The Greek economy is beating expectations, sweeping away fears of a post-Olympics slowdown. Kerin Hope reports on a boom in the shipping industry, the trend in infrastructure improvements and banks’ survival strategies.
A revision of Greece’s national accounts last year – the first for two decades – showed that the economy has been growing much faster than projected. The revised statistics, which captured more of the fast-growing service sector, raised gross domestic product (GDP) by as much as 25%.
Eurostat, the EU’s audit arm, is expected to approve the new Greek figures this month. One result would be a cut in the budget deficit from 2.6% to 2.2% of GDP, well within the 3% of GDP limit for eurozone members.
More importantly, Greece’s public debt would no longer be the largest among eurozone members. Under the revised figures, the debt would fall from 104% to about 85%, making it possible for Greece to achieve the 60% of GDP debt target set under the Maastricht criteria by 2015.
“The revision, once it’s accepted, gives Greece a boost. The increased role of services has been recognised, and more of the grey economy has been captured. But the emphasis still has to be on fiscal consolidation – improving revenue collection while controlling expenditure,” says Paul Mylonas, chief economist at National Bank of Greece.
With an election due next March at the latest, the finance ministry will be pressured to loosen policy in the second half, especially given the cushion provided by the revised statistics. Some analysts believe that prime minister Costas Karamanlis will call an early vote in October. According to opinion polls, his right-of-centre New Democracy party would defeat the opposition Socialists by a narrow majority to win a second four-year term.
The Karamanlis government focused on rebuilding Greece’s credibility with the European Commission (EC) following massive spending overruns on infrastructure and sports facilities built for the 2004 Athens Olympics, and a dispute with Eurostat over the recording of military procurements in the budget. Amid allegations that Greece had failed to fulfil the Maastricht deficit criterion before it joined the eurozone, the budget deficit soared to 6.6% of GDP in 2004.
The right track
Buoyant growth, tight fiscal policies and a fresh crackdown on tax evasion have put Greece back on track. It will shortly exit the EU’s ‘excessive deficit’ monitoring procedures.
However, the focus on fiscal discipline has meant delays in structural reform. The next government will have to implement some painful changes: an overhaul of the debt-burdened pension system and full privatisation of state-controlled utilities.
Unexpectedly strong growth rebuffed fears of a post-Olympics slowdown. In fact, the games helped to rejuvenate Greece’s tourism sector, which accounts for up to 16% of GDP and remains the biggest employer. Arrivals this year are projected to increase by about 8% to 16.5 million, in addition to a 10% rise in last year. In spite of competition from low-cost neighbouring destinations such as Croatia, Bulgaria and Turkey, the tourist sector is expected to continue growing in the high single digits.
Fleet renewal
The Greek shipping industry, which carries an estimated 70% of China’s raw material imports, is enjoying a prolonged boom. Shipping companies – now mainly based in Athens – have invested in fleet renewal on a massive scale, placing orders for new tankers and dry goods carriers worth more than $25bn in the past five years. Greek owners still control the world’s largest fleet, amounting to 28% of total tonnage. With 40 million tonnes of new capacity in the pipeline, the fleet is set to increase by 15% in the next three years.
This year, Greece’s economy is set to expand by almost 4% – having grown by 4.1% in 2006. The country aims to continue outperforming the EU-15 over the medium term with growth of about 4% yearly, driven by high investment and strong consumer demand.
Officials are buoyed by a decline in unemployment to 8.9% last year, which was the first time in more than a decade that the jobless rate has fallen below 9%. While unemployment among women and workforce entrants remains high, participation in the labour force increased steadily from 56% in 2000 to 62% in Q3/2006. “This is an encouraging trend, although it’s still below the EU average of 65%,” says Mr Mylonas.
Immigration from the Balkan countries and the former Soviet Union has increased the workforce by an estimated 40% since the early 1990s. Although many immigrants still work in the grey economy, increasing numbers of them have permanent jobs and pay social security.
Infrastructure funding
Greece’s funding allocation from the EU’s latest structural aid package for developing member-states, covering 2006 to 2013, amounts to more than €22bn, a figure that will not be affected by the upward revision of GDP. Following the posting to Athens of a team of EC experts who are Greek nationals, funds are likely to flow faster than before. Much of the current EU package will be spent on infrastructure improvements aimed at completing Greece’s network of major highways. Access to the Balkan countries to the north will be accelerated through upgrades of cross-border road links.
