DBRS Upgrades Hellenic Republic to B, Positive Trend

DBRS Ratings Limited (DBRS) upgraded the Hellenic Republic’s Long-Term Foreign and Local Currency – Issuer Ratings from CCC (high) to B and maintained the Positive trend. DBRS also upgraded the Short-Term Foreign and Local Currency – Issuer Ratings from R-5 to R-4 and maintained the Stable trend.

KEY RATING CONSIDERATIONS

The upgrade is driven by the strong reform progress made by Greece since 2010 when it signed its first memorandum of understanding (MoU) with official institutions; good signs of economic recovery in 2017 and three consecutive years of fiscal over-performance. Moreover, policy risks from a shift in political power are now lower. Since the previous DBRS rating review last November, the third review of the Third Economic Adjustment Programme (the Third Programme), was concluded and the fourth and final review is now underway – these are additional encouraging signs. Improvements in the ‘Fiscal Management’ and ‘Political Environment’ building blocks of our methodology underpin the upgrade.

The Positive trend reflects expectations in coming months of potentially credit-positive outcomes with respect to an exit from the Third Programme and negotiations over debt relief. DBRS also will consider the frequency and depth of post-programme monitoring to ensure adequate frameworks for policy continuity.

RATING DRIVERS

Triggers for a rating upgrade could include: (1) continued successful implementation of fiscal and structural reforms; (2) a clearer view of financing beyond the Third Programme (3) material debt relief measures.
By contrast, the Positive trend could be returned to Stable due to some combination of: (1) a lack of cooperation between Greece and its institutional creditors; (2) renewed financial-sector instability.

RATING RATIONALE

In 2017 GDP Growth Returned Underpinned by Policy Certainty, Supporting Improvement in the Banks

Economic confidence is supported by the successful conclusion of the third review, the European Stability Mechanism (ESM) approved the fourth tranche of €6.7 billion of financial assistance for Greece on 27 March. The first sub-tranche (€5.7bn) covered debt service needs, contributed to the Public Debt Management Agency (PDMA) cash buffer and to arrears clearance. The second sub-tranche for arrears clearance (€1.0 billion) will be released most likely before the conclusion of the fourth programme. The fourth and final review of the programme consists of 88 key deliverables focusing on energy market reform and privatisations and is expected to be completed in June. A total of approximately €18.0 billion, including the tranches described above, is expected to be disbursed to Greece by the end of the programme in August.

After a prolonged period of recession, the Greek economy moved to expansionary territory in 2017, with real GDP increasing by 1.4%. The main drivers were goods and services exports and investment, while consumption and goods and services imports had a negative impact on growth. The growth rate was below the 1.8% estimated by the government in the 2018 budget, however, it is the strongest growth Greece recorded in its decade-long crisis. According to the IMF’s latest forecast, real GDP growth is expected to reach 2% this year with private consumption and investment being the main contributors, on the back of the significant improvement in the labour market and the business climate. On the back of the labour market reforms, the unemployment rate has been falling reaching 21.5% in 2017, but remaining the highest in the (European Union) EU. The IMF projects a decline to 15% in 2021.

Greece’s banks’ profitability continues to improve helped by more positive economic developments. However, high levels of impaired assets prevail, with a non-performing exposure ratio of 43.1% at end-December 2017. This year, reduced reliance on the ECB’s Emergency Liquidity Assistance (ELA) is reflected in the decline in the ceiling from €24.8bn in mid-December to €14.7bn according to most recent data. This demonstrates banks’ improved liquidity including access to wholesale markets. Also, deposits placed by the private sector increased at an annual rate of 6.3% in March. Capital controls introduced in June 2015 have been eased; credit to the domestic private sector is stabilising. Results of a new round of ECB stress tests is expected to be published on 5th May.

Stronger GDP Boosts Employment Growth to Help Achieve Primary Fiscal Surplus

Greece has managed to restore its fiscal sustainability. Since 2010, it went through an unprecedented fiscal adjustment, with the cumulative improvement in the primary balance exceeding 16 percentage points in 2017. In 2017, Greece delivered a primary surplus of 4%, well above the 1.75% target set by the programme. Under the programme definition, the primary surplus surpassed the target by a wide margin for the third consecutive year. The target for the primary surplus is set at 3.5% a year in 2019-2022. DBRS considers that the fiscal reforms undertaken under the adjustment programmes have restored Greece’s fiscal sustainability, however, its durability is contingent on sustained economy recovery. Privatisation efforts have accelerated recently with the sale of 67% of Thessaloniki Port to a German-led consortium of investors. However, there are still delays and obstacles in the implementation of others (Hellenikon, DESFA). Progress on the privatisation programme is required for the successful conclusion of the fourth and final review of the programme.

Debt Sustainability is Expected to be Addressed with Medium Term Debt Relief

Using conventional stock analysis Greece’s gross general government debt-to-GDP ratio is extremely high at 178.6% at end-2017. Primary fiscal surpluses and nominal GDP growth should help facilitate a reduction in the stock ratio, from a peak of 191.3% in 2018 to 165.1% in 2023, according to the IMF. In addition, medium-term debt relief measures under discussion, could make a meaningful difference to the level of Greece’s annual financing needs. Greece returned to capital markets in July 2017 and again in February this year, as well as in April successfully auctioning 12-month T-bills for the first time since 2010. The authorities have accumulated a cash buffer to cover debt service payments until end-2019. All these developments are critical in the assessment of Greece’s exit from the Third Programme in August. DBRS will closely monitor plans for the frequency and content of post-programme monitoring as crucial to ensuring reforms stay on track through political cycles.

