Governor's Annual Report - 2019
20/03/2020 - Press Releases
FROM CRISIS TO PANDEMIC TO GROWTH
2020: A CHALLENGING YEAR FOR THE GREEK ECONOMY
At the start of the new decade, the Greek economy has corrected the major macroeconomic and fiscal imbalances that had caused the economic crisis, and is now trying to pick up pace towards a sustainable growth trajectory. Along the way, however, Greece faces a number of significant challenges, largely a legacy of the economic crisis, as well as external risks. The outbreak of the coronavirus that causes an infection called Covid-19 and an exacerbation of the refugee/migrant crisis weigh heavily on the short-term growth outlook and temporarily raise serious obstacles on the path to normality. The coronavirus pandemic is testing the limits of societies and economies around the globe and calls for an unprecedented level of scientific, social and economic cooperation and coordination. Bond and capital markets have already suffered heavy losses, with the weaker economies hit hardest.
Despite the anaemic growth of the European economy, the Greek economy continued to recover until recently, as evidenced by the positive performance of several key macroeconomic and financial indicators. The strong upward trend of the economic sentiment indicator and the improvement of the business confidence indicator had, until lately, pointed to a continuation and acceleration of the growth momentum. Positive developments were also recorded in the financial sector, with an increase in bank deposits and an improvement in bank funding conditions, which have contributed to boosting bank liquidity and bank credit to businesses and households. Meanwhile, restored confidence in the banking sector enabled the full lifting of capital controls as of 1 September 2019. In addition, the recent repeal by the Governing Council of the European Central Bank (ECB) of its decision of March 2015 that had imposed ceilings on the purchase of Greek government bonds by Greek banks attests to the renewed confidence in the Greek banking system.
Prudent fiscal policy, a shift to a more growth-friendly fiscal policy mix mainly focused on a more rational distribution of the tax and social security contribution burden, a reduction of non-performing loans (NPLs), privatisations and the implementation of a national reform programme are the main pillars of the effort aimed at strengthening the credibility of economic policy over the medium term. Several of these medium-term policy objectives must be kept in place in the current extraordinary economic conditions, while others need to be adjusted to the circumstances.
In acknowledgement of the progress made by Greece, Standard & Poor’s upgraded the Greek sovereign’s rating by one notch in October 2019, and Fitch followed suit in January 2020, while Greece’s ranking in Transparency International’s perception of corruption index improved by seven places. In an international environment of negative yields, Greek government and corporate bond yields had been declining steadily and rapidly, until just recently when this trend was reversed on account of the coronavirus pandemic, with bond yield spreads widening considerably in the last few days. These recent developments highlight, among other things, the importance of the inclusion of Greek government bonds in the quantitative easing programme of the European Central Bank (ECB). In this regard, particularly welcome is the decision by the Governing Council of the ECB on 18 March to grant a waiver of the eligibility requirements for securities issued by the Greek government for purchases under the Pandemic Emergency Purchase Programme (PEPP), which will have an overall envelope of €750 billion and be conducted until at least the end of 2020.
In order to assert its position on the new global economic map, the Greek economy must step up its efforts to address a number of remaining constraints and challenges, with a focus on narrowing the large investment gap, creating numerous and well-paid high-skilled, full-time jobs, reducing the high stock of NPLs, and bringing down the public debt. Meanwhile, the implementation of the national reform and privatisation programme, with the necessary temporary adjustments in view of the extraordinary circumstances, would improve the economic outlook, as would a rationalisation of the fiscal targets. An adjustment of the primary fiscal surplus target to lower levels relative to those currently applicable would yield gains, so long as the reduction in the primary fiscal surplus is not such as to jeopardise public debt sustainability.
It is against this background that the Eurogroup on 16 March, making use of the Stability and Growth Pact (SGT) provisions that allow for flexibility in the application of the fiscal rules to cater for unusual events outside the control of governments, decided that, for all the euro area Member States, the budgetary impact of temporary fiscal measures in response to the coronavirus spread will be excluded when assessing compliance with EU fiscal rules, targets and requirements. In addition, the automatic stabilisers will fully play their role and will not affect compliance with the applicable fiscal rules. Finally, in the case of Greece, additional spending related to the management of the refugee/migrant crisis will be excluded from the fiscal target.
