DBRS Morningstar Confirms the Hellenic Republic at BB (high), Stable Trend

DBRS Ratings GmbH (DBRS Morningstar) confirmed the Hellenic Republic’s Long-Term Foreign and Local Currency – Issuer Ratings at BB (high). At the same time, DBRS Morningstar confirmed the Hellenic Republic’s Short-Term Foreign and Local Currency – Issuer Ratings at R-3. The trends on all ratings remain Stable.

KEY RATING CONSIDERATIONS
The Stable trend reflects DBRS Morningstar’s view that Greece remains committed to ensuring fiscal and debt sustainability, despite the more challenging macroeconomic environment. On the back of a strong rebound in tourism activity, ongoing improvements in the labour market, and support measures, real GDP growth amounted to close to 6.0% in 2022. The effective implementation of the Recovery and Resilience Plan (RRP) and the government support measures will continue to provide support to the economy this year, however, the growth outlook is subject to downside risks related to the intensification of the conflict in Ukraine that could lead to a further tightening in monetary policies and weaker external demand. The measures to cushion the impact of elevated energy costs resulted in a primary deficit of 1.6% of GDP in 2022 down from 5.0% in 2021. Public debt is expected to have declined by nearly 25 percentage points in 2022, benefiting from improved fiscal outcomes and strong nominal growth. Despite the significant improvement in fiscal and debt outcomes, the implementation of a prudent consolidation plan will be crucial for Greece to address the ongoing challenges, while building a sustainable growth model.

Greece’s ratings are underpinned by its euro area membership and by the implementation of past economic reforms that have enhanced the resilience of the economy. Greece continues to make progress on the execution of the National Recovery and Resilience Plan (Greece 2.0), which consists of reforms that if implemented, could boost inclusive growth and investment, narrowing the investment gap between Greece and its euro area peers. DBRS Morningstar notes that the funds will continue to provide incentives for the implementation of growth enhancing reforms, while supporting investment growth. By contrast, the ratings are constrained by the economic legacies inherited from Greece’s prolonged crisis, namely, the very high public debt ratio and still high non-performing loans in the banking system. In addition, low investment weighs on Greece's growth performance with the investment gap for now remaining high. Investment spending has fallen in the years of the crisis from 21% of GDP in 2009 to 13.3% in 2021, the lowest in the euro area and far from the average of 22.2%.

RATING DRIVERS
The ratings could be upgraded if one or a combination of the following occur: (1) continued implementation of reforms that boost investment, thereby improving longer term economic prospects; (2) sustained commitment to fiscal consolidation that keeps the public debt ratio on a downward trajectory. Triggers for a downgrade include: (1) persistently weak economic performance; (2) a reversal or stalling in structural reforms; (3) renewed financial-sector instability.

RATING RATIONALE

Growth Will Slow This Year, But RRF and Government Measures Will Continue to Support the Economy

Greece’s economy experienced a severe contraction in 2020 with real GDP dropping by 9.0%, as the pandemic severely affected the highly important tourism industry. In 2021, the economy rebounded strongly growing by 8.4%, supported by strong investment and export growth as well as pent up private consumption. On the back of a strong rebound in tourism activity, ongoing improvements in the labour market, and government support measures, the economy remained strong in 2022 posting 5.9% growth. Growth is moderating this year, as weaker external demand, higher prices and interest rates weigh on economic activity. The European Commission (EC) forecasts GDP growth at 1.2% this year and at 2.4% in 2024. Inflation reached 9.3% YoY in 2022, driven primarily by energy prices, and is expected to ease to 4.5% in 2023 and to 2.2% in 2024. The main risks to the outlook are related to the intensification of the conflict in Ukraine that could lead to further tightening in monetary policies, weaker external demand, and high inflation for longer, affecting among other factors, Greece’s tourism industry.