Since the Crisis the External Imbalances Have Receded Substantially

Greece’s current account deficit has been on an improving trend, falling by almost 12 percentage points since 2009. The current account deficit in 2017 was 0.8% of GDP compared with a deficit high of 12.3% of GDP in 2009. In 2018, the current account is expected to be around the 2017 levels, supported by the strong performance of exports of goods and services. Greece’s exports of goods have increased by 58% since 2009 in nominal terms. The strong services balance also contributed, increasing to a surplus of 9.8% of GDP in 2017 from a surplus of 4.8% of GDP in 2009. This is mainly attributed to the improvement in the travel balance, with tourist revenues increasing by 10.8% in 2017 due to an increase in the number of inbound visitors and a rise in the expenditure per trip. Foreign arrivals increased by 9.7% in 2017 and are expected to grow even more strongly in 2018 mainly driven by increased air connectivity and the extension of the tourist season.

From a stock perspective, Greece’s negative net international investment position (NIIP) remains high at 141.4% of GDP at end-2017 up from 88.8% in 2011, mostly reflecting public sector external debt. It is expected to remain at high levels because of the long-term horizon of foreign official-sector loans to the public sector. A current account close to balance, if sustained, should prevent a material deterioration in the external borrowing position.

DBRS Currently Sees a Durable Commitment to Reforms

Greece’s political landscape changed drastically during the crisis years, resulting in five national elections, eight prime ministers and four coalition governments. The SYRIZA-ANEL coalition government elected in September 2015, despite the slim parliamentary majority, is the longest-serving since the onset of the debt crisis in 2009. However, the legislation of a number of unpopular measures had a negative impact on popular support for SYRIZA. The latest opinion polls show that the center-right, New Democracy is leading by almost 10 percentage points. In the event the IMF assess the need to frontload the implementation of pension cuts and tax increases to ensure that the primary surplus of 3.5% is achieved, the government could face additional pressure. However, DBRS believes, that the increased political stability observed over the last two years is likely to be maintained after the end of the current adjustment programme and we do not expect any policy reversals under a potential New Democracy-led government.

RATING COMMITTEE SUMMARY

The DBRS Sovereign Scorecard generates a result in the BB (high) – BB (low) range. Additional considerations factored into the Rating Committee decision include the high debt stock and concerns about longer term debt sustainability. The main points discussed during the Rating Committee include the political, economic and fiscal outlook; debt sustainability and developments with official institutions.

KEY INDICATORS

Fiscal Balance (% GDP): 0.8 (2017); 0.8 (2018F); 0.9 (2019F)
Gross Debt (% GDP): 178.6 (2017); 179.5 (2018F); 177.9 (2019F)
Nominal GDP (EUR billions): 177.2 (2017); 184.8 (2018F); 192.4 (2019F)
GDP per Capita (EUR): 16,641 (2017); 17,307 (2018F); 18,120 (2019F)
Real GDP growth (%): 1.4 (2017); 2.0 (2018F); 2.0 (2019F)
Consumer Price Inflation (%): 1.1 (2017); 0.7 (2018F); 1.1 (2019F)
Domestic Credit (% GDP): 132.0 (Sep-2017)
Current Account (% GDP): -1.1 (2017); -0.8 (2018F); -0.6 (2019F)
International Investment Position (% GDP): -139.5 (2016); -141.4 (2017)
Gross External Debt (% GDP): 248.2 (2016); 228.6 (2017)
Governance Indicator (percentile rank): 62.5 (2016)
Human Development Index: 0.87 (2015)

Notes:
All figures are in Euros unless otherwise noted. Public finance statistics reported on a general government basis unless specified. Governance indicator represents an average percentile rank (0-100) from Rule of Law, Voice and Accountability and Government Effectiveness indicators (all World Bank). Human Development Index (UNDP) ranges from 0-1, with 1 representing a very high level of human development.

The principal applicable methodology is Rating Sovereign Governments, which can be found on the DBRS website www.dbrs.com at http://www.dbrs.com/about/methodologies. The principal applicable rating policies are Commercial Paper and Short-Term Debt, and Short-Term and Long-Term Rating Relationships, which can be found on our website at http://www.dbrs.com/ratingPolicies/list/name/rating+scales.

The sources of information used for this rating include the IMF, World Bank, UNDP, Haver Analytics, Bank of Greece, PDMA, Greek Ministry of Finance, Eurostat, ECB. DBRS considers the information available to it for the purposes of providing this rating to be of satisfactory quality.

DBRS does not audit the information it receives in connection with the rating process, and it does not and cannot independently verify that information in every instance.

Generally, the conditions that lead to the assignment of a Negative or Positive Trend are resolved within a twelve month period. DBRS’s outlooks and ratings are under regular surveillance.

For further information on DBRS historical default rates published by the European Securities and Markets Authority (“ESMA”) in a central repository, see:
http://cerep.esma.europa.eu/cerep-web/statistics/defaults.xhtml.

Ratings assigned by DBRS Ratings Limited are subject to EU and US regulations only.

Lead Analyst: Nichola James, Co-Head of Sovereign Ratings, Global Sovereign Ratings.
Rating Committee Chair: Roger Lister, Chief Credit Officer, Global FIG and Sovereign Ratings.
Initial Rating Date: 16 August 2013.
Last Rating Date: 10 November 2017.

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