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Country Commercial Guides
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CHAPTER II. ECONOMIC TRENDS AND OUTLOOK
Major Trends and Outlook
Greece, a member of the European Union (EU), is projected in less than a year to meet all the macroeconomic convergence criteria for participation in the Economic and Monetary Union (EMU), established by the Maastricht Treaty. Greece currently aims to apply formally to enter EMU by March 2000 and join the EMU on January 1, 2001.
The government is in its sixth year of a convergence program designed to meet EMU entry requirements. By the end of 1998, as a result of a fiscal policy focused on expanding revenue collection, the government budget deficit to GDP ratio had fallen to 2.2 percent. Thanks to a tight monetary policy, cuts in indirect taxation, limited real pay increases and a gradual drachma appreciation after the March 14 1998 devaluation, inflation had been reduced to 4.7 percent at the end of 1998. The stable Drachma policy from 1994 to 1998, was a significant contributor in bringing the double-digit inflation of the 1980's and early 1990's under control. The Drachma was included in the EU Exchange Rate Mechanism (ERM) on March 16, 1998, following an unexpected 12.3 percent drachma devaluation on March 14, and a commitment to the EU Monetary Committee that the Greek government would speed up structural reforms and prepare a revised economic convergence program. The Drachma/Ecu central rate was then set at 357 drachmas per Ecu. Greece having failed to meet all EMU entry criteria on time, stayed outside the EMU, together with those other three EU countries which had opted to do so (Greece was not aiming to reach the targets in 1998). On January 1, 1999, the drachma was included in the EU ERM 2 alongside the Danish Kroner. The drachma's central rate was set at 353.109 Drachmas per Euro, a little higher than the previous setting, reflecting improved economic fundamentals of Greek economy since the March 14, 1998 drachma devaluation.
The basic macroeconomic targets of the revised convergence program of June 1998 and the outcome and subsequent revised projections are as follows:
1998* 1999* 2000 2001 EMU TARGET GDP growth 3.5/3.7 3.7/3.2 3.5 3.8 N/A Government Deficit (Gen.) as % of GDP 2.4/2.2 2.1/1.9 1.7 0.8 3.0 Government Debt (Gen.) as % of GDP 107.8/105.5 103.5/105.1 104.4 103.7 60.0 Inflation** 4.5/4.7 2.5/2.5 1.9 1.8 2.2 (annual average) (est.)*Target Outcome/Target Projected **Includes private consumption deflator
The revised convergence program targets, as well as and the outcome for 1998 and new projections show that Greece has met the EMU entry criteria on government deficits and debt (declining rate) in 1998. As regards inflation the criterion will be met by early 2000. (Note: The EU "harmonized inflation" figure generated by EUROSTAT is some 0.2 percentage points below official Greek inflation data).
The fiscal balance showed a continuous improvement thanks again to higher tax revenues and holding the line on expenditures. Expenditures rose slightly above inflation due to a small increase in the wage bill (public sector), despite reduced growth (up 1.7 percent only) in interest payments due to lower interest rates. Higher revenues were attributable to more effective tax collection, abolition of numerous tax exemptions, and imposition of additional taxes.
The 1998 general government debt and annual deficit to GDP ratios improved to 105.5 percent and 2.2 percent respectively. For 1999 the government projects a further reduction of the deficit to 1.9 percent of GDP and of debt to 105.1 percent of GDP. The debt/GDP ratio is projected to decline further to 104.4 percent of GDP in 2000 and 103.7 percent of GDP in 2001. Outlays for military procurement will keep the debt stock slightly higher than projected in the revised convergence program.
