 Feb-11 Apr-11 Jun-11 Aug-11 Oct-11 Dec-11 Feb-12 Apr-12 Jun-12 Aug-12 Oct-12 Dec-12 Feb-13 Apr-13 Jun-13 Aug-13 Oct-13 Dec-13 Feb-14 Apr-14 Jun-14 Aug-14 Oct-14 Dec-14 Feb-15 Apr-15 Jun-15 Aug-15 Oct-15 Dec-15 ESI (LHS) Business Index (LHS) Consumer Confidence Indicator (RHS) mom change *Note: Based on Piraeus Bank Research estimation method ( =100) Source: European Commission DG ECFIN, ELSTAT, Piraeus Bank Research 8

9 The outlook of the Greek economy is expected to improve after the post capital-controls shock Key growth drivers in 2H 14 / 1H 15 Recession drivers during 2H 15 to 1Q 16 Key recovery drivers in 2016 Real GDP growth QoQ % change) Real GDP growth QoQ % change) 0.3 (0.5) (0.5) (0.9) (1.0) 3Q'14 4Q'14 1Q'15 2Q'15 3Q'15 4Q'15 1Q'16 2Q'16 3Q'16 4Q'16 ü 2013 positive momentum carried forward ü Substantial pick-up in tourism (2014 arrivals up 43% vs and 1H 15 arrivals up 19% vs 1H 14) ü Key sectors resilient despite political uncertainty during Q Q2 15: Manufacturing up 2.8% Services up 2.4% Retail sales up 0.8% Tourism receipts up 10.1% y-o-y ü Political uncertainty, bank holidays and capital controls ü New fiscal austerity measures up to 4.3% of GDP ü 18bn back-loaded payment of tax obligations by end of 2015 Increased tourism revenues (July Sep 15: 5.2% ΥοΥ) and ~ 50bn banknotes in circulation lead to a milder than expected recession ü Clear political path with no elections until 2019 ü Capital controls expected to be lifted / substantially relaxed in early 2016 ü Utilisation of 11.5bn EU structural funds during ü 5.5bn liquidity injection in the economy through clearance of State s arrears to the private sector ü New FDIs through mature privatisations (e.g. Piraeus Port and regional airports) 9

10 The Revised GDP data are now more in line with sentiment indicators The revised GDP data are now more in line with the leading indicators. Yet, we believe that the steep decline in sentiment is more a result of sentimental overreaction and is not indicative of the decline in economic activity. For 2016, we estimate a negative carry-over effect of approx. -1.1%. The quarterly GDP profile, according to our estimations, is -0.5% in Q1, 0% in Q2, +1.0 in Q3 and +% in Q4. For 2017, we estimate GDP to grow between 2% - 3% based on a positive carry-over effect of 2% and a QoQ growth rate of approx. 0.3% Real GDP (% change) Q1/10 Q2/10 Q3/10 Q4/10 Q1/11 Q2/11 Q3/11 Q4/11 Q1/12 Q2/12 Q3/12 Q4/12 Q1/13 Q2/13 Q3/13 Q4/13 Q1/14 Q2/14 Q3/14 Q4/14 Q1/15 Q2/15 Q3/15 Q4/15 Q1/16 Q2/16 Q3/16 Q4/16 Q1/17 Q2/17 Q3/17 Q4/17 QoQ (RHS) YoY (LHS ) ESI vs GDP growth rate Q1/01 Q3/01 Q1/02 Q3/02 Q1/03 Q3/03 Q1/04 Q3/04 Q1/05 Q3/05 Q1/06 Q3/06 Q1/07 Q3/07 Q1/08 Q3/08 Q1/09 Q3/09 Q1/10 Q3/10 Q1/11 Q3/11 Q1/12 Q3/12 Q1/13 Q3/13 Q1/14 Q3/14 Q1/15 Q3/15 Economic Sentiment Indicator (LHS) (revised) Real GDP growth (% ΥoΥ, RHS) (old) Real GDP growth (% ΥoΥ, RHS) Source: ELSTAT, European Commission DG ECFIN, Piraeus Bank Research 10

