Bank of Greece Monetary Policy Report 2018-2019
01/07/2019 - Press Releases
Today, in accordance with its Statute, the Bank of Greece submitted its
Monetary Policy Report 2018-2019 to the Speaker of the Greek Parliament and the
Implementation of reforms to speed up growth
The present Report
on Monetary Policy is submitted by the Bank of Greece at a time when the Greek
economy continues to recover. Economic sentiment is positive, the liquidity
situation of the banking system and the economy is improving and Greek
government bond yields have been trending downward.
growth rates remain relatively low and Greece’s sovereign rating is below
investment grade. The economy continues to face major challenges, and
significant downside risks and uncertainties arise from the external
environment, such as a slowdown of global economic activity amid rising trade
protectionism and geopolitical tensions. Risks also arise from the domestic
environment, relating to a backtracking or cancellation of reforms, the fiscal
implications of court rulings and the recent expansionary fiscal package that
fuel uncertainty about the achievement of the agreed fiscal targets and the
long-term sustainability of public debt and of the pension system.
In order to speed
up recovery, address the risks and challenges, and consolidate investor
confidence in the prospects of the Greek economy, it is essential to keep the
much-needed reforms on track, safeguard fiscal stability and adopt a more
growth-friendly fiscal policy mix.
Economic activity picked up in 2018 – recovery continued in the first
quarter of 2019
GDP grew by 1.9%
in 2018, compared with 1.5% in 2017. The economy continued to expand in the
first quarter of 2019, albeit at a slower pace, with GDP seasonally adjusted
and at constant prices growing by 1.3% year-on-year. The main drivers of growth
were services exports, investment and private consumption. On the other hand,
imports, goods exports and government consumption made negative contributions.
data and short-term activity indicators point to continued recovery in the
second quarter of the year. However, export activity is expected to be affected
by rising uncertainty and the global economic slowdown, amid rising trade protectionism.
2018 saw a small
decline in inflation. The increase in the minimum wage and the indirect tax
cuts are exerting effects in opposite directions, which are expected to some
extent to offset each other, bringing the average rate of HICP inflation in 2019
to slightly lower levels than in 2018.
Positive trends in the financial sector
situation of the banking system continued to improve in 2018 and into the first
months of 2019. More specifically, deposits continued to rise, banks’ reliance
on Emergency Liquidity Assistance (ELA) from the central bank decreased
significantly and was ultimately reduced to zero, and access of banking
institutions to the interbank market improved. These developments, together
with improved confidence, enabled a further relaxation of capital controls,
most recently with the lifting of all restrictions on cash withdrawals in
The improvement in
banking system liquidity and the gradual reduction of the stock of
non-performing loans (NPLs), which however remains very high, led to an
increase in bank credit to non-financial corporations. Furthermore, Greece’s
sovereign rating has been upgraded, and Greek government bond yields have been
trending downwards since the beginning of the year. These favourable
circumstances enabled the Greek government to issue new benchmark bonds. It
should be noted, however, that the yields on government bonds rated below
investment grade are vulnerable to occasional turbulence in international
Positive fiscal developments in 2018, still heavily reliant on taxation and
on Public Investment Programme under-execution
government primary balance in 2018, as calculated according to the methodology
of the enhanced surveillance, turned out a surplus of 4.3% of GDP, against a
targeted 3.5% of GDP, thereby overachieving the programme targets for the
fourth year in a row. This overachievement in recent years helps contain public
debt and boosts market confidence in the commitment of the Greek authorities to
the agreed fiscal targets. However, as the Bank of Greece has already stressed
in earlier reports, the high primary surplus targets and their systematic
overachievement mainly through tax increases and curtailment of public
investment spending act as a drag on the economic recovery and adversely affect
long-term potential output.
Forecasts suggest continued recovery and a primary surplus below target
According to Bank
of Greece forecasts, economic activity is expected to increase by 1.9% in 2019,
by 2.1% in 2020 and by 2.2% in 2021, mainly driven by private consumption,
business investment and exports.
consumption is projected to pick up slightly in 2019 and to increase moderately
in the two years thereafter, on the back of a gradual improvement in real
disposable income, as a result of rising employment and wages. Investment is
expected to contribute positively to growth as confidence gradually strengthens
and the liquidity of the financial system is restored.
