Greek Outlook 2016: Backloaded measures require frontloaded action Ilias Lekkos Irini Staggel Anastasia Aggelopoulou Lekkosi@piraeusbank.gr Staggelir@piraeusbank.gr Aggelopouloua@piraeusbank.gr Economic Research & Investment Strategy June 2016
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Déjà vu all over again The felling of déjà vu for the Greek economy is growing once again. Similar to what we have seen time and again over the last 7 years as soon as the Greek economy starts showing some signs of life there comes a new period of prolonged and intense negotiations between the Government and the Institutions ultimately resulting in a new and substantial wave of fiscal austerity, which in turn drags the Greek economy back to recession. With GDP contracting by 1.4%(YoY) in Q1-2016 and with a new set of fiscal consolidation measures equal to 2.2% of GDP to be introduced in the second half of the year, urgent action is required by all sides in order to limit the depth and duration of economic contraction. In what follows we estimate a number of macroeconomic scenarios starting from the most pessimistic one where the economy feels the full effect of the austerity measures without any mitigating actions. In that scenario the economy will contract by -2.8%. We believe that the prospect of such an adverse outcome should motivate all policy makers to spring into action. We also estimate a scenario under which Greek households, in an attempt to cushion the impact of austerity on their living standards, reduce their savings even further, limiting somewhat the size of economic contraction to -2.5%. Yet, the only factor with true recession mitigating potency is the clearance of Government Arrears which if distributed timely could help limit the level of GDP recession to -1.1%. 3
2/1/13 2/3/13 2/5/13 2/7/13 2/9/13 2/11/13 2/1/14 2/3/14 2/5/14 2/7/14 2/9/14 2/11/14 2/1/15 2/3/15 2/5/15 2/7/15 2/9/15 2/11/15 2/1/16 2/3/16 2/5/16 level A bird s - eye view of the Business Cycle Despite the prolonged uncertainty and speculation regarding the progress of the negotiations and expectations for a new set of substantial fiscal consolidation economic sentiment at 89.7 points remains in the recovery stage of the business cycle. Financial Markets on the other hand have already priced-in the successful conclusion of the negotiations and the disbursement of the next tranche. Economic Climate Tracer Piraeus Bank Greek Sovereign & Corporate Bond Index Yields (Weighted Average) downswing expansion 25 14 Jan.'05 20 12 10 15 8 Nov.14' 10 6 - May 16' 5 4 2 0 0 contraction upswing -2.0-0.25-0.15-5 5 0.15 mom change Piraeus Bank Sovereign Bond Index - Yield Piraeus Bank Corporate Bond Index - Yield Source: European Commission DG ECFIN, Bloomberg, ELSTAT, Piraeus Bank Research 4
Q1/14 Q2/14 Q3/14 Q4/14 Q1/15 Q2/15 Q3/15 Q4/15 Q1/16 Pre-agreement Real GDP Baseline Scenario Following the release of Q1-2016 real GDP figures of -0.5% QoQ (-1.4% YoY) contraction we revised downwards our Q2-2016 estimates from 0% to -0.25% while keeping H2-2016 unrevised. Real GDP growth rate Real GDP over a new base 2.0 1.5 1.3 1.2 0.9 0.9 0.8 0.5-0.5 - -1.5-2.0 0.6 0.4 0.2-0.3 1.4-0.8 0.4 0.1 0.3-1.3-1.7 0.1-0.9-0.5-1.4 0.6 0.4 0.2-0.2-0.4-0.6 0.5 0.5-0.25-0.25-0.5 Q1/16 Q2/16 Q3/16 Q4/16 QoQ %, sa data, 2010 prices YoY %, sa data, 2010 prices Updated Baseline Scenario Old Baseline Scenario (as of March 2016) Source: ELSTAT, Piraeus Bank Research 5
Measures Legislated Jan.-May 2016 Yet another wave of fiscal consolidation to hit Greek shores The new fiscal path based on primary surplus targets (as % of GDP) of: 2015 2016 2017 2018 and beyond -0.25% 0.5% 1.75% 3.5% Total new fiscal measures legislated: 3.0% of GDP, of which 2.2% in 2016 2016 2017 2018 2019 VAT reforms 255 437 437 437 Tax reforms 298 382 456 456 Personal income tax reforms 1,700 1,700 1,700 1,700 Excise duty tax reforms 597 597 610 610 Pension reforms 1,206 1,903 2,571 2,708 Other reforms -221-234 -247-260 Total Measures Legislated Jan.-May 2016 ( mn) 3,835 4,784 5,526 5,650 as % of GDP 2.2 2.7 3.0 3.0 Source: MinFin, European Commission, Hellenic Parliament, Piraeus Bank Research 6