11 Greek Economic Outlook: The Broad Framework Greek Economic Outlook: The Headwinds Greek Economic Outlook: The Potential Tailwinds Greek Economic Outlook: Inflation Greek Economic Outlook: Labour Market Greek Government Debt Greek Banking Sector 11

12 Yet another wave of fiscal consolidation to hit Greek shores The new fiscal path based on primary surplus targets (as % of GDP) of: and beyond -0.25% 0.5% 1.75% 3.5% Total new fiscal measures : 4.3% of GDP of which already legislated: pending: 2.8% of GDP 1.5% of GDP Measures Legislated Jul.-Dec Further Reforms (% of GDP) VAT reforms 724 2,730 2,730 2,730 Tax reforms (luxury goods, insurance, special taxes etc) Corporate income tax reforms (increase in percentage, advance payment) Personal income tax reforms (advance payment) Property tax reforms (ENFIA on EOT buildings, property income) Excise duty reforms (farmers' diesel, small breweries) Pension reforms (health contribution, supplementary pension, retirement limits etc) 434 1,193 1,271 1,367 Other reforms Total Measures Legislated Jul.-Dec ,546 5,448 5,356 4,963 % of GDP Fiscal Measures : : Pension reforms Others 0.2 : 0.2 : Further Reforms % of GDP Total Reforms of MoU % of GDP Source: European Commission, Hellenic Parliament, Piraeus Bank Research 12

13 Forcing the Fiscal Policy back into a restrictive mode The increase of the cyclically adjusted primary surplus to 3.2% in 2016 from 2.7% in 2015 signals the switch of fiscal policy back to a restrictive mode. State Budget (on a modified cash basis, bn ) (excl. revenues from Privatization proceeds & ANFA/SMPs) Cyclically adjusted Primary Balance (% of potential GDP) Δ(CAdj PB) > 0 : restrictive fiscal policy Δ(CAdj P B) < 0 : expansionary fiscal policy Jan Jan-Feb Jan-Mar Jan-April Jan-May Jan-June Jan-July Jan-Aug Jan-Sep Jan-Oct Jan-Nov Jan-Dec (forecast) Δ (Cyclically adjusted Primary Balance) Cyclically adjusted Primary Balance Source: IMF, Min Fin, State Budget 2016, Piraeus Bank Research 13

14 With Public Investment failing to provide any support to the economy In 2014 the front-loading of PIP capital expenditures played a pivotal role in the revival of the Greek economy. Since then its progress has failed to meet our expectations. Production Index in Construction (contributions, 2010=100) PIP expenditures (cumulative, bn ) Q1/11 Q2/11 Q3/11 Q4/11 Q1/12 Q2/12 Q3/12 Q4/12 Q1/13 Q2/13 Q3/13 Q4/13 Q1/14 Q2/14 PI of Civil Engineering (contribution) PI of Building Construction (contribution) Production Index in Construction (YoY% change) Q3/14 Q4/14 Q1/15 Q2/15 Q3/15 Jan Jan-Feb Jan-Mar Jan-April Jan-May Jan-June Jan-July Jan-Aug Jan-Sep Jan-Oct (forecast) Jan-Nov Jan-Dec Source: Min Fin, State Budget 2016, ELSTAT, Piraeus Bank Research 14

15 Private Sector Investments still on a downward trend Residential investment has continued to decline, buffeted by high uncertainty, tax hikes and lack of mortgage funding. Non-residential investment is held back by capital controls, a level of aggregate supply still substantially lower than aggregate demand (i.e. negative output gap). Gross Fixed Capital Formation, Residential (current prices) Fixed Capital Formation in Non Financial Corporations (current prices, mn) Residential (% of total) Residential (YoY% change) Q1/07 Q3/07 Q1/08 Q3/08 Q1/09 Q3/09 Q1/10 Q3/10 Gross Fixed Capital Formation Q1/11 Q3/11 Q1/12 Q3/12 Q1/13 Q3/13 Q1/14 Q3/14 Net Fixed Capital Formation Q1/15 Q3/15 Source: ELSTAT, Piraeus Bank Research 15