Developments to mid 1999 have been positive. The drop of inflation (to 2.4 percent on an annualized basis in May) raised hopes that the EMU inflation criterion will be met at the beginning of 2000 the latest. The official target for the end-1999 inflation is to dip below 2 percent. The rate of wholesale price increases (goods only) rose in April to an annualized rate of only 0.1 percent up from the 5.6 percent rate recorded at the on April 1998. The large increase in 1998 was due to the mid-March 1998 drachma devaluation. The January-April 1999 wholesale price index rate of increase was only 1.6 percent. The government has limited increases for most of the state administered prices and fees and is prepared to reduce further indirect taxes in the Fall of 1999 to ensure that inflation stays close to 2 percent. Public sector wage increases for 1999 have been contained within the 2-3 percent range.
Investor and consumer confidence has remained strong. GDP growth for 1998 reached 3.7 percent, 0.2 percentage points higher than earlier official projections. The 1999 latest official estimate, following the end of the Kosovo conflict, is for a 3.2 percent growth. The overall impact of the Kosovo conflict is, according to government officials, a loss of 0.3 percentage points of GDP. This is primarily confined to losses in trade mainly with Yugoslavia and to higher transport costs for trade with central Europe. Losses in tourism in Northern Greece have been largely offset by gains in the South.
Growth is being financed by a booming stock exchange, private sector borrowing, including foreign borrowing, and public sector absorption of EU structural adjustment funds. EU net transfers to Greece in 1998 were 4.9 billion dollars, or about 4 percent of GDP. This figure may increase further if available funds are fully utilized. Utilization rates in recent years have improved. Investors' confidence is best reflected in the bullish performance in the Athens Stock Exchange (ASE), which quite easily weathered the impact of the Russian crisis in 1998. The ASE index rose by 85 percent in 1998. In the first five months of 1999 it rose another 43.7 percent. In mid-June 1999 the ASE index hovered around 4000 points. The ASE index was at 2737.55 points at the end of 1998 and at 1479.63 points at the end of 1997.
Greek financial markets have attracted increased foreign capital inflows in the last few years, first due to increasing interest rate differentials resulting from the stable Drachma policy. After the Drachma devaluation on March 14, 1998 and the Drachma's inclusion in the ERM, strong foreign capital inflows (about 10 billion dollars in three months) were stimulated by prospects for significant structural reforms and subsequent productivity increases. Part of those funds boosted the Athens Stock Exchange and drove the interest rates on long-term Greek government securities down. By mid June 1999 the 10-year bond yield was below 6 per cent and its spread to the equivalent German bonds had fallen to about 165 basis points. This implies that Greece has met the interest rate criterion required to enter EMU (below 200 basis points).
The large foreign capital inflows in 1998 increased liquidity and made more money available for businesses directly though the banking system and increasingly through the ASE. In 1998, the value of transactions in the ASE increased to 13.3 trillion Drachmas, up from 5.5 trillion Drachmas recorded in 1997, and 1.82 trillion Drachmas recorded in 1996. In the first five months of 1998, the value of transactions in the ASE were about 15 trillion drachmas an average of about 150 billion drachmas per day. The ASE market capitalization rose from 21.1 trillion drachmas (dollars 89 billion) at the end of 1995, to 45.6 trillion drachmas (dollars 161 billion) at the end of 1998. This rose again to 54 trillion drachmas (of which 39 per cent is the value of bonds) by the end of April 1999, 42.3 percent above the projected GDP for 1999. Additional capital was also made available through inflows of EU support funds (mostly for agriculture) totaling roughly 3 percent of GDP in 1998. The result was a boost in investment and private consumption and an increase in GDP growth to 3.7 percent. The unemployment rate in 1998 fell to 10.1 percent. Unemployment is projected to drop to 9.8 percent in 1999 but the first indications show an increase, bringing the rate close to 11 per cent mainly as a result of illegal immigration and better recording techniques.
While the macroeconomic fundamentals for the Greek economy have improved, serious structural reform is needed for Greece to meet and sustain EMU convergence criteria. The Greek government has been implementing a program which would privatize or sell minority stakes in some 12 government enterprises and sell some banks completely. To date, the government has been successful in selling minority stakes in the Hellenic Telecommunications Organization (OTE), the National Bank of Greece and Hellenic Petroleum. Some success is also clear in the banking sector, where government stakes have been steadily sold off, despite some problems in execution. The private banking sector (including the foreign banks) accounts for about 45 percent of the total commercial banking system as regards deposits and loans. Structural change in the public sector (i.e., elimination of unnecessary activities/entities, changes in the labor and social insurance regimes) is at the top of the Greek government's agenda but more practical measures need to be taken.
