DBRS Confirms the Hellenic Republic at B (high), Positive Trend

DBRS Ratings Limited (DBRS) confirmed the Hellenic Republic’s Long-Term Foreign and Local Currency – Issuer Ratings at B (high) and maintained a Positive trend. DBRS confirmed the Short-Term Foreign and Local Currency – Issuer Ratings at R-4 with a Stable trend.

KEY RATING CONSIDERATIONS

Since the last rating review Greece has completed the Third Adjustment Programme. GDP growth has been more skewed than expected towards the external sector, but some rebalancing towards domestic demand is expected in coming quarters. GDP growth is projected to strengthen to 2.1% this year from 1.5% in 2017, to 2.5% in 2019. Budgetary performance is sound and we expect the target for 2018 to be exceeded. Nevertheless, further sustained progress is needed, and Greece has yet to fully return to the markets. The authorities have presented two scenarios for the general government primary surplus in the 2019 draft budget. The base case generates a 4.2% primary surplus and an alternative scenario 3.6%, close to the current target. DBRS expects a decision on the budget scenario by year-end, and a compromise solution to emerge.

DBRS’s decision to maintain a Positive trend reflects the likelihood that Greece will continue its reform path in the post-programme period. DBRS anticipates evidence to emerge of compliance with the Enhanced Surveillance mechanism and a gradual return to market funding. A European Commission positive assessment under the Enhanced Surveillance should activate the contingent debt measures and could also support efforts to restore confidence in capital markets.

RATING DRIVERS

Triggers for an upgrade include: (1) continued implementation of fiscal and structural reforms to support future economic growth; (2) compliance with post-programme monitoring; and (3) greater bond market access.

By contrast, a return to a Stable trend could stem from: (1) a reversal or stalling in structural reforms; (2) material fiscal slippage (3) renewed financial-sector instability.

RATING RATIONALE

Some Reduction Expected in Very High Public Debt Levels, but Long-term Sustainability Questions Remain

The draft budget includes a projection of a 12.8 percentage point reduction in the public debt ratio in 2019 - from an estimated level of 183% this year to 170.2% next year, albeit still a very high level. The improvement relates to primary surplus generation and growth of nominal GDP. Mitigants to the high debt stock include the fact that EU institutions hold over 70% of government debt that contributes to the very long weighted-average maturity and most of the debt financed at low fixed interest rates. According to the Greek Debt Management Office, at end-August Greece held a €24.1bn cash buffer equivalent to two years of gross financing needs. This allows time for the restoration of full market confidence while Greece implements growth supporting policies and fiscal consolidation. In addition, some of the cash buffer could fund the repayment of more expensive debt.

In the longer term, the challenge of sustaining primary surplus over many years to meet debt service payments raises questions in the context of the high debt stock. A Eurogroup review of debt dynamics at the end of the EFSF grace period in 2032 to establish whether additional debt re-profiling is necessary, provides some comfort.

Economy Continues to Recover with a Strong External Sector

In August 2018, Greece completed successfully its Third Adjustment Programme, amid a recovering economy. Real GDP growth for 2017 was revised upwards to 1.5% from 1.4%. While below the 1.8% estimated by the government in the 2018 budget, it was the strongest growth Greece recorded in its decade-long crisis. Moreover, the 2.2% growth in the first half of this year, due to stronger growth in exports of goods and services and the gradual recovery in private consumption, suggests that the Greek economy continues to strengthen. However, external trade headwinds could present some risks to the GDP growth projection.

According to the Draft 2019 Budget presented by the Greek government, real GDP growth is expected to reach 2.1% in 2018 and 2.5% in 2019, with private consumption and investment being the main contributors. On the back of the labour market reforms, employment has been growing and the unemployment rate has been falling amounting to 19.0% in July 2018. However, it remains the highest in the EU. DBRS considers that the continuation of the reform effort and safeguarding the reforms that have already been adopted, will support ability to remain on a sustained growth path.

Greece Continues to Overperform on its Fiscal Targets

Since 2010, the country went through an unprecedented fiscal adjustment, with the cumulative improvement in the primary balance exceeding 16 percentage points in 2017. For a second consecutive year, in 2017 Greece delivered a primary surplus of 4.2% well above the 1.75% target set by the programme. The primary surplus target for 2018 is set at 3.5% and is expected to be achieved.

Given the overperformance of fiscal targets, the Greek government has presented two scenarios for the primary surplus targets. The 2019 Budgetary plan presented to the European Commission in October, included two different scenarios regarding the pre-legislated pension cuts, scheduled for implementation in January 2019. The pension measures are in addition to the 2016 Pension Reform, which affected significantly the pensions issued after the reform, but left intact those issued before. Under the baseline scenario, which incorporates the pension cuts, the primary fiscal surplus in programme terms is projected at 4.2% of the GDP, well above the 3.5% target set by the Medium-Term Fiscal Strategy 2019-2022. In the alternative scenario, which excludes the pension measures, the primary fiscal surplus is estimated at 3.6% of GDP for 2019. The European Commission is expected to provide its assessment in the first quarterly review of the Greek economy in mid-November. DBRS considers that the fiscal reforms undertaken under the three adjustment programmes have restored Greece’s fiscal sustainability, however the future targets remain challenging and their durability are contingent on sustained economy recovery.