ΤΗΕ GREEK ECONOMΥ: DEVELOPMENTS IN 2019 AND PROSPECTS FOR 2020
In 2019, the Greek economy maintained its growth momentum, despite a slowdown of the European economy. Real GDP grew by 1.9%, as in 2018, while the growth rate of the euro area economy fell to 1.2%, from 1.9% in 2018. In 2020, the growth performance of the Greek economy will largely be determined by the impact of the Covid-19 pandemic on the global and European economies. There are three main channels through which the impact of the Covid-19 outbreak is affecting the Greek economy. On the demand side, through a slowdown of Greek exports of goods as well as services (transport, shipping and tourism), and weaker domestic consumption and investment. On the supply side, through disruptions in the global and regional supply chains of intermediate and capital goods, and business closures as a way to contain the pandemic. And finally through the international financial system, as an increase in funding costs amid global repricing of risks leads to tighter financing conditions for banks, businesses and households, as well as for the Greek State. Bond yield spreads have already widened sharply in the past few days, especially in the case of Greece, amid continued heightened volatility in global markets in general.
The growth rate of the Greek economy is projected to slow down considerably in 2020, on account of the impact of the Covid-19 outbreak. This impact cannot, for the time being, be accurately quantified, due to a lack of available data and given that the pandemic is still unfolding. According to the baseline scenario of the Bank of Greece, GDP growth in 2020 is now projected to be zero, rather than 2.4% as last revised after incorporating the National Accounts data for the fourth quarter of 2019 (6 March 2020). This downward revision by a further 2.4 percentage points is due to the impact from the Covid-19 pandemic. Based on the latest information on the pandemic developments, the most likely scenario is that there will be a strong negative impact in the first two quarters of 2020, partly offset in the last two quarters. The weaker economic outlook would be mainly driven by demand-side factors, with declines in external demand for goods and services, as well as in domestic demand, particularly affecting sectors such as transport, tourism, trade, catering and entertainment. No-one can at present predict with any certainty how the pandemic will evolve, while its impact on the national economies will also depend on the fiscal and monetary measures taken at a national and international level. The baseline scenario of the Bank of Greece incorporates the offsetting measures already adopted.
Τhe conduct of fiscal policy in 2019 was marked by compliance with the enhanced surveillance requirements, a commitment to implementing fiscal reforms and, since the national elections of last July, a rebalancing of the fiscal policy mix, mainly with a view to easing the tax burden. The shift towards a growth-friendly fiscal policy and, more importantly, the focus on reforms resulted in a rapid decline of Greek government bond yields to new historical lows, which enabled the Greek government to comfortably tap international financial markets for raising low-cost funds and to make an early repayment of part of the IMF loan.
According to the available general government cash data for 2019, the primary surplus target was overachieved for the fifth consecutive year, with provisional data suggesting an outcome of close to 4% of GDP.
For 2020, the forecast until recently was that the fiscal target would be met, as a result of the implementation of a growth-friendly and fiscally neutral policy mix, consisting mainly of an easing of the tax burden and measures to encourage electronic transactions. However, the coronavirus pandemic will require significant new expenditure to address the disease, support businesses and preserve jobs and will have a strong negative effect on economic growth and, thereby, on public revenue. Against this background, the general government primary balance is expected to fall several percentage points of GDP short of the initial target of 3.5% of GDP, although the exact outturn is, for the time being, very difficult to assess. A shortfall, however, would by no means constitute a breach of target, as the Stability and Growth Pact provides for flexibility in the event of extraordinary circumstances.
The greatest challenge facing fiscal policy today, and in fact a total game changer, is to utilise all available means in order to finance the expenditure needed for addressing the coronavirus disease and for minimising the adverse effects on the real economy, with the smallest possible impact on public debt sustainability.
THE GLOBAL AND EURO AREA ECONOMIES
2019 saw a significant decline in global trade growth to 1%, down from 3.7% in 2018, amid rising trade protectionism and heightened uncertainty. The slowdown in global trade took a toll on external demand and industrial production and led to muted global GDP growth of 2.9%, the lowest rate of growth in a decade, against 3.6% in 2018.
In the euro area in particular, GDP growth declined to 1.2% from 1.9% in 2018, mainly owing to weaker external demand. However, the economic slowdown in the euro area was contained by domestic demand, which remained robust on the back of employment growth and rising disposable income, and of a continued improvement in financial conditions supported by a continued accommodative monetary policy stance.
The coronavirus outbreak is, at present, the most serious source of risk for the global and European economies, as there is a direct impact on industry from supply chain disruptions, as well as on trade, transport, tourism and the financial markets. The economic impact cannot, as yet, be quantified with accuracy, but only estimated on the basis of different hypothetical scenarios. According to the OECD’s base-case scenario, assuming a contained outbreak, global economic growth in 2020 is projected to be 2.4%, i.e. 0.5 percentage points lower than the November 2019 projection. Under the severe scenario, assuming broader diffusion of the coronavirus and a widespread impact, global economic growth would fall to 1.5%. In light of the latest developments on the coronavirus front, the OECD’s base-case scenario seems very unlikely.