Principal growth sectors
Services make up the largest and fastest growing sector of the Greek economy, accounting for about 63 percent of GDP (at factor cost). Trade and banking (22 percent), transportation and communications (9 percent), health and education (9.5 percent) and tourism are the largest sectors.
Banking and Trade: Growth in the banking system is due to higher volume, provision of new services and rapid consolidation towards larger groups to cope with increased competition associated with the more competitive environment stemming from EMU. Private insurance is growing fast and there are increased prospects for business from the large projects associated with the 2004 Olympics in Athens. Higher demand boosted retail trade volume by 2.4 percent. The volume increase in banking and finance was 8 percent in 1998.
Transportation and Communications: The transport sector (including shipping) was particularly active as foreign trade expanded further in 1998. Land transport was up. Conversely, The number of air passengers carried by the national airline Olympic Airways (OA) fell by 7.6 percent. However, following the liberalization of air transport on April 1997, a number of private companies are becoming active and seeking a larger share in air transport. Conversely, transport of goods by rail dropped 2.8 percent, following a 5.3 percent drop in 1997 and a 14.2 percent increase in 1996. Telecommunications volume rose by 5 percent. This was due to increased competition to the Hellenic Telecommunications Organization (OTE) which has been expanding its digital network and increasing revenues as a result. In the cellular companies sector the entrance of an OTE subsidiary has intensified competition with the other two established cellular phone companies (both foreign based).
Tourism: The tourist industry reported a strong recovery in 1998. According to Bank of Greece data, in the first nine months of 1998 overnight stays rose by 6.3 percent. Preliminary data for 1999 indicate an increase in tourist arrivals and bookings but less than anticipated due to Jugoslav conflict.
Construction (8.1 percent of GDP): Construction has traditionally been one of the main growth areas. In 1998 it showed strong (10.0 percent) growth, thanks to increased private investment activity and to public construction works. Residential construction was up by 8.5 percent. Construction has benefited from higher public investment budgets and the acceleration of EU-financed major infrastructure projects. Public sector construction activity was up by 14 percent, a doubling of previous year's rate.
Industry: The industrial sector accounts for about 14 percent of GDP. Industrial activity registered an increase for the fifth year in a row following a drop in the previous two years. In 1998 it rose by 3 percent. Food production increased by 3.9 percent following a 3.3 percent drop in 1997. Production of chemicals rose by 10 percent and that of non-metallic minerals (cement) and basic metallurgy by increased by 2.5 and 2.4 percent respectively. Increased construction activity in Greece boosted demand for cement. Increased exports and domestic demand led to increased production for basic metallurgy (aluminum) products. Conversely, weak foreign demand had a negative impact on the production of clothing and footwear (down 10.3 percent). High technology equipment, especially in telecommunications, is a fast growing sector and production of such equipment including electrical machinery rose by 22.9 percent. A strong increase was also noted in rubber and plastic products (up 9.7 percent) mainly due to strong domestic demand with export potential primarily in Southeastern and Central Europe. The mining sector now accounts for only about one percent of GDP. In 1998 it recorded increases in quarrying and building materials and lignite (up 2.3 percent), sulfur and barite (14.2 percent). Conversely drops were recorded in the production of ferro-nickel (down 11.8 percent), bauxite (down 4.3 percent) and crude oil (down 31.3 percent).
Agriculture: This sector accounts for about 10 per cent of GDP and employs 17 percent of the work force. In 1998 it recorded an output increase of 1 percent, the second increase in a row. Despite significant support from the EU in the form of both structural funds and subsidies, Greek agriculture is still characterized, to a large extent, by small farms and low capital investment. Adjustments in the EU Common Agricultural policy have increased the need for modernization and better management in the agricultural sector, but these changes have been slow in coming.