Continued Improvement in Greek Banks, but Still High NPEs

Greece’s banks’ profitability continues to improve helped by a more positive economic backdrop. However, high levels of impaired assets prevail, with a non-performing exposure ratio of 44.9% at end-June 2018. Reduced reliance on the ECB’s Emergency Liquidity Assistance (ELA) is reflected in the decline in the ceiling from a peak of €90bn in July 2015 to €5bn according to the latest data available. This demonstrates banks’ improved liquidity including access to wholesale markets. The net flow of credit to the private sector is positive. Capital controls introduced in June 2015 have been mostly lifted as deposits placed by the private sector increased at an annual rate of 7.4% in September. Greek banks have existing capital-strengthening/strategic plans put in place following the EBA stress test in May.

Since the Crisis the External Imbalances Have Receded Substantially

Greece’s current account deficit improved in 2017 to 0.8% of GDP from 1.1% of GDP in 2016, mainly driven by the improvement in the services balance. In 2018, the current account is expected to be around the 2017 levels, supported by the strong performance of exports of goods and services. Greece’s exports of goods have increased by 58% since 2009 in nominal terms. The strong services balance has also performed strongly, increasing to a surplus of 9.8% of GDP in 2017 from a surplus of 4.8% of GDP in 2009. This is mainly attributed to the improvement in the travel balance with foreign arrivals increased by 14.6% in the first seven months of 2018 compared to the same period of the previous year.

From a stock perspective, Greece’s negative net international investment position (NIIP) remains high at 141.7% of GDP in June, up from 88.8% in 2011, mostly reflecting public sector external debt. It is expected to remain at high levels because of the long-term horizon of foreign official-sector loans to the public sector. A current account close to balance, if sustained, should prevent a material deterioration in the external borrowing position.

DBRS Expects a Broad Continuation of Existing Policies

Greece holds parliamentary elections every four years, with the next due by October 2019. The recent agreement between Greece and the Former Yugoslav Republic of Macedonia (FYROM) on name change increased the tensions in the coalition government and could raise the prospects of snap elections. The agreement was signed in June 2018 and requires a constitutional change by FYROM, before reaching the Greek Parliament for ratification. The latest opinion polls show that the center-right, New Democracy is leading by almost 10 percentage points. DBRS believes, that the increased political stability observed over the last two years is likely to be maintained and we do not expect any policy reversals under a potential New Democracy-led government.

RATING COMMITTEE SUMMARY

The DBRS Sovereign Scorecard generates a result in the BB to B high range. The main points discussed during the Rating Committee include economic and fiscal performance, the political situation, the debt profile and debt management.

KEY INDICATORS

Fiscal Balance (% GDP): 0.8 (2017); 0.8 (2018F); 1.1 (2019F)
Gross Debt (% GDP): 178.6 (2017); 183.0 (2018F); 170.2 (2019F)
Nominal GDP (EUR billions): 177.2(2017); 184.8 (2018F); 192.4 (2019F)
GDP per Capita (EUR): 16,641 (2017); 17,307 (2018F); 18,120 (2019F)
Real GDP growth (%): 1.5 (2017); 2.1 (2018F); 2.5 (2019F)
Consumer Price Inflation (%): 1.1 (2017); 0.7 (2018F); 1.2 (2019F)
Domestic Credit (% GDP): 132.0 (2017); 127.8 (Mar-2017)
Current Account (% GDP): -1.1 (2017); -0.8 (2018F); -0.5 (2019F)
International Investment Position (% GDP): -141.4 (2017); -141.7 (Jun-2018)
Gross External Debt (% GDP): 227.8 (2017); 220.0 (Jun-2018)
Governance Indicator (percentile rank): 62.5 (2016); 66.3 (2017)
Human Development Index: 0.87 (2016); 0.87 (2017)

EURO AREA RISK GROUP: MEDIUM

Notes:

All figures are in Euros unless otherwise noted. Public finance statistics reported on a general government basis unless specified. Governance indicator represents an average percentile rank (0-100) from Rule of Law, Voice and Accountability and Government Effectiveness indicators (all World Bank). Human Development Index (UNDP) ranges from 0-1, with 1 representing a very high level of human development.

The principal applicable methodology is Rating Sovereign Governments, which can be found on the DBRS website www.dbrs.com at http://www.dbrs.com/about/methodologies. The principal applicable rating policies are Commercial Paper and Short-Term Debt, and Short-Term and Long-Term Rating Relationships, which can be found on our website at http://www.dbrs.com/ratingPolicies/list/name/rating+scales.

The sources of information used for this rating include IMF, World Bank, UNDP, Haver Analytics, Bank of Greece, PDMA, Greek Ministry of Finance, Eurostat, ECB, European Council: Consilium Europa, European Commission. DBRS considers the information available to it for the purposes of providing this rating to be of satisfactory quality.

DBRS does not audit the information it receives in connection with the rating process, and it does not and cannot independently verify that information in every instance.

Generally, the conditions that lead to the assignment of a Negative or Positive Trend are resolved within a twelve month period. DBRS’s outlooks and ratings are under regular surveillance.

For further information on DBRS historical default rates published by the European Securities and Markets Authority (“ESMA”) in a central repository, see:
http://cerep.esma.europa.eu/cerep-web/statistics/defaults.xhtml.

Ratings assigned by DBRS Ratings Limited are subject to EU and US regulations only.

Lead Analyst: Nichola James, Co-Head of Sovereign Ratings, Global Sovereign Ratings.
Rating Committee Chair: Roger Lister, Managing Director, Global FIG and Sovereign Ratings
Initial Rating Date: 16 August 2013.
Last Rating Date: 29 June 2018.

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