16 Private Sector Investments.. and record high real cost of money. Average Real Interest Rate on New bank loans (< 1mn) to Non Financial Corporations (nominal rate minus change in HICP, %) Piraeus Bank Greek Corporate Bond Index Weighted Average Yield Q1/09 Q2/09 Q3/09 Q4/09 Q1/10 Q2/10 Q3/10 Q4/10 Q1/11 Q2/11 Q3/11 Q4/11 Q1/12 Q2/12 Q3/12 Q4/12 Q1/13 Q2/13 Q3/13 Q4/13 Q1/14 Q2/14 Q3/14 Q4/14 Q1/15 Q2/15 Q3/15 Euroarea Greece /01/13 01/02/13 03/03/13 02/04/13 02/05/13 01/06/13 01/07/13 31/07/13 30/08/13 29/09/13 29/10/13 28/11/13 28/12/13 27/01/14 26/02/14 28/03/14 27/04/14 27/05/14 26/06/14 26/07/14 25/08/14 24/09/14 24/10/14 23/11/14 23/12/14 22/01/15 21/02/15 23/03/15 22/04/15 22/05/15 21/06/15 21/07/15 20/08/15 19/09/15 19/10/15 18/11/15 18/12/15 17/01/16 Source: ECB, Eurostat, BoG, ELSTAT, Bloomberg, Piraeus Bank Research 16

17 Greek Economic Outlook: The Broad Framework Greek Economic Outlook: The Headwinds Greek Economic Outlook: The Potential Tailwinds Greek Economic Outlook: Inflation Greek Economic Outlook: Labour Market Greek Government Debt Greek Banking Sector 17

18 The steady recovery in the non-cyclical components of GDP (mainly consumption) has played a key supportive role throughout the crisis period and explains a big part of GDP resilience. Furthermore the credit impulse has turned positive since mid-2012, indicating that the wave of deleveraging is over and that any incremental step is positive for the Greek economy. Pro-Cyclical vs. Non-Cyclical (YoY change) Credit Impulse vs Domestic Demand Q1/96 Q4/96 Q3/97 Q2/98 Q1/99 Q4/99 Q3/00 Q2/01 Q1/02 Q4/02 Q3/03 Q2/04 Q1/05 Q4/05 Q3/06 Q2/07 Q1/08 Q4/08 Q3/09 Q2/10 Q1/11 Q4/11 Q3/12 Q2/13 Q1/14 Q4/14 Q3/ Q1/05 Q4/05 Q3/06 Q2/07 Q1/08 Q4/08 Q3/09 Q2/10 Q1/11 Q4/11 Q3/12 Q2/13 Q1/14 Q4/14 Q3/15-3 Pro - Cyclical (YoY % change) Non-Cyclical (YoY% change) Loans, (flows mn, 4Q Moving Sum) 2nd derivative [t-(t-4)], LHS Domestic Demand (YoY% change), RHS Source: ELSTAT, Eurostat, BoG, Piraeus Bank Research 18