Should Fiscal Multiplier equal 1: Implications for growth The incremental impact of the new agreement on fiscal revenues is estimated at 3.8 bn in H2-2016 and 0.95 bn for the full-2017. The result of this uneven distribution of the phasing in of the new measures is that the marginal impact of the measures will be extremely severe in Q3 & Q4-2016, will decline in Q1 & Q2-2017 and will even turn negative in Q3 & Q4-2017. A full pass-through of the measures to growth (fiscal multiplier=1) with no mitigating actions will push GDP growth down to -2.8%. Incremental Impact of the New Measures ( mn) Real GDP growth rate (YoY % change) 2500 2.0 2000 1500 - -1.4-1.9-0.2 0.8 1000 500-2.0-3.0-1.4-1.9 0-4.0-3.4-500 -5.0-4.3 Q1/16 Q2/16 Q3/16 Q4/16-1000 Q3/16 Q4/16 Q1/17 Q2/17 Q3/17 Q4/17 Updated Baseline Scenario Scenario 1 (full fiscal impact) Source: MinFin, European Commission, Hellenic Parliament, ELSTAT, Piraeus Bank Research 7
Scenario 2: Savings to cushion the blow Experience has taught us that Greek households, when buffeted with new austerity measures, lower their saving ratio as they try to maintain their living standards. For example, in 2014 household saving ratio (HSR) stood at -5.5% (of disposable income) which declined to -6.1% in 2015 thus limiting the extend of the recession. If we assume that HSR will decline by another 0.6% to -6.7%, this will mitigate the impact of the fiscal measures limiting GDP contractions to -2.5%. Households Saving Ratio (HSR) Real GDP growth rate (YoY % change) 1000 500 0-500 -1000-1500 -2000-2500 -3000 1.1-0.1-4.1-5.5-6.1 2011 2012 2013 2014 2015 2016 (full fiscal impact) Δ (Gross Disposable Income) Δ(Final Consumption) HSR = -6.1 HSR = -6.7 Δ(Gross Savings) Gross Saving Ratio, RHS 2016 (lower HSR) 2.0 - -2.0-3.0-4.0-5.0-6.0-7.0 2.0 - -2.0-3.0-4.0-5.0-1.4-1.4-1.9-1.9-0.2-3.7 0.8-2.8 Q1/16 Q2/16 Q3/16 Q4/16 Updated Baseline Scenario Scenario 2 (lower HSR) Source: MinFin, European Commission, Hellenic Parliament, ELSTAT, Piraeus Bank Research 8
Dec-11 Dec-12 Dec-13 Dec-14 Dec-15 Jan-16 Feb-16 Mar-16 Jun-16 Sep-16 Scenario 3: Lower HSR & Partial Arrears Clearance The conclusion of the Programme Review came at a significant fiscal cost but on the positive side brings new funding of at least 10.3 bn, 3.5 bn of which will be used to repay General Government Arrears. Assuming that 70% of that amount is used for domestic payments to local suppliers, wages etc. (with the remaining 30% used to pay for imports), then this extra income can be used to finance additional consumption which in turn has the potential to mitigate the impact of austerity even further. Under that scenario the extent of the recession is contained to -1.1%, slightly worse than the Pre-agreement scenario of -0.7%. Schedule of Arrears clearance ( bn) Real GDP growth rate (YoY % change) 12.0 2.0 1 8.0 6.0 4.0 8.7 9.6 4.8 3.8 6.0 6.0 6.5 6.7 Expected Arrears Clearance - -1.4 4.9 3.2-2.0-3.0-1.4-1.9-1.9-0.2-1.1 0.8-0.1 2.0-4.0 General Government Tax refunds arrears Total Arrears -5.0 Q1/16 Q2/16 Q3/16 Q4/16 Updated Baseline Scenario Scenario 3 (lower HSR & Arrears) * 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, Hellenic Parliament, ELSTAT, Piraeus Bank Research 9
Scenariology Overview Assumptions Updated Baseline Scenario Completion of 1st review based on the measures agreed in August 2015 (i.e. 1.5% of GDP) plus an update of Q1-2016 to -0.5% QoQ (vs previous estimate of -0.25%) and Q2-2016 to -0.25% QoQ (vs previous estimate of 0%) Scenario 1 (full fiscal impact) Fiscal multiplier =1 on legislated measures of 3.8 bn evenly distributed in Q3 & Q4-2016. Scenario 2 (lower HSR) Fiscal multiplier =1 and Household saving ratio decline to -6.7% from -6.1%. Scenario 3 (lower HSR & Arrears) Same as in scenario 2 plus a positive impact from the 70% of cleared government arrears. 10
Real GDP Outlook: Pick the scenario you like Real GDP - 2016 Outlook -0.7 Updated Baseline Scenario -2.8 Scenario 1 (full fiscal impact) -2.5 Scenario 2 (lower HSR) -1.1 Scenario 3 (lower HSR & Arrears) -3.0-2.5-2.0-1.5 - -0.5 Source: MinFin, Hellenic Parliament, ELSTAT, Piraeus Bank Research 11