Greece continues to make progress with the implementation of the Recovery and Resilience Plan (Greece 2.0) by utilizing both the grant and loan components. Thus far, the EC has approved the 2nd payment for grants and loans bringing the total amount of disbursements to EUR 11.1 billion (EUR 5.75 billion of grants and EUR 5.35 billion of loans) and 13% of the total milestones and targets are now complete. DBRS Morningstar notes that the funds from the NextGen EU could have a significant positive impact on the Greek economy, which according to estimates by the European Commission could increase real GDP by 2.1-3.3% by 2026, excluding the potential impact from the implementation of structural reforms under the plan. The plan consists of 106 investments and 68 reforms primarily focused on the green and digital transition. In DBRS Morningstar’s view, the deployment of EU funds, if combined with the implementation of structural reforms, will improve Greece’s growth prospects and warrants a positive qualitative adjustment to the “Economic Structure and Performance” building block assessment.

Fiscal Position Improved in 2022, Driven by Cyclical Tailwinds and the Phasing Out of Covid-19 Support

After years of fiscal overperformance, Greece recorded high deficits in 2020 and 2021 due to the deep economic contraction and the support packages to mitigate the economic impact of the pandemic. The fiscal deficit stood at 9.9% of GDP in 2020, the third largest in the EU, before narrowing to 7.5% of GDP in 2021. The 2021 outcome was significantly improved from initial estimates pointing to a high deficit of 9.6% of GDP, and was due to the stronger than expected performance of revenues and the lower take up of COVID-19 related measures. In 2022, the government introduced support measures to weather the impact of increased energy costs amounting to EUR 10.6 billion with the fiscal cost amounting to EUR 4.8 billion (2.3% of GDP) in 2022, as it was partially financed by revenues from the Energy Transition Fund. The fiscal accounts are expected to improve further, with the primary deficit projected to decline from 5.0% of GDP in 2021 to 1.6% in 2022 and to return to a primary surplus of 0.7% of GDP this year.

The main risks to the fiscal outlook relate to slower growth this year that may lead to a weaker fiscal outcome, the evolution of the energy crisis that could result in additional spending arising from higher energy prices than currently foreseen, and the activation of state guarantees that were granted during the pandemic. DBRS Morningstar takes the view that Greece will maintain its commitment to fiscal consolidation and will comply fully with guidelines from the European institutions once targets are reinstated.

Public Debt Remains the Highest in the Euro area, But Favourable Structure and Declining Interest Costs Mitigate the Risks

Greece’s debt-to-GDP ratio increased to 206.4% of GDP in 2020 and declined to 194.5% in 2021, remaining the highest in the EU. In 2022 the debt ratio is expected to have amounted to 168.9% of GDP, due to the improved fiscal outcomes and high nominal GDP growth. In its 2023 State Budget, the government envisages the public debt ratio to continue on its downward trend falling to 159.3% in 2023, recording a 47 percentage point decline since 2020 and falling below 2012 levels. Greek government bond yields after recording historical low levels in 2021, have increased currently to around 4.4%. However, there are several risk mitigating factors in place related to Greece’s favourable debt structure, as the official sector holds more than 70% of government debt with very long weighted-average maturity of 20 years at end-2022, and with 100% of debt at fixed rates. In addition, the PDMA has in place a proactive debt management strategy using interest rate hedges to mitigate the risk of funding cost increases over the medium term. In 2023, the average effective interest rate on medium to long term debt is expected to stand at 1.2%.

Greece has fully repaid its International Monetary Fund (IMF) loans and prepaid EUR 2.7 billion of the Greek Loan Facility (GLF loans) in 2022. Despite the favourable debt profile, DBRS Morningstar notes that Greece’s debt sustainability relies primarily on its ability to return to and to sustain primary surpluses and on solid nominal GDP growth rates, as in the long run official sector debt will be replaced with market financed debt that will be susceptible to market volatility. The sizeable cash reserves of around EUR 37 billion in February 2023 continue to serve as a liquidity buffer and enhance confidence among market participants. These reserve buffers, combine with the pro-active debt management strategy to achieve the lowest possible interest rate costs, thereby significantly reducing repayment risks, and underpinning the positive qualitative factor in the “Debt and Liquidity” building block assessment. At the same time, in DBRS Morningstar’s view, fiscal discipline and sustained economic growth are key with respect to Greece’s debt sustainability.