Exports of goods
are expected to continue to show positive rates of change, albeit decelerating,
as the impact from the Greek economy’s improved competitiveness is partly
offset by the deteriorating global environment. Imports of goods and services
are expected to increase, but to be slightly outpaced by exports. Thus, the
positive contribution of net exports to GDP growth should be only marginal.
HICP inflation is
projected to rise slightly until 2021, though still remaining at low levels,
mainly reflecting the projected moderate unit labour cost growth and the
assumed path of oil prices. Core inflation is projected to follow a path
slightly above that of headline inflation.
As regards public
finances, the Bank of Greece forecast for 2019, taking into account the
recently enacted expansionary fiscal package and based on the latest available
data, is that the primary surplus will come to 2.9% of GDP, against a target of
3.5% of GDP.
Macroeconomic and fiscal risks remain
outlook is subject to significant downside risks, both external and domestic.
Risks arising from the external environment include a stronger than expected
global economic slowdown as a result of trade protectionism; a possible sharp
correction in global financial markets that would increase the cost and reduce
the availability of funding, the possibility of a no-deal Brexit and other
Turning to the
domestic environment, delays in implementation and/or a cancellation of reforms
would adversely affect the investment climate and economic activity. There are
also significant downside risks on the fiscal front, relating to the Council of
State Plenum rulings that earlier pension cuts were unconstitutional.
Furthermore, as estimated in the European Commission’s Enhanced Surveillance
Report, the recent expansionary fiscal measures will have a fiscal cost of more
than 1.0% of GDP in 2019 and beyond. This poses an additional risk for the
achievement of the agreed primary surplus targets. The European Commission will
re-assess the impact of the measures in autumn 2019. Further fiscal risks for
2020 and 2021 arise from repealing the legislated reduction of the tax-free
personal income allowance and the associated counter-measures.
On the upside,
activation of the respective plans proposed by the Bank of Greece and the
Ministry of Finance for tackling non-performing loans could free up resources
to be channelled into productive investment projects, thereby supporting
Bank profitability still weak – capital adequacy satisfactory
of Greek banks before taxes and provisions remains weak, as shown by the
results for 2018 and the 2019 Q1 results of the four systemic banks. In terms
of capital adequacy, both the Common Equity Tier 1 (CET1) ratio and the Capital
Adequacy Ratio, on a consolidated basis, remain satisfactory (at 14.9% and
15.5%, respectively, for the four systemic banks at the end of the first
quarter of 2019).
A decline in non-performing loans
Banks have made
progress in reducing non-performing loans (NPLs). More specifically, at
end-March 2019, NPLs amounted to €80 billion, down by about €1.8 billion from
end-December 2018 and by around €27.2 billion from their March 2016 peak. The
reduction in the stock of NPLs in the first quarter of 2019 was mainly driven
by write-offs (€0.9 billion), followed by loan sales (€0.8 billion), while a
significant volume of NPL sales is currently in the pipeline and is set to be
completed by year-end.
The ratio of
non-performing loans to total loans in March 2019 remained elevated at 45.2%.
Overall, despite the improvements in the economic and institutional
environment, the recoveries from active NPL management (collections, loan
restructuring, collateral liquidation, etc.) remain limited, which is worrying.
On a positive note, over the past few years banks have increasingly shifted to
long-term NPL workout solutions. Still, an alarmingly high proportion of cured
loans fall back into arrears, often just a quarter after the loan
restructuring. This raises serious questions about the suitability and
effectiveness of the solutions offered.
As regards the
operational targets for NPL reduction, the aim is to bring the average NPL
ratio down to below 20% by end-2021. Overall, there has been progress in this
regard; however, the pace of NPL reduction is not sufficient to bring the NPL
ratio close to the European average of 3.2% as at end-2018. The Bank of Greece
sees a need for a decisive and systemic approach to the NPL issue, on top of
the banks’ own efforts and has put forward a systemic proposal in this
direction. The Ministry of Finance has also put forward its own proposal for
The Greek economy
continues to face significant challenges and legacies from the protracted
economic crisis. The most important challenges are the following:
• The high stock
of non-performing loans (NPLs) on bank balance sheets, which impairs banks’
ability to lend to healthy businesses and delays the recovery of investment and
• High public debt
– although its medium-term sustainability improved significantly with the
measures adopted by the Eurogroup in June 2018 – creates uncertainty about
Greece’s ability to service its debt in the long term, raising borrowing costs
both for the public and for the private sector and hampering growth prospects.
