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The case of Investing in Greece and financing conditions

2nd Athens Investment Forum 2019

Dr. Tasos Anastasatos Group Chief Economist Eurobank Ergasias S.A.

24 September 2019

Page 2 Source: ELSTAT, Eurostat, Eurobank Research

Investment crucial for transforming the Economy’s Growth Model

• Private consumption as a share of GDP remains high, investment low

• Estimated decline in net capital stock of €85bn (at 2010 prices)

• Productivity idle due to disinvestment; needs to improve given that demographic factors compress potential growth

• Sectoral change also needed: tradeables’ increase still moderate

• Unemployment decline continues (17%) but still elevated; need for quality jobs

• Investment real annual growth of 8.4-9.5% needed over the next 10 years to yield real annual growth in Greek GDP of 2.8-3.9%

Shares of Nominal GDP %

53.8% in EA

20.3% in EA

20.9% in EA

Labour Productivity Growth: poor performance continued in 2019Q2

Page 3 Source: ELSTAT, Eurobank Research

Households’ dissaving means need to attract capital from abroad

Households’ savings

negative for 7 years in

a row → risk for

consumption -5.9% of households’

disposable income

Gross Savings Cumulative Change

2011-2018 -39.1 BN EUR

BN EUR

6.6% of households’ disposable income

Institutional Sector Households and NPISH

BN EUR

Page 4 Source: BoG, ELSTAT, Eurobank Research

Attraction of FDI a high priority

• Given relative scarcity of domestic resources, attraction of FDI is crucial; improvement relative to the peak of the crisis but still half the Euro Area average as % of GDP

0.1% of GDP

2.0% of GDP

Net Foreign Direct Investment 2.0% of

GDP BN

Euro

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R&D expenditure by sector, % of GDP

Individuals with basic or above basic overall digital skills, as % of all

R&D, Digital skills lagging behind

• For Greece to attract higher value-added activities and participate in the 4th industrial revolution, more investment in R&D and digital skills is required

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Progress in competitiveness

WB Doing Business Distance to Frontier Index (Best pactice:100) Nominal Unit Labor Cost Index

(2010=100)

Significant progress in wage and quality competitiveness until the end of 2014; stagnation afterwards

Greece seriously lags behind the OECD in terms of structural competitiveness and this hinders the exploitation of the significantly improved wage competitiveness compared to the Eurozone

Source: AMECO, World Bank

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Source: Bloomberg, Eurobank Research

10-yr yield spread vs. their German counterpart (25/09/2019)

Moody’s (1 March 2019), Fitch (10 Aug 2018), S&P (25 Jun & 20 Jul 2018) upgraded Greek sovereign based on conclusion of the 3rd programme, improved fiscal and growth outlook, labour market recovery

The sovereign’s rating is still significantly below the investment grade rating

10-YR GGB’s spread down by more than 2 ppts Year-to-date

Moody's S&P Fitch

Aaa AAA AAA

Aa1 AA+ AA+

Aa2 AA AA

Aa3 AA- AA-

A1 A+ A+

A2 A A

A3 A- A-

Baa1 BBB+ BBB+

Baa2 BBB BBB

Baa3 BBB- BBB-

Ba1 BB+ BB+

Ba2 BB BB

Ba3 BB- BB-

B1 B+ B+

B2 B B

B3 B- B-

Caa1 CCC+ CCC+

Caa2 CCC CCC

Caa3 CCC- CCC-

CC CC

C C

C RD RD

/ SD SD

/ D D

Ca

Upgrades in the sovereign’s rating but still significant distance to investment grade

Page 8 Source: ECB, BoG

Gradual decline in Eurosystem funding reliance (€ bn)

Credit & Deposits (private sector, € bn)

Further stabilization of macro environment facilitated return of bank deposits and lift of capital controls in Sep 2019

1. Private-sector deposits increase by €8.1bn or 6.4% in 2018; €5.2bn year-to-Aug 2019

2. Cash outside the Greek banking system in August 2019 at €24.1 bn or 12.6% of GDP (vs €41.9bn or 23.2% of GDP in Apr. 2017 & 10.0% of GDP EA average)

ELA eliminated from March 2019 onwards as a result of deposits’ return, continued deleveraging, increased bank access to interbank funding (c. €22.4bn in August 2019 vs. €9.8bn in November 2015)

Achievements and Structural Challenges (VIII): Domestic financial conditions gradually improve

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3,95%

3,94% 3.5

4.5

5.5

6.5

7.5

Jun-1

0

No

v-1

0

Apr-

11

Sep-1

1

Feb

-12

Jul-1

2

De

c-1

2

Ma

y-1

3

Oct-

13

Ma

r-1

4

Aug-1

4

Jan-1

5

Jun-1

5

No

v-1

5

Apr-

16

Sep-1

6

Feb

-17

Jul-1

7

De

c-1

7

Ma

y-1

8

Oct-

18

Ma

r-1

9

Aug-1

9

New Loans

Outstanding amounts of Loans

%

Bank Interest rates on loans to (non-financial) corporations

De-escalation of financing costs, credit expansion feasible

Source: BoG

• Expansionary monetary policy and reduction of country risk result in de-escalation of financing costs, thereby rendering more investment projects viable

• Room of further improvement by implementation of growth-friendly policies

• Credit to corporations by domestic MFIs in Aug. 2019: €74,9 bn (impact of NPEs)

NPL stock still a challenge (41.4% of total loans in Q1:2019 vs an EU average of 3.1%) Greek systemic banks committed to the SSM for a 53% NPLs reduction between Q4:2018-

Q4:2021 (from 45.1% to 21.2%)

Demand for credit still low compared to pre-crisis peak but expected to increase as the economy picks up pace

Credit a lagging indicator of GDP growth this time - but on a more sustainable basis

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