Further Improvement on NPLs, But Adverse Macroeconomic Environment Raises the Risk of New Flows

Greek banks made further progress in reducing their impaired assets, with the NPL ratio falling to 9.7% at the end of Q3 2022, below 10% for the first time since Q4 2009. This reduction was primarily driven by sales and securitizations of loans under the Hercules Asset Protection Scheme (HAPS), operated by the four systemic banks. All the systemic banks have now achieved the target of a single digit NPL ratio. DBRS Morningstar notes that banks’ effective management and allocation of RRF funds, together with the substantial reduction of NPLs that has taken place, positions banks well to increase the provision of credit to Greek corporates, thereby supporting the economic recovery. Nevertheless, the resolution of private non-performing debt, that was transferred from the banks’ balance sheets to the real economy and is now managed by credit servicing firms (CSFs), remains a key challenge. At the same time, the more challenging macroeconomic and higher interest rate environment could affect banks’ loan portfolios adversely and result in new NPLs. This accounts for DBRS Morningstar’s negative qualitative factor in the “Monetary Policy and Financial Stability” building block assessment. As a result of the de-risking that has taken place, the Common Equity Tier 1 (CET1) ratio on a consolidated basis stood at 13.7% in June 2022, slightly down from 13.6% in December 2021, and remaining below the euro area average. However, with most of the clean-up process completed, banks should be in a good position to improve their capital position organically going forward.

Current Account Widened in 2022, Record Year for FDI

The current account deficit widened in 2020 and 2021, reaching 6.6% and 6.8% of GDP respectively, primarily due to the significant deterioration in the travel balance. Some of this is a structural deterioration related to energy costs and the green transition and some is cyclical related to pent up demand and the investment cycle, the latter potentially leading to a structural improvement by building the capacity to further raise exports in the medium term. Despite the strong performance of exports particularly of services, due to the recovery in international tourist flows, Greece’s high reliance on energy imports in conjunction with the surge in energy prices widened the current account deficit to 9.7% of GDP in 2022. The tourism sector recovered strongly in 2022 with international tourist arrivals reaching almost 90% of 2019 levels and travel receipts 99% of the 2019 levels. The macroeconomic adjustment since 2010 and the labour market reforms of 2012 have improved the external competitiveness of the Greek economy. Greece’s export performance has improved significantly, with Greek exports of goods increasing from 9.0% of GDP in 2010 to around 27% in 2022. Exports of goods and services now represent approximately 50% of GDP from 22% in 2010. However, the value-added of Greek goods exports remains low compared to its euro area peers.

Inflows of EU funds and rising inflows of foreign direct investments, which recorded a two decade high in 2021, reaching EUR 6.3 billion, and more than EUR 7.0 billion in 2022, will provide balance of payments offset to the current account deficit. The IMF estimates that the current account deficit will moderate in the coming years as international tourist arrivals continue to recover and the cost of energy falls. From a stock perspective, Greece’s net external liabilities remain high at 148.6% of GDP in Q3 2022 mostly reflecting public sector debt held by the official sector. The level is expected to remain at high levels because of the long-term horizon of foreign official-sector loans to the public sector.

Elections This Year, RRF Provides Incentives for Continuation of Reforms but Delays Cannot Be Ruled out

The next parliamentary elections will be held this year, most likely in the Spring. Under the current electoral system - introduced by the SYRIZA/ ANEL coalition government in 2016 – which is based on simple proportionality, the formation of a single party government will not be possible. Unless there is multiple party cooperation, a second election, approximately a month after the first, is the most likely scenario. The second election will be held under a different electoral system of reinforced representation, deeming the formation of a single party government possible. The center-right ruling party New Democracy is leading according to the latest opinion polls. In DBRS Morningstar’s view, policy continuity is expected with the RRF providing incentives for the continuation of reforms, however, a prolonged electoral cycle could result in some delays in policy implementation. In recent years, Greece has enjoyed a stable political environment and good cooperation with its EU peers and institutions under first SYRIZA and then New Democracy governments.