19 In the short-run Consumption will play a role in GDP stabilisation Private Consumption (% change) In 2016 private consumption will contribute to growth. It constitutes approx. 70% of GDP and its main component is through inelastic expenditures. Since Q4/13 private consumption has increased. In Q3/15 the capital controls had a milder than -8.0 expected, impact on private consumption, mainly -1 Q1/12 Q2/12 Q3/12 Q4/12 Q1/13 Q2/13 Q3/13 QoQ% change Q4/13 Q1/14 Q2/14 Q3/14 YoY% change Q4/14 Q1/15 Q2/15 Q3/15 due to the increased stock of banknotes in circulation. Households Gross Saving Ratio (%) Banknotes in circulation (bn ) Q1/07 Q2/07 Q3/07 Q4/07 Q1/08 Q2/08 Q3/08 Q4/08 Q1/09 Q2/09 Q3/09 Q4/09 Q1/10 Q2/10 Q3/10 Q4/10 Q1/11 Q2/11 Q3/11 Q4/11 Q1/12 Q2/12 Q3/12 Q4/12 Q1/13 Q2/13 Q3/13 Q4/13 Q1/14 Q2/14 Q3/14 Q4/14 Q1/15 Q2/15 Q3/15 Jan-12 Mar-12 May-12 Jul-12 Sep-12 Nov-12 Jan-13 Mar-13 May-13 Jul-13 Sep-13 Nov-13 Jan-14 Mar-14 May-14 Jul-14 Sep-14 Nov-14 Jan-15 Mar-15 May-15 Jul-15 Net liabilities related to the allocation of euro banknotes within the Eurosystem Banknotes in circulation Sep-15 Nov-15 Source: ELSTAT, BoG, Piraeus Bank Research 19

20 External sector: Tourism and low oil prices Oil prices ( ) vs Trade balance (mn ), 6m Moving Average External Trade has been making a positive contribution on the back of lower oil prices, recovery of tourism revenues and declining demand for imports due to recessionary pressure Jun-09 Oct-09 Feb-10 Jun-10 Oct-10 Feb-11 Jun-11 Oct-11 Feb-12 Jun-12 Oct-12 Feb-13 Jun-13 Oct-13 Feb-14 Jun-14 Oct-14 Feb-15 Jun-15 Oct-15 Trade Balance Oil (mn, 6m MA), LHS Oil Prices (, 6m MA), RHS Gap of Growth vs External Trade Travel Receipts (bn ) INTRA EU Trade (bn ), LHS ΕΧTRA EU Trade (bn ), LHS -1 0 Jan Jan-Feb Jan-Mar Jan-April Jan-May Jan-June Jan-July Jan-Aug Jan-Sep Jan-Oct Jan-Nov Jan-Dec Real GDP growth rate Gap (GR-EA), RHS Source: ELSTAT, BoG, Piraeus Bank Research 20

21 Liquidity - The Greek economy should benefit from... Disbursement of the remaining tranches of 5.7 bn for 2015 and of 14.2 bn in 2016 Disbursements from the PIP for bn Increase in state cash-reserves from approx. 1.0 bn at end Sept. to 8 bn in the long run Estimated return of cash to the banking sector following the pattern observed in bn Unwinding of repos financing with entities in the wider public sector 3.5 bn Record amounts of cash in circulation 48bn Source: European Commission, MinFin, Bank of Greece, Piraeus Bank Research 21

22 5.5 bn of arrears to be cleared in 2016 Arrears clearance, funded out of the 3 rd MoU funds will increase private sector liquidity and banking sector deposits. General Government Arrears to third parties* (bn ) Schedule of Arrears clearance (bn ) Dec-11 Dec-12 Dec-13 Dec-14 Jan-15 Feb-15 Mar-15 Apr-15 May-15 Jun-15 Jul-15 Aug-15 Sep-15 Oct-15 Nov-15 General Government Tax refunds arrears Total Arrears remaining amount of programme financing Arrears clearance * General Government Arrears are Outstanding arrears to third parties (outside of the general government), not paid within 90 days since the date they were due and Tax Refunds Arrears refer to outstanding refunds data that have been issued and cleared until the last day of each month. Source: MinFin, State Budget 2016, European Commission, Piraeus Bank Research 22