large primary surpluses over a prolonged period (3.5% of GDP up to 2022)
impacts negatively on GDP growth. The restrictive effect of large primary
surpluses is even more pronounced when accompanied by very high taxation
(including high social security contributions) and cuts in the Public
Investment Programme, resulting in weaker economic recovery and expanding the
• The still
negative current account balance and the negative net international investment
• High long-term
unemployment, high youth unemployment and low female labour force participation
exacerbate inequalities, threaten social cohesion and lead to human capital
• The demographic
crisis, due to population ageing and outward migration of highly skilled labour
during the crisis, leads to a decline in active population and exerts downward
pressure on potential growth, putting the long-term sustainability of the
social security system and public finances at increased risk.
• High income
inequality, coupled with the limited effectiveness of social benefits in
reducing poverty risk (2017: 15.83% in Greece, compared with 33.98% in the EU).
While globalisation, digitalisation, demographic change and climate change open
new opportunities for growth, they also increase inequalities. Despite the
State’s intervention through social and tax policies geared towards inclusive
growth and lower inequalities, the results have so far not been satisfactory.
• The slow digital
transformation of the economy, as evidenced by Greece’s weak performance in
terms of fast broadband connectivity and basic digital skills. Based on the
Digital Economy and Society Index (DESI) of the European Commission for the
year 2019, Greece ranks 26th among the 28 EU countries, which implies a high
risk of technological lag and digital illiteracy and of a low-productivity
• The prolonged
recession has left a huge investment gap, which could permanently impair the productive
capacity of the Greek economy. The net capital stock of the Greek economy,
including housing (at constant 2010 prices), declined by €67.4 billion between
2010 and 2016.
• Looking beyond
the effects of subdued domestic demand and funding constraints, including
significantly higher borrowing rates than elsewhere in the euro area, the
business environment is far from investment-friendly. This is due to high tax
rates, excessive red tape and legislative complexity, legal uncertainty and
delays in court proceedings and enforcement of judgments and, more generally,
the existence of barriers and obstacles that have proven to stand in the way of
investment plan implementation, thereby worsening the business climate. In this
context, it should be noted that Greece’s structural competitiveness is not
only low compared to that of its European partners, but has in fact decreased
in recent years, according to the ease of doing business index of the World
Bank (October 2018), the global competitiveness index of the World Economic
Forum (October 2018) and the global competitiveness ranking for 2019 of the IMD
World Competitiveness Center.
• Finally, there
is the challenge of climate change, which will require coordinated efforts to
address. The Bank of Greece has been playing an active role in this area
through its Climate Change Impact Study Committee (CCISC).
Prerequisites for an investment- and export-led recovery
Going forward, in
view of the challenges and risks facing the Greek economy, priority must be
given to the following policies aimed to facilitate the transition of the
economy to a sustainable, extrovert growth model led by investment.
1st A drastic
reduction in NPLs, through the activation of the plans put forward by the Bank
of Greece and the Ministry of Finance, is necessary for bank lending to
increase and for investment to recover.
2nd There is a need to
broaden the sources of long-term financing. That is, to better utilise the
financing opportunities offered by capital markets and/or alternative finance
channels (such as venture capital, crowdfunding, SME-specific trading
platforms, convertible bonds, etc.). Significant impetus to such alternative
channels could be provided by the completion of the Capital Markets Union at
the European level.
3rd A more aggressive
policy for attracting foreign direct investment is warranted, as domestic
savings are insufficient to match the investments needed for high growth rates.
If the country is to attract more foreign direct investment, it is necessary to
speed up privatisations, which mobilise additional private investment, and to
focus on removing major disincentives, such as red tape; the lack of a clear
and stable legislative and regulatory framework; an unpredictable tax system;
weaknesses in property rights protection; limited access to financing and high
borrowing costs; delays in legal dispute resolution; and the remaining capital
controls restricting outgoing cross-border payments and fund transfers.
4th There is also a
need to strengthen the independence of institutions and the rule of law.
