S&P affirms B-/B rating and stable outlook for Greece
S&P affirmed Greece’s sovereign rating at B-/B with a stable outlook. The investment house believes the Greek economy is rebalancing, as reflected in its reduced current account deficit, notable budgetary consolidation, and improved competitiveness, among other positives. However, it adds that the general government debt and the economy΄s external debt are still large.
S&P in the press release explains that the ΄B-΄ long-term rating on Greece reflects its view of the country΄s uncertain economic growth prospects, its high albeit long-dated government debt burden, and its significant external debt position. At the same time, the rating is supported by Greece΄s relatively high (although still falling) GDP per head, its significant budgetary and structural reforms, and its large conditional liquidity lines from the European Economic and Monetary Union (EMU or eurozone) and the IMF.
"We estimate real GDP will contract by about 4% in 2013 and 1% in 2014 on declining disposable income due to further job losses, falling wages, and budgetary consolidation, before recovering to grow by about 1% in 2015. Consumption has fallen because of soaring unemployment, declining wages, tax hikes, and severe budgetary contraction amid tightening credit conditions. We think investment growth will remain negative as domestic banks curtail lending and businesses deleverage, accompanied by significant credit risk in the economy" says the investment house.
And it adds,
"positively, we believe that the economy is rebalancing. We expect the current account deficit will decline to about 1% of GDP in 2013, from almost 15% in 2008, on a substantial contraction in imports and lower interest payments after two stages of government debt restructuring in 2012. In the medium term, we believe the current account will strengthen gradually as a result of the economy΄s ongoing reorientation toward external demand. We anticipate this will happen as the current weak export performance strengthens on the back of restored competitiveness, especially if accompanied by political stability.
Intense economic pressures and the implementation of new labor legislation are breaking down previous wage rigidities. We note that, since 2010, Greek total economy unit labor costs have reduced sharply; according to the European Commission, the competitiveness index in second-quarter 2013 based on relative unit labor costs was almost 3% below its 2000 level which more than restores
lost pre-crisis price competitiveness.
We expect ongoing downside pressure on nominal wages to accompany a further increase in unemployment to about 28.5% by end-2014, partly depending on the timing of any public sector dismissals. Since 2010, nominal private sector wages have declined more in Greece than in any other European economy, including those of the Baltic countries, which in our view has undermined Greek social stability.
While we view the shift in external flow dynamics relatively positively, we note that Greece΄s external vulnerabilities persist given its large stock of external debt, as well as its large net international liability position at almost 120% of GDP.
We view the government progress on budget deficit reduction as significant. We expect the general government deficit to fall to around 4% of GDP this year from 15.6% in 2009, partly due to reduced interest payments following successful debt exchanges last year--possibly leading to a small primary surplus.
We note that public administration, health care, and revenue administration reforms are not yet complete, and that the privatization process is slow. However, if the government achieves a primary budget surplus this year, this could in our view trigger an additional easing of borrowing terms by the
official lenders. This could help the government reduce or even eliminate the funding gap identified for 2015-2016.
Despite the commercial debt restructuring and significant easing of borrowing conditions by official lenders so far (the weighted-average residual maturity at the end of June 2013 stood at 16.12 years), we expect net general government debt at about 170% of GDP in 2013-2015. This will depend on Greece΄s compliance with EMU/IMF financial program targets, including the government΄s capacity to generate privatization revenues, and on its economic growth performance. We estimate the ratio of general government interest expenditure to general government revenues at around 11% on average during 2013-2015".
OUTLOOK
As far as Greece΄s outlook is concerned S&P stresses the following:
"The stable outlook balances our view of eurozone member states΄ determination to support Greece΄s eurozone membership and the Greek government΄s commitment to a fiscal and structural adjustment against the economic and political challenges of doing so. We expect the government to implement the EMU/IMF program and we assume, at a ΄B-΄ rating level of confidence, no further distressed exchange on the sovereign΄s remaining stock of commercial debt.
We could raise our long-term rating on Greece if the government follows through fully on its steps to comply with the EMU/IMF program, thereby restoring predictability to its policymaking as well as contributing to a sustained economic recovery and improved prospects of sustainable debt-servicing.
We could lower the ratings if we believe that there is a likelihood of a distressed exchange on Greece΄s remaining stock of commercial debt, due to further weakening of the political situation or withdrawal of the scheduled official creditor support".
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