According to the latest ECB staff macroeconomic projections (March 2020), euro area growth is projected to be 0.8% in 2020, revised downwards from 1.1% in the December 2019 projections, assuming a contained spread of Covid-19. More specifically, growth is expected to be very weak in the first half of 2020 before improving in the second half, on the back of a rebound in external demand, the implementation of coordinated offsetting fiscal measures and an expansionary monetary policy. The adverse impact stems from supply and production chain disruptions owing to the containment measures and from a deterioration in confidence. In the event of a more protracted and widespread diffusion of Covid-19, the impact will be even more severe. Specifically, based on two alternative adverse scenarios, assuming a more persistent Covid-19 outbreak in the euro area and, in addition, shocks to financial markets and oil prices, the additional negative impact on euro area GDP growth would be between 0.6 and 1.4 percentage points in 2020, meaning that the euro area is very likely to post negative growth rates.
The greatest challenge for the euro area today, overshadowing all the other considerations, is the protection of human lives, while safeguarding social cohesion and addressing swiftly and effectively the impact of the coronavirus pandemic to the economy and society. Although the response so far from the European Central Bank (ECB), the European Commission, the European Stability Mechanism (ESM), the Eurogroup and, particularly, the Member States themselves can be seen as positive, it is clear that even more cooperation and coordination is necessary at a scientific level, as well as in the fiscal/monetary domain, where flexibility and realism must prevail. Considering that the Member States do not have the same capacities, a stance of cohesion, solidarity and flexibility in addressing the pandemic and providing facilities to the Member States most in need, or facing fiscal difficulties, would prove catalytic in validating the governance of the euro area in the eyes of its citizens at this crucial stage.
THE SINGLE MONETARY POLICY
The ECB has been closely monitoring developments regarding the coronavirus outbreak and the risks it poses to the euro area economy, the markets and the monetary policy framework and stands ready to take measures as necessary to minimise these risks. As a first response, in its meeting on 12 March 2020, the Governing Council decided on a comprehensive package of monetary policy measures, while at the same time the Supervisory Board adopted measures that provide temporary capital and operational relief to banks, so that they, in turn, can continue lending to businesses and households under the extraordinary circumstances of the pandemic. More specifically, the Governing Council of the ECB decided the following: (a) Additional longer-term refinancing operations (LTROs) will be conducted, temporarily, to provide immediate liquidity support to the euro area financial system. These operations will provide an effective backstop in case of need. They will be carried out through a fixed rate tender procedure with full allotment, with an interest rate that is equal to the average of the deposit facility rate over the life of the respective operation. The LTROs will provide liquidity at favourable terms to bridge the period until the TLTRO III operation in June 2020. (b) For the period from June 2020 to June 2021, more favourable terms will be applied on all TLTRO III outstanding operations. These operations will support bank lending to those affected most by the coronavirus outbreak, in particular small and medium-sized enterprises. Throughout this period, the interest rate on these TLTRO III operations will be 25 basis points below the average rate applied in the Eurosystem’s main refinancing operations over the same period. For counterparties that maintain their credit provision levels, the interest rate applied on all these operations will be lower, and, over the period ending in June 2021, can be as low as 25 basis points below the average interest rate on the deposit facility. Moreover, the maximum total amount that counterparties will henceforth be entitled to borrow in TLTRO III operations is raised to 50% of their stock of eligible loans as at 28 February 2020. (c) A temporary envelope of additional net asset purchases of €120 billion will be added until the end of the year, ensuring a strong contribution from the private sector purchase programmes. In combination with the existing asset purchase programme (APP), this will support favourable financing conditions for the real economy in times of heightened uncertainty.
On 18 March 2020, in a second move, more crucial for markets, the ECB decided to launch a Pandemic Emergency Purchase Programme (PEPP), which will have an overall envelope of €750 billion. Greek government bonds will also be eligible for purchase under the PEPP, having been granted a waiver of the general bond eligibility requirements.
These important actions of the ECB complement the fiscal actions taken both at the euro area and the national levels to address the impact of the coronavirus spread on the economies of the euro area Member States.
THE BANKING SYSTEM
The main developments in the banking system in 2019 were an improvement in operating profitability; sustained satisfactory capital adequacy; a continued recovery of credit expansion to non-financial corporations; an increase in private sector bank deposits; and a further reduction in the stock of non-performing loans (NPLs) on banks’ balance sheets, which however remains at very high levels. The improvement in operating profitability was mainly driven by one-off gains from financial operations and by a containment of operating expenses. On the contrary, core profitability declined, mainly as a result of deleveraging after the sale of subsidiaries abroad and of loan repayments exceeding new loan disbursements, as well as additional provisioning.