Ambitious but achievable Privatizations Programme Based on the 3rd Economic Adjustment Programme: The targeted total value of assets to be sold is 50 bn 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 2011-2015 the total amount of assets sold reached 3.0 bn, while privatization revenues reached 2.86 bn. The remaining amount to be disbursed is 175 mn. In 2016 the targeted total value of assets to be sold is 2.3 bn, of which approx. 1.3 bn is from the privatization of the 14 Greek Regional Airports, which has already been agreed. 2.5 Privatizations ( bn) 2.0 1.5 0.5 2011-2012 2013 2014 2015 2016 Value of Assets Revenues Source: European Commission, MinFin, State Budget 2016, Piraeus Bank Research 12
Jan Jan-Feb Jan-Mar Jan-April Jan-May Jan-June Jan-July Jan-Aug Jan-Sep Jan-Oct Jan-Nov Jan-Dec Jan Jan-Feb Jan-Mar Jan-April Jan-May Jan-June Jan-July Jan-Aug Jan-Sep Jan-Oct Jan-Nov Jan-Dec Tourism & Public Investments will continue to support growth The tourism industry (expected to peak in Q3-2016) and infrastructure spending (expected to pick at Q4-2016) continue to provide support to economic activity and the labour market. Travel Receipts ( mn) PIP expenditures (cumulative, bn) 16000 14000 12000 10000 8000 6000 4000 2000 0 7.0 6.0 5.0 4.0 3.0 2.0 2015 2016 2015 2016 (Target) 2016 (Estimate) Source: MinFin, State Budget 2016, BoG, ELSTAT, Piraeus Bank Research 13
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 Sep-15 Nov-15 Jan-16 Mar-16 May-16 Jul-16 Sep-16 Nov-16 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 VAT not enough to push Greece out of deflation The VAT hike from 23% to 24% plus the increase in other indirect and consumption taxes will push inflation up, while the dropping out of last August s VAT hike (from 13% to 23%) will have the opposite effect. The upshot is that we expect average inflation in 2016 to -%. Inflation Rate (CPI, YoY % change) HICP & Effect of tax changes 0.5 6.0-0.5 5.0 4.0 3.0-2.0-1.5-2.0 - -2.5-2.0-3.0-0.9-1.3-1.7 - -3.0-3.5 Tax impact HICP constant tax (YoY % change) HICP (YoY % change) Headline Inflation Year average Source: ELSTAT, Piraeus Bank Research 14
1st & 2nd EAP Feb-15* Aug-15 Nov-15 Dec-15 mid June 16' Sept 16' Oct-Nov 16' remaining amount of programme financing (excl. Recap) Planned disbursements following the 1st Review of the 3rd EAP At the end of the 3rd EAP in mid 2018, the cumulative total of disbursements of the three programmes will amount to 281.6 bn. The 3rd EAP Disbursements (Aug. 2015- Aug. 2018, bn) 35.0 300 3 25.0 2 15.0 1 5.0 226.7 215.8 228.8 230.8 13.0 2.0 237.2 244.7 7.5 247.5 2.8 252.9 5.4 281.6 28.7 280 260 240 220 200 ESM: Bank recapitalisation ESM Total (cumulative), RHS Note: Οn 27/02/2015, the Hellenic Financial Stability Fund (HFSF) redelivered 10.9 bn in bonds issued by the EFSF for the recapitalisation of Greek banks. This comprised: a full repayment of the 7.2 bn disbursed on 30/05/2013; and a partial repayment of 3.7 bn of the loan tranche disbursed on 19/12/2012) Source: MinFin, Bloomberg, EFSF, ESM, IMF, Piraeus Bank Research 15
Debt maturities now stretch all the way to 2059 (for now) Bonds (post PSI, new) & international 12% T-bills 5% IMF 4% EU billateral 16% Debt distribution by holder 83% held by the official sector Other State loans 9% ESM 7% ECB/NCB 6% EFSF 41% Bonds & Loans Maturities* (as of 10 May 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 Bank Research 16
2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030 Deferred Interest on EFSF creates a hump in 2022-2024, which will continue to grow to the tune of 1 bn per year Principal amount and interest payments due (2016-2030, bn) 35 30 25 20 15 10 5 0 Bonds Loans interest payments 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 17
Jan-16 Feb-16 Mar-16 Apr-16 May-16 Jun-16 Jul-16 Aug-16 Sep-16 Oct-16 Nov-16 Dec-16 Half of debt payments in 2016 are interest payments ( 5.9 bn) Maturities and Interest Payments in 2016 ( mn) 4,000 3,500 3,000 2,500 2,000 1,500 1,000 500 0 Bonds Loans Interest Payments Note: Figures do not include short-term securities (T-bills) and 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 18
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) 2 1-1 -2-3 -4 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 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 2009. Source: Ameco Database, DG ECFIN, ELSTAT, IMF, Piraeus Bank Research 19
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