“This package is very significant as a driver of growth. It’s going to contribute one or two percentage points of GDP, which translates into growth of 1%-plus. But we need a better effort than in the previous package to ensure the full disbursement,” says Platon Monokroussos, senior economist at EFG Eurobank.
Since 2004, the Greeks have realised the difference that better infrastructure can make. New transport systems built for the Olympic Games in 2004 have reduced congestion and pollution in Athens city centre, making the capital an attractive destination for short-break and conference tourism. The next wave of projects, which includes the upgrade to motorway standards of roads in western Greece – the main gateway for EU traffic – as well as the Balkans and Turkey, will promote Greece’s ambitions of becoming a regional energy and business hub.
New energy
By mid-year, natural gas will start flowing through a cross-border pipeline from Turkey to Greece in the first joint infrastructure project undertaken by the formerly hostile neighbours. The €300m pipeline will carry Azeri gas to Greece at a later stage. A joint venture between Greece’s state-controlled gas utility, Depa, and Italy’s Edison group is building an undersea link across the Adriatic Sea to Italy, which is due to become operational in 2012.
Greece also has a stake in a long-awaited project for a $1bn pipeline project to carry oil from Burgas on Bulgaria’s Black Sea coast to Greece’s Aegean port of Alexandroupolis. Russian companies will have a 51% stake in TransBalkan Pipeline, the operator, with Bulgarian and Greek partners each holding 24.1%. With capacity of 35 million-50 million tonnes yearly, the pipeline is small compared with the Baku-Ceyhan pipeline across Turkey, but it will nonetheless help to reduce tanker congestion in Turkey’s crowded Bosphorus strait.
Big on the Balkans
Since the demise of communism, Greek companies have poured more than €12bn into the Balkan countries to become one of the region’s biggest investors. The biggest slice of funds has gone to Bulgaria and Romania, but Serbia also attracts a steady flow. The largest investors are Greek banks, which have spent more than €2.5bn on acquiring local banks through privatisation deals and expanding their networks.
OTE, the partly privatised telecoms operator, is also a strong regional player through its mobile subsidiary CosmOTE, which controls GSM networks in five Balkan countries. Private Greek companies, from cement and steel producers to soft drinks and food manufacturers, regard regional expansion as the way to stay competitive in a globalised economy.
Banks look outward
National Bank of Greece’s (NBG) acquisition of Turkey’s Finansbank last year marked another stage in the drive to expand. EFG Eurobank and Alpha Bank acquired smaller Turkish banks. While trade with Turkey has tripled to more than $2bn in the past four years, only a few large Greek companies have made investments there. This is set to change as medium-sized Greek enterprises prepare to move into Turkey under NBG’s umbrella.
“Getting bigger has become critical for survival. Greek companies are more outward looking and the Balkan experience has given them know-how and confidence to penetrate markets in other places: Turkey, central Europe or the Gulf states,” says Costas Mitropoulos, chairman of Kantor, an Athens-based consultancy.
In contrast, foreign direct investment in Greece has averaged less than €1bn yearly in the past decade. According to analysts, the main obstacles are excessive bureaucracy, lack of transparency and inflexible labour practices. Also, costs are high compared with the low-wage countries in the Balkans.
The outlook is brightening, though, thanks to new legislation on public-private partnerships, a move to encourage the development of integrated tourist resorts by foreign investors and the full liberalisation of Greece’s domestic energy market. Last year, foreign direct investment reached a record €4bn, equivalent to 2% of GDP, according to finance ministry figures.
Seeking diversity
Greece’s big construction companies are diversifying into the energy sector through joint ventures with foreign partners. European groups, among them Spain’s Endesa and Italy’s Edison and Enel, have formed joint ventures with Greek contractors to bid for about 1600 megawatts (MW) of generating capacity to be built over the next four years. The private electricity suppliers also plan to add about 1000MW of renewables – mostly wind parks – so that Greece can meet its EU commitment on renewable energy supplies.
“Delays in deregulation in a period of rising demand have caused an energy crunch. These investments are urgently needed to ensure the economy can fulfil its potential,” says Mr Mitropoulos.