23 Realistic Privatisations Targets Based on the 3rd Economic Adjustment Programme: The targeted total value of assets to be sold is 50 billion Sale of assets will be used to repay ESM, to decrease debt and to fund investment The fund will be managed by Greek authorities under supervision of European institutions Based on the 2016 State Budget: During the total amount of assets sold totalled 3.0 bn, while privatization revenues reached 2.86bn. The remaining amount to be disbursed is 175mn. In 2016 the targeted total value of assets to be sold is 2.3 bn, of which approx. 1.3bn is from the privatization of the 14 Greek Regional Airports, which has already been agreed. 2.5 Privatizations ( bn) Value of Assets Revenues Source: European Commission, MinFin, State Budget 2016, Piraeus Bank Research 23

24 Greek Economic Outlook: The Broad Framework Greek Economic Outlook: The Headwinds Greek Economic Outlook: The Potential Tailwinds Greek Economic Outlook: Inflation Greek Economic Outlook: Labour Market Greek Government Debt Greek Banking Sector 24

25 Economic Outlook: Inflation In 2015, the average headline CPI declined by 1.7%. In 2016, the inflation outlook will be decided by a tug-of-war between the inflationary impact of VAT hikes and the disinflationary effect of excess supply. The net effect will push inflation close to 0% in mid-2016, but deflation will intensify once VAT hikes drop out of the calculations Inflation Rate (CPI, YoY % change) HICP & Effect of tax changes Q1/09 Q2/09 Q3/09 Q4/09 Q1/10 Q2/10 Q3/10 Q4/10 Q1/11 Q2/11 Q3/11 Q4/11 Q1/12 Q2/12 Q3/12 Q4/12 Q1/13 Q2/13 Q3/13 Q4/13 Q1/14 Q2/14 Q3/14 Q4/14 Q1/15 Q2/15 Q3/15 Q4/15 Q1/16 Q2/16 Q3/16 Q4/16 Q1/17 Q2/17 Q3/17 Q4/ Q1/09 Q2/09 Q3/09 Q4/09 Q1/10 Q2/10 Q3/10 Q4/10 Q1/11 Q2/11 Q3/11 Q4/11 Q1/12 Q2/12 Q3/12 Q4/12 Q1/13 Q2/13 Q3/13 Q4/13 Q1/14 Q2/14 Q3/14 Q4/14 Q1/15 Q2/15 Q3/15 Q4/15 Q1/16 Q2/16 Q3/16 Q4/16 HICP constant tax (YoY % change) Tax impact HICP (YoY % change) Source: ELSTAT, EUROSTAT, Piraeus Bank Research 25

26 Output gap vs Tax hikes The substantial output gap plus the global disinflationary environment (with low energy and commodity prices) have contributed to a very low level of constant-tax inflation. Yet the recent administrative increases in the VAT rates provide an unwelcome counterweight, stabilizing prices for now. HICP constant tax YoY % change Inflation & Output Gap Q3 15' y = x R² = Output Gap HICP & Effect of tax changes Feb-10 Apr-10 Jun-10 Aug-10 Oct-10 Dec-10 Feb-11 Apr-11 Jun-11 Aug-11 Oct-11 Dec-11 Feb-12 Apr-12 Jun-12 Aug-12 Oct-12 Dec-12 Feb-13 Apr-13 Jun-13 Aug-13 Oct-13 Dec-13 Feb-14 Apr-14 Jun-14 Aug-14 Oct-14 Dec-14 Feb-15 Apr-15 Jun-15 Aug-15 Oct-15 Dec-15 HICP constant tax (YoY % change) Effect of tax changes HICP (YoY % change) Source: DG ECFIN, ELSTAT, Eurostat, Piraeus Bank Research 26

