Fitch retains BB+ rating, stable outlook for Greece

Fitch on Friday retained its BB+ rating for Greece, with the outlook also remaining stable, keeping the country’s creditworthiness one step away from investment grade.

The next international ratings firm to issue an assessment on the Greek economy and the country’s credit rating will be DBRS, scheduled for Sept. 8, followed by Moody’s on Sept. 15.

KEY RATING DRIVERS

Credit Fundamentals: Greece’s rating is underpinned by structural indictors, including governance scores, human development indicators and GDP per capita, that are among the highest of sub-investment grade peers. These strengths are set against the legacies of the sovereign debt crisis, which include large stocks of public and external debt, as well as low medium-term growth potential and vulnerabilities in the banking sector.

Improved 2023 Outlook: Fitch has revised its GDP growth forecast to 2.3% in 2023 (from 0.9%), thanks to a positive carry-over effect (1.5pp, given a much stronger than expected performance in 4Q22) and reduced energy risks. We still expect household consumption to slow considerably this year, reflecting the impact of inflation and reduced credit demand. In contrast, investment growth will remain solid thanks to absorption of funds under the Recovery and Resilience Facility (RRF), while sectors such as tourism will continue to support exports.

Reforms Crucial for Medium-Term Growth: We expect the economy to expand by 2.0-2.5% in 2024-26, driven by investment and a recovery in household consumption. Our forecasts are underpinned by the assumption that the Greek authorities will continue to meet milestones and targets under the RRF, which is the key anchor for unlocking public and private investment over the short to medium term. Addressing demographic challenges remains an important structural challenge, with planned labour reforms crucial to lift participation rates.

Expected Policy Continuity: Greece will see a second consecutive election on 25 June, given the failure of parties to form a government following the 21 May parliamentary elections. The centre-right New Democracy (ND) performed well above poll predictions, securing close to 40% of the vote and making it likely it will win the upcoming vote. If ND manages to secure a comfortable majority (which seems likely given that the second elections will revert to a majority bonus system, providing the winner 50 extra seats), this could reduce political instability risks and would allow policy continuity. Overall, we maintain our forecast that the next Greek government will maintain good relations with the EU and other partners, assuring macroeconomic stability.

Deficit Reduction: Fitch expects continued fiscal consolidation in 2023, partly reflecting a better starting position given a lower than expected deficit in 2022. We forecast the primary surplus rising to 1% of GDP (and to 2% in 2024), with short-term downside risks largely contained, given the strong revenue growth in first few months of the year (in cash terms tax revenue increased by 12% yoy in January-April).

The stability programme sets continued improvement in the public finances until 2026, with the primary surplus rising to 2.5% and public debt/GDP falling by 38pp in 2022-2026. The programme underscores the authorities’ broad commitment to fiscal prudence, with some reforms (including digitalisation of revenue) potentially providing some structural improvements. Nevertheless, we see risks including weaker growth and rising expenditure demands. Continued expenditure restraint may prove more challenging after temporary pandemic-response measures are fully wound down or if revenue growth significantly slows.

Falling Debt; Stable Financing Conditions: Under our baseline scenario of an improving fiscal stance and solid nominal growth, the public debt/GDP ratio will fall to 162.2% in 2023 and 154.4% in 2024, a projected 50pp decline from the high of 206% reached in 2020 (but still three times the ‘BB’ median of 55.6%). Stable financing conditions, limited debt-rollover needs and a sizeable cash position (close to EUR35 billion) will continue to support debt management. The combination of long maturities and an active hedging strategy means that interest rate costs will remain broadly unchanged, although some financing pressure could build up if Greece decides to tap capital markets more aggressively.

Eurostat has decided not to include the guarantees from the Hellenic Asset Protection Scheme (around EUR18 billion) as part of public debt, reducing uncertainty around stock-flow adjustments.

Inflation Pressures Ease: We forecast annual harmonised inflation to ease to 4% in 2023 and to 1.9% in 2024, given base effects and moderation in economic activity. Some upward risks are likely to persist, given pressures from core inflation (which is now above the headline rate at around 6%). Labour market dynamics will support faster wage growth this year (above 6%), but risks of a wage-price spiral are limited.

Current Account Deficit to Moderate: A projected decline in imports (due to falling energy prices and weaker domestic demand) will lead to a gradual narrowing of the current account deficit (CAD) in 2023-2024 (after reaching a 12-year high of 9.7% of GDP in 2022). The CAD deficit (which we expect to average 6.5% in the next two years) will be financed largely by rising net FDI inflows and EU transfers, hence reducing external vulnerability risks. We project the net external debt position to remain large (despite falling modestly to 115.6% of GDP in 2024), although the inclusion of central bank liabilities means that exposure is more limited.

Stable Banking Sector: The rapid improvement in asset quality continued in 4Q22, with the non-performing loan ratio falling to 8.2% according to Bank of Greece data. We expect further improvement in asset quality over the short to medium term but at a more moderate pace, as asset disposal transactions are likely to be smaller and overall economic activity is cooling. The sector’s liquidity and capital positions are stable, with no spill-overs so far from global banking jitters in 1Q23. Credit growth has weakened in 2023, in part as corporate lending has slowed, but we expect it to gather pace as growth starts to strengthen in 2H23.

ESG – Governance: Greece has an ESG Relevance Score (RS) of ‘5[+]’ for both Political Stability and Rights and for the Rule of Law, Institutional and Regulatory Quality and Control of Corruption. Theses scores reflect the high weight that the World Bank Governance Indicators (WBGI) have in our proprietary Sovereign Rating Model. Greece has a medium WBGI ranking at 64.8 reflecting a recent track record of peaceful political transitions, a moderate level of rights for participation in the political process, moderate institutional capacity, established rule of law and a moderate level of corruption.

RATING SENSITIVITIES

Factors that Could, Individually or Collectively, Lead to Negative Rating Action/Downgrade
-Public Finances: A sustained upward trend in public debt/GDP, for example due to structural fiscal loosening, weak growth or materialisation of contingent liabilities from the banking sector.

-Macro: Renewed adverse shocks to the Greek economy affecting the economic recovery or Greece’s medium-term growth potential.

Factors that Could, Individually or Collectively, Lead to Positive Rating Action/Upgrade
-Public Finances: Confidence in a post-election fiscal policy that leads to a firm downward path for the government debt/GDP ratio over the medium term.

-Macro: Improvement in medium-term growth potential and performance, for example, driven by higher investment dynamics and/or implementation of structural reforms.