International experience has shown that robust economic growth is achieved by
countries with strong, independent institutions and good governance that
enhances public trust, as key enabling conditions for investment in physical
and human capital. Any interference with public administration or with the
functioning of independent authorities and especially with the justice system
is incompatible with a modern state governed by the rule of law.
5th It is of the
utmost importance not only to prevent any backtracking or cancellation of
reforms, but also to strengthen those reforms that foster market competition.
Higher competition will, in turn, motivate innovation and new investment,
leading to higher productivity and employment and improving the structural
competitiveness of the economy.
6th In consultation
and agreement with Greece’s European partners, the primary surplus targets to
be achieved up to 2022 should be lowered and a fiscal policy mix adopted with
lower tax rates and social security contributions, so as to become more
friendly to investment, competitiveness and growth.
A lower, more realistic, primary surplus target compared to the current one of
3.5% of GDP through 2022, if combined with more reforms and privatisations,
would probably imply lower, rather than higher public debt. This is so because,
with a public debt-to-GDP ratio of 180%, a 1 percentage point-higher growth
rate (likely to mateliarise if the lower primary surplus target is achieved
through lower taxes and social contributions, combined with more privatisations
and reforms) and/or 100 basis points-lower borrowing costs (already
materialised, relative to the European Commission’s baseline scenario) are 1.8
times more effective in reducing the debt ratio than an additional GDP
percentage point of primary surplus. On top of this, one must also factor in
the revenue from more privatisations.
7th Greater emphasis
must be placed on: creating public-private partnerships; developing State-owned
property, mainly through modern land-use legislation; increasing those public
investments that would have a multiplier effect on the economy; and introducing
international accounting standards across all enterprises and entities (above a
certain size) within general government and the broader public sector.
Public-private partnerships optimise total national resources, i.e. the sum of
public and private resources, and offer solutions even in sectors like social
security and healthcare, increasing rather than reducing available resources
for citizens and improving the quality of services offered. European countries
with a particularly strong welfare state, e.g. in Scandinavia, are leaders in
the implementation of such schemes in social security and healthcare, whereby
private funds complement public resources, and private sector involvement in
these areas is subject to supervision, control and licensing by the State.
8th It is necessary to
strengthen the “knowledge triangle” (education, research and innovation) through
policies and reforms that promote research, technology diffusion,
entrepreneurship and foster closer ties between businesses, research centres
and universities. This would further contribute to increasing R&D spending
and the ICT sector’s share in GDP. Overall, a strengthening of the knowledge
triangle would lead to the digital transformation of the economy, an increase
in the stock of knowledge and productive capital, the development of
outward-oriented sectors and, more generally, to a knowledge economy and
9th Lastly, a key
prerequisite for achieving the policies outlined above is the modernisation of
public administration, with a redesigning of procedures and responsibilities,
digitisation and the evaluation and development of staff capacities and
Since 2010, the
Greek economy has achieved an unprecedented correction of its macroeconomic
imbalances, improved its competitiveness in unit labour cost terms, while the
banking system has been restructured and recapitalised. The economy has started
to recover, albeit still at a relatively slow pace. Nevertheless, the economy
continues to face major challenges, with significant risks arising on the
domestic front relating to a backtracking or cancellation of reforms, as well
as on the external front, such as a slowdown in global economic activity on
account of rising trade protectionism and geopolitical tensions.
In order to
consolidate investor confidence in the prospects of the Greek economy and
ensure faster growth rates, progress with the necessary reforms must not stall
or be reversed, but on the contrary needs to be stepped up. This would make
Greece an attractive choice for domestic and foreign direct investment and
foster the Greek economy’s transition to a new, export-oriented model, with
high and sustainable rates of economic growth. In such an event, the investment
gap could be closed within a reasonable timeframe and with realistic investment
rates, provided that the investments are concentrated in the more productive and
export-oriented sectors of the economy. Looking ahead, two things are of the
utmost urgency: public investment, which had been drastically curtailed in
recent years, must be increased, given its multiplier effects on the economy,
and privatisations must be accelerated, as this would mobilise additional
The reaction of
markets over the past weeks, with the sharp drop in the yields of Greek
government bonds, augurs well for the future, on condition that the positive
sentiment that has been generated is confirmed by timely economic policy action
of relevance to the investment climate.