27 Economic Outlook: Nominal GDP & GDP Deflator Due to structural changes since 2010, the GDP deflator has shown greater sensitivity to the negative output gap than CPI. This sensitivity differential has now closed, and we estimate the GDP deflator will come in at -0.7% in 2015, pushing the nominal GDP growth rate to -1.0%. For 2016, we anticipate that the GDP deflator will end up close to 0% and the nominal GDP growth rate will range between -1.0% and 0%. GDP Deflator & CPI (YoY % change) Nominal & Real GDP (YoY % change) Q1/09 Q2/09 Q3/09 Q4/09 Q1/10 Q2/10 Q3/10 Q4/10 Q1/11 Q2/11 Q3/11 Q4/11 Q1/12 Q2/12 Q3/12 Q4/12 Q1/13 Q2/13 Q3/13 Q4/13 Q1/14 Q2/14 Q3/14 Q4/14 Q1/15 Q2/15 Q3/15 Q4/15 GDP Deflator Real GDP Nominal GDP GDP Deflator CPI Source: ELSTAT, Piraeus Bank Research 27

28 Greek Economic Outlook: The Broad Framework Greek Economic Outlook: The Headwinds Greek Economic Outlook: The Potential Tailwinds Greek Economic Outlook: Inflation Greek Economic Outlook: Labour Market Greek Government Debt Greek Banking Sector 28

29 Economic Outlook: Unemployment Rate In 2015, the unemployment rate reached 25.2%, supported by job creation schemes and the hiring of public sector employees. In 2016, we expect the unemployment rate to range between 23.5% and 24.5%, as we estimate that the employment schemes will continue to support the labour market and that, towards the end of the year, activity will strengthen. In 2017, we expect the unemployment rate to range from 22.5% to 23.5% and to decline thereafter, as the economy will return to growth and the first positive results of the privatizations will be reflected in the employment figures. Unemployment rate (%) Q1/10 Q2/10 Q3/10 Q4/10 Q1/11 Q2/11 Q3/11 Q4/11 Q1/12 Q2/12 Q3/12 Q4/12 Q1/13 Q2/13 Q3/13 Q4/13 Q1/14 Q2/14 Q3/14 Q4/14 Q1/15 Q2/15 Q3/15 Q4/15 Q1/16 Q2/16 Q3/16 Q4/16 Q1/17 Q2/17 Q3/17 Q4/ UR (t) - UR (t-4), (LHS) UnRate (RHS ) Source: ELSTAT, Piraeus Bank Research 29

30 Another big gap between hard and soft data is evident in the labour market. If the gap persists, it will bode ill for the evolution of the unemployment rate. Hiring Intentions (normalized data, sa, 3m moving average) vs Employment (YoY% change, sa data) Economic Growth vs Unemployment rate Yearly change % unemployment Q3/15 y = x R² = Jan-07 Jun-07 Nov-07 Apr-08 Sep-08 Feb-09 Jul-09 Dec-09 May-10 Oct-10 Mar-11 Εmployed (YoY % change, sa), LHS Aug-11 Jan-12 Jun-12 Nov-12 Apr-13 Sep-13 Feb-14 Jul-14 Dec-14 Hiring Intention (3m ma), RHS May-15 Oct Real GDP (YoY % change) Source: European Commission DG ECFIN, ELSTAT, Piraeus Bank Research 30

31 Greek Economic Outlook: The Broad Framework Greek Economic Outlook: The Headwinds Greek Economic Outlook: The Potential Tailwinds Greek Economic Outlook: Inflation Greek Economic Outlook: Labour Market Greek Government Debt Greek Banking Sector 31

32 Public Debt: the successful bank recap saves 20bn yet the future is not rosy Given the lower than expected bank recap needs, Debt / GDP is estimated to be 177.5% in We expect Debt / GDP to increase further in 2016 to 183.5% before declining to 176 % in General Government Gross Debt (% of GDP) Source: ELSTAT, Piraeus Bank Research 32