Reducing the high stock of NPLs remains the most important challenge facing the banking system. The implementation of the “Hercules” plan is expected to contribute to a faster reduction of this stock. The decrease in NPLs so far, combined with improved liquidity conditions, has contributed to improved bank lending conditions to non-financial corporations, especially large-sized ones. On the other hand, the growth rate of housing and consumer credit remained negative.
Positive developments were also observed in private sector bank deposits, due to banknote redeposits and a repatriation of funds invested in financial assets abroad. This development was more favourable in the case of households as a result of a rise in their disposable income, while the dynamics of non-financial corporation deposits weakened. The gradual replenishment of the deposit base of Greek banks allowed the termination of their reliance on the emergency liquidity assistance (ELA) from the Bank of Greece and reduced recourse to Eurosystem liquidity-providing monetary policy operations, and helped to contain the weakening of credit expansion to the economy.
Improved depositor confidence in the banking system contributed to averting an outflow of deposits after the full lifting of capital controls in September 2019.
On 12 March 2020, as previously mentioned, the ECB’s Supervisory Board announced a package of measures to ensure that the banks under its direct supervision are in a position to continue financing the real economy in view of the negative impact and challenges to their business operations from the coronavirus outbreak. The announcement by the ECB was coordinated with a relevant announcement by the European Banking Authority (EBA) postponing the EU-wide stress test exercise to 2021 and adopting a number of other measures. The ECB decision refers to capital relief measures and operational flexibility in the implementation of bank-specific supervisory measures.
Benefiting from the abovementioned monetary and supervisory relief measures of the ECB, Greek banks have already announced actions to provide relief to businesses in the sectors affected by the Covid-19 crisis.
2019 saw banks push forward their efforts to tackle their high stock of NPLs. Although the NPL problem can largely be attributed to the crisis, legislative measures such as the blanket moratorium on primary residence auctions and the abuse of foreclosure protection, as well as several other legal and judicial impediments prevented the effective management of the problem.
At end-2019, NPLs remained at high levels, amounting to €68.0 billion (or 40.3% of total loans), compared with a euro area average of 3.4% at end-September 2019. This was €13.8 billion less than at end-December 2018 and roughly €39.2 billion less than in March 2016, when NPLs reached their peak. The reduction in the stock of NPLs in 2019 was mainly due to €8.1 million in sales and €4.3 million in write-offs.
Regarding the banks’ operational targets for NPL reduction, the ultimate objective is to bring the NPL ratio down to below 20% by end-2021. The pace of NPL reduction could be further accelerated through the implementation of solutions such as the “Hercules” plan (Law 4649/2019). At a later stage, once its results are assessed, the “Hercules” plan would be complemented by other, holistic measures, such as the ones put forward by the Bank of Greece in the recent past, aimed also at addressing the problem posed by banks’ current capital structure, with deferred tax credits (DTCs) accounting for a disproportionately large part of banks’ total capital. In any event, as soon as the “Hercules” plan is well under way, it would be important to conduct an assessment of the Greek banking sector’s fundamentals, in particular core profitability, provisioning coverage ratios and regulatory capital quality, especially once the coronavirus pandemic is over.
All of the above, however, are subject to revision, given the extraordinary conditions and the high uncertainty under which the banking system and the real economy currently have to operate. In other words, it is likely that progress towards achieving the target of a significant reduction of the NPL ratio will be adversely affected in the short term, but without jeopardising the ultimate objective.
RISKS AND SOURCES OF UNCERTAINTY
The projected outlook for the Greek economy is subject to significant downside risks associated with the volatile global economic environment, geopolitical tensions in the Eastern Mediterranean region, extreme weather events as a result of climate change, the recent exacerbation of the refugee/migrant crisis, but above all the coronavirus outbreak, which has an impact on both the demand and the supply side of the Greek economy, with strong adverse effects on tourism, shipping, transport and supply chains, but also on domestic demand through declines in private consumption and investment. At this stage, as previously mentioned, the Bank of Greece is revising its forecast for GDP growth in 2020 downwards to 0.0%, from its previous forecast of 2.4%.
As regards the external environment, downside risks arise from the uncertain and weak recovery of the global economy. A more protracted and escalating diffusion of Covid-19 would fuel expectations of a temporary recession, as is already apparent from the recent surge of volatility in international financial markets, thereby significantly increasing the risk of a slowdown of the global and European economies. Turning to the euro area economy, as mentioned previously, growth is projected to remain particularly weak, and a negative annual outturn is very likely, reflecting the adverse impact on business investment, manufacturing and exports from the slowdown of global trade and lower external demand, but above all the dampening of domestic demand due to reduced private consumption as a result of the spread of Covid-19.