Government Role in the Economy
The Greek government has traditionally played a very important role in the economy. In 1998, roughly 45 percent of recorded economic activity was in the public sector. The government controlled at the end of 1998, 7 social insurance funds, 51 public enterprises and directly or indirectly some 65 percent of the banking system, following the privatization of the Ionian Bank of Greece. The government owns or controls all public utilities, and the national airline, Olympic Airways. The revised 1998-2001 Convergence Program, designed to enable Greece to comply with the Maastricht Treaty criteria for EMU, sets macroeconomic targets which require structural reforms, including reduction of the public sector. This process is also being reinforced by EU directives, which require the phasing out of the public sector monopolies for the most part by 2001.
General government expenditures, which according to Maastricht Treaty definitions, include those of social insurance funds and local authorities, amounted to 39.8 percent of GDP (including interest payments) in 1998. They are projected to drop to 36.6 percent of GDP in 2001.
The implementation of privatization had been for years strenuously resisted by the labor unions and significant elements within the governing party PASOK. After privatizing a few small banks since 1993, the government sold the Bank of Crete to EFG Eurobank (Latsis group). Alpha Credit Bank (the largest Greek private bank, also acquired the majority holding of Ionian Bank of Greece. The government also sold in different stages a 35 percent minority holding of the telephone monopoly (OTE) through public flotation or direct sale of stocks. Another 10-15 percent of the OTE stock will be offered for sale in July 1999, thus reducing the government holding to 51 percent of the stock. The Greek government has also sold its direct minority holding in the National Bank of Greece, and a 23 percent stake in Hellenic Petroleum. Twenty percent of the Duty Free Shops have been sold and the balance is scheduled to be sold in July 1999. The government has a plan stretching until the end of 1999 to privatize or sell minority stakes in 12 public sector enterprises and organizations including the port operations in Piraeus and Thessaloniki.
Balance of Payments
Greece's balance of payments has been characterized by chronic trade deficits roughly balanced by strong invisible receipts primarily tourism, shipping and EU transfer payments, and more recently by high private capital inflows. The export potential of the country had been restricted by the relatively small industrial base and a lack of adequate investment since the mid-90's. In the last few years, spurred by a booming stock exchange and lower interest rates Greece's productive base is being expanded. The stable Drachma policy, pursued from 1994 until March 1998, eroded Greece's competitiveness. The drachma actually appreciated in real terms due to relatively higher Greek inflation. However, the Drachma devaluation on March 14, 1998 and its inclusion in the EU Exchange Rate Mechanism (ERM) has brought stability and also restored part of Greece's competitiveness.
In the invisibles account, net transfers from the EU (4 percent of GDP) and tourism receipts have been the largest items. EU net transfers will increase until 1999, as Greece absorbs EU structural funds totaling some $20 billion. Greece may get another EU structural funds package beyond 1999, but nothing has been officially decided yet. If so, net transfers from the EU can continue to rise. Tourism revenues increased in 1998 by 37.5 percent over 1997. Emigrant remittances and transport receipts (mainly from shipping) make up the bulk of the remainder of invisible transfers. The current account deficit was $ 3.64 billion in 1997 or 3 percent of GDP. In 1999 and 2000 it is projected to stay at the same level if not a little lower. Relatively high interest rates and the stability brought by the drachma inclusion in the ERM have boosted inflows of private capital through 1998, thus financing the current account deficit and adding to foreign exchange reserves, which stood at dollars 20.5 billion as of end May 1999.
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[end of document] Note* International Copyright, United States Government, 1998 (or other year of first publication). All rights under foreign copyright laws are reserved. All portions of this publication are protected against any type or form of reproduction, communications to the public and the preparation of adaptations, arrangement and alterations outside the United States. U. S. copyright is not asserted under the U.S. Copyright Law, Title 17, United States Code.
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