33 Disbursements following the 3rd EAP programme According to the 3rd EAP a total amount of 21.4 bn has been disbursed in bn of this was allocated to the recapitalisation of Greek banks. A remaining amount of 5.7 bn is still due to be disbursed, so in Q1/16 Greece stands to receive an extra 10.5bn of official sector funding. At the end of the 3rd EAP, the cumulative total of disbursements of the three programmes will amount to bn. The 3rd EAP Disbursements (Aug Aug. 2018, bn.) st & 2nd EAP Aug-15 Nov-15 Dec-15 Q1/16 Q2/16 Q3/16 Q4/16 ESM excl. Recap: Remaing ( 44.4 bn) ESM ( 16 bn) Expected total (cumulative), RHS Q1/17 Q2/17 Q3/17 Q4/17 Q1/18 Q2/18 Jul-18 Aug-18 ESM: Bank recapitalisation ( 5.4 bn) Total (cumulative), RHS Note: Figures do not include 25 bn for the banking sector financing needs. Source: MinFin, Bloomberg, EFSF, ESM, IMF, Piraeus Bank Research 33

34 Financing needs fully covered by a 86 bn official sector loan Financing Requirements Duration August 2015 August 2018 (a) Total debt service 54.1 of which Amortisation 30.5 Repayment of bridge -loan 7.0 Interest payments 16.6 (b) Arrears clearance 7.0 Cash buffer and SDR holdings (c) replenishment 7.6 (d) Bank recapitalisation 25.0 (e) Privatisation (revenues) -6.2 (f) Primary surplus (revenues) - Total Gross Financing Needs 85.5 Source: European Commission, Piraeus Bank Research 34

35 Debt maturities now stretch all the way to 2059 (for now) Debt distribution by holder 83% held by the official sector Bonds & Loans Maturities* (as of 20 Jan. 2016, mn ) *Figures do not include T-bills and approx. 26 bn related to Bank of Greece loans, special and bilateral loans, other internal and external loans, repos and external securitizations. Moreover notes amounting to 5.42 bn that have been disbursed for funding bank recapitalisation are not included. The amount was disbursed pro rata in ESM floating rate notes and the final maturity will be in line with the maximum weighted average loan maturity of 32.5 years. Source: MinFin, Bloomberg, EFSF, ESM, IMF, Piraeus 35

36 Deferred Interest on EFSF creates a hump in , which will continue to grow to the tune of 1 bn per year Principal amount and interest payments due ( , bn.) Note: Figures do not include short-term securities (T-bills) and approx. 26 bn related to Bank of Greece loans, special and bilateral loans, other internal and external loans, repos and external securitizations. Source: MinFin, Bloomberg, EFSF, ESM, IMF, Piraeus Bank Research 36

37 A bird s-eye view of the evolution of Greek debt Despite the widespread belief that interest in Greek debt is at rock-bottom levels, the combination of GDP recession and entrenched deflation is creating a substantial positive snowball effect that contributed 6.76% in 2014 and 8.53% in 2015 to Greek Government Debt growth. 3 Driving Factors of Debt (as % of GDP) Primary Balance (reverse sign) i.e: "+" is a deficit " -" is a surplus "Snow-ball" effect Stock - flow adjustment+ Δ (debt) Note: ESA 2010 adjustment, primary balance based on MoU methodology since Source: Ameco Database, DG ECFIN, ELSTAT, IMF, Piraeus Bank Research calculations 37

38 Greek Economic Outlook: The Broad Framework Greek Economic Outlook: The Headwinds Greek Economic Outlook: The Potential Tailwinds Greek Economic Outlook: Inflation Greek Economic Outlook: Labour Market Greek Government Debt Greek Banking Sector 38

39 Banking Sector: Evolution of loans and deposits In 2015 the outflow of deposits and the dependency of Greek banks on Eurosystem funding had an adverse impact on the total credit formation. In the recapitalization and the gradual restoration of domestic confidence in the banking system will increase deposit inflows. Credit will stabilise in 2016 and start expanding by Private Sector Loans (% of GDP) Private Sector Deposits (residents, % of GDP) Source: Bank of Greece, Piraeus Bank Research 39