On the domestic front, the coronavirus spread and the recent escalation in the refugee/migrant crisis pose the most serious downside risks.
CHALLENGES AND PREREQUISITES FOR SUSTAINABLE GROWTH
The moderate upturn in economic activity in recent years has mainly been supported by increasing aggregate demand, driven by consumption and exports. The ongoing shift to a growth-friendly economic policy and the reforms underway in the structure and the functioning of the State and the economy generate expectations of a gradual return of per capita GDP to a path of convergence with the European average in the medium term, once of course the coronavirus crisis is over.
In order to achieve strong growth in the medium-to-long term, once the current crisis is behind us, the Greek economy will need to address, apart from the two major external shocks that are clearly national priorities, a number of medium-term challenges, namely the large investment gap, high unemployment, the high stock of NPLs, high public debt and slow digital transformation.
Thus, mainly supply-side economic policy interventions are necessary, so as to expand Greece’s productive capacity and increase actual and potential output.
Obviously, some of the policy interventions required cannot possibly be achieved in the current environment of sharp corrections in international markets. Dealing with the pandemic and, more generally, protecting public health, along with addressing the refugee/migrant crisis are pressing priorities. In no way, however, does this mean that interventions which would bring about medium-term results should now be ignored. After all, they lead to higher growth in the medium term and to debt sustainability, both of which are prerequisites for being able to allocate more resources to public health, as well as to the protection of the national borders, which are also Europe’s borders. Such interventions include the following priorities:
- tackling the problem of non-performing loans (NPLs);
- pursuing a prudent fiscal policy;
- increasing private productive investment;
- reducing unemployment;
- implementing the national reform programme;
- privatisations, more efficient management of public property and expansion of Public-Private Partnerships (PPPs);
- targeted policy action aimed at reversing the projected downward trend in active population as a result of adverse demographic trends;
- strengthening the “knowledge triangle” and expanding the human capital stock;
- exploiting the opportunities opened up by the transition to a green economy.
The Greek economy continued, until recently, to recover, and economic policy credibility has largely been restored. Commitment to fiscal stability, a rebalancing of the fiscal policy mix and a timely implementation of the government’s ambitious reform programme are the main driving forces for a return of the economy to a sustainable growth trajectory in the medium term. However, in order to achieve a strong recovery, once the coronavirus crisis is over, and fast growth in the medium term, it is necessary to address in a timely manner the significant issues still impeding the functioning of the economy, partly a legacy of the economic crisis and partly the result of chronic structural weaknesses. The most important of these issues refer to the reduction of NPLs and the completion of the reform programme aimed at fostering a business-friendly environment.
Today, the normal course of the economy is temporarily disrupted by the coronavirus pandemic, which, from an economic perspective, is a severe external shock exerting an impact through demand, supply and also through the financial system. Addressing this shock depends on the necessary measures being taken by governments around the world in order to protect public health. Although the repercussions of the coronavirus outbreak on the Greek economy cannot, at this stage, be accurately quantified, they will clearly lead to a significantly lower GDP growth rate relative to what was expected until recently. The adverse effects are expected to make themselves felt in the first two quarters, especially the second, and to be partly offset in the last two quarters, in part as a result of economic policy coordination currently underway worldwide.
The coronavirus pandemic poses major challenges and dilemmas for societies, citizens, institutions and political leaderships. Values and virtues such as responsibility, solidarity, cooperation, sound judgement, collective action, coordination, utilisation of scientific knowledge, as well as responsible and solid leadership take on crucial importance in the current extraordinary context. Such notions are necessary but not sufficient conditions for successfully countering the pandemic that is sweeping the globe. It is precisely this international dimension that brings to the fore the absolute need for international cooperation and coordination, primarily in the areas of science and epidemiology, as well as in the fiscal and monetary domain. The time is now for a collective, global response to address the healthcare costs of the pandemic, using all available financial resources, but also to minimise the impact, through the concurrent use of fiscal and monetary policies. Considering, furthermore, that the impact of the pandemic will inevitably be harsher on the weaker economies with less organised healthcare systems, these economies will need to receive support by all means possible. Flexibility, international cooperation and policy implications based on the policy lessons learned from past epidemiological, economic and financial crises will help minimise the loss of human lives, minimise the cost to the economies and support their quick recovery.Related link
: Annual report (in Greek)