40 Banking Sector: Evolution of loans and deposits The liquidity position of the Greek banking system is (once again) stretched to extreme levels, pushing the funding gap to record highs. Based on the assumption of further relaxation of capital controls and the pattern of deposits inflows after the 2012 lows (see next slide), we expect a 4.5% growth in deposits in 2016 and a stabilisation in credit contraction. Loans Deposits Gap (outstanding amount mn ) Funding Gap * ( mn) Deposits > Loans Q2/ Deposits < Loans Q1/03 Q4/03 Q3/04 Q2/05 Q1/06 Q4/06 Q3/07 Q2/08 Q1/09 Q4/09 Q3/10 Q2/11 Q1/12 Q4/12 Q3/13 Q2/14 Q1/15 Q4/15 0 Credit to Private Sector (excl BOG) Total Deposits (excl. BoG) Q1/05 Q2/05 Q3/05 Q4/05 Q1/06 Q2/06 Q3/06 Q4/06 Q1/07 Q2/07 Q3/07 Q4/07 Q1/08 Q2/08 Q3/08 Q4/08 Q1/09 Q2/09 Q3/09 Q4/09 Q1/10 Q2/10 Q3/10 Q4/10 Q1/11 Q2/11 Q3/11 Q4/11 Q1/12 Q2/12 Q3/12 Q4/12 Q1/13 Q2/13 Q3/13 Q4/13 Q1/14 Q2/14 Q3/14 Q4/14 Q1/15 Q2/15 Q3/15 Q4/15 * Funding Gap in Domestic Private Sector is calculated as the difference between the net flows of Loans minus the flows of Deposits & repos during the period. Net flows of Loans are derived from changes in outstanding amounts corrected for reclassifications, loan write-offs and exchange rate variations. Flows of Deposits & repos are derived from changes in outstanding amounts corrected for foreign exchange valuations and reclassification adjustments. Source: ELSTAT, Piraeus Bank Research 40

41 Funding sources: 2015 vs 2012 In order to understand the dynamics of the 2015 liquidity shock, we compare the behaviour of deposits and Eurosystem funding in 2015 to the previous stress period in 2012: While the pattern of Eurosystem funding (especially post peak) is broadly similar in both cases, the deposit decline has been substantially steeper and the recovery much more muted in 2015 than in Deposits Inflows Pattern Eurosystem Funding Pattern 0-5,000-10,000 Dec14-Jul 15: Outflow 44bn 180, , ,000 June 2012 Jul 12 - Jun 13: Δ(Eurosystem Funding) = bn -15,000-20,000-25,000-30,000-35,000 Sep 11 - Jun 12: Outflow 40bn June 2012 Jul 12 - Jun 13: Inflow 12.6bn 120, ,000 80,000 60,000 June ,000 40,000-45,000-50,000 t-9 t-8 t-7 t-6 t-5 t-4 t-3 June 2015 t-2 t-1 t t+1 t+2 t+3 t+4 t+5 t+6 t+7 t+8 t+9 t+10 t+11 t+12 20,000 0 t-9 t-8 t-7 t-6 t-5 t-4 t-3 t-2 t-1 t t+1 t+2 t+3 t+4 t+5 t+6 t+7 t+8 t+9 t+10 t+11 t+12 Source: ELSTAT, Piraeus Bank Research 41

42 Banking Sector: Non Performing Loans The gradual deceleration of the Debt Servicing Ratio (as a result of both lower rates and maturity extensions) was one of the factors that contributed to the elimination of the new NPL formation, at least until Q NPLs Ratio Debt Service Ratio* (Households & Non Financial Corporations) vs NPLs Q H M Q H M Q H M Q H M Q H M Q Η M Q Η M Q H M Q H M Q H M Q Q Total Loans Consumer Corporate loans Mortgage Loans Q H M Q H M Q H M Q H M Q Η M Q Η M Q H M Q H M Q H M Q Debt Service Ratio, LHS * Debt Service Ratio (DSR) is defined as the ratio of the flow of debt service payments (interest payments plus amortisations) to the flow of income. NPLs 3QMA (t - (t-1)), RHS Source: ELSTAT, Piraeus Bank Research 42

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