Significant progress has been made in reducing red tape in the public sector, improving the business environment and unblocking several investment projects. Greece has also accelerated its efforts to improve its digital performance, especially in the functioning of the public administration. Government priorities in the next few months focus on the successful implementation of the Greece 2.0 economic programme, with several reforms and investments in the pipeline. DBRS Morningstar views that the improvement in the political environment and the government’s commitment to address Greece’s long standing challenges warrants a positive qualitative adjustment to the “Political Environment” building block assessment.

ENVIRONMENTAL, SOCIAL, GOVERNANCE CONSIDERATIONS

Social (S) Factors
The Human Capital and Human Rights factor affects the ratings assigned. Greece’s GDP per capita estimated at $20,875 in 2022 is relatively low compared with its euro system peers. This factor has been taken into account in the “Economic Structure and Performance” building block.

Governance (G) Factors
The Institutional Strength, Governance, and Transparency factor affects the ratings assigned. According to the World Bank Governance Indicators in 2021 Greece’s scores of 63 for Rule of Law and 68 for Government Effectiveness, are significantly lower than its euro area peers. The Bribery, Corruption and Political Risk factor is also a relevant factor in the analysis. Greece underperforms the EU average in the ‘Control of Corruption’ indicator (61.5 percentile rank), however, it has made good progress in recent years improving its score in the Corruption Perception Index from 36 in 2012 to 52 in 2022. DBRS Morningstar notes Greece’s institutional strengths associated with euro membership and recent improvements in these areas. These factors have been taken into account in the “Fiscal Management and Policy” and “Political Environment” building blocks.

There were no Environmental factors that had a significant or relevant effect on the credit analysis.

A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework can be found in the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings at https://www.dbrsmorningstar.com/research/396929/dbrs-morningstar-criteria-approach-to-environmental-social-and-governance-risk-factors-in-credit-ratings (May 17, 2022).

For more information on the Rating Committee decision, please see the Scorecard Indicators and Building Block Assessments. https://www.dbrsmorningstar.com/research/410740.

EURO AREA RISK CATEGORY: LOW

Notes:
All figures are in euros unless otherwise noted. Public finance statistics reported on a general government basis unless specified.

The principal methodology is the Global Methodology for Rating Sovereign Governments, https://www.dbrsmorningstar.com/research/401817/global-methodology-for-rating-sovereign-governments (August 29, 2022). In addition, DBRS Morningstar uses the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings, https://www.dbrsmorningstar.com/research/396929/dbrs-morningstar-criteria-approach-to-environmental-social-andgovernance-risk-factors-in-credit-ratings (May 17, 2022) in its consideration of ESG factors (May 17, 2022)

The sources of information used for this rating include Ministry of Finance (State Budget 2023), Hellenic Statistical Authority, Bank of Greece (Monetary Policy- Interim Report 2022), Public Debt Management Agency (Funding Strategy for 2023, Debt Bulletin 108), Eurostat, European Council: Consilium Europa, European Commission (Enhanced Surveillance Report – Greece, May 2022, 2022 Country Report – Greece, European Commission Winter 2023 Forecast, Assessment of the final national energy and climate plan of Greece, Analysis of the recovery and resilience plan of Greece June 2021), International Monetary Fund (Article IV Consultation (June 2022), World Economic Outlook October 2022), World Bank, European Central Bank, Bank for International Settlements, Social Progress Imperative, Global Carbon Project, Politico Poll of Polls, Haver Analytics. DBRS Morningstar considers the information available to it for the purposes of providing this rating to be of satisfactory quality.

DBRS Morningstar 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.

The conditions that lead to the assignment of a Negative or Positive trend are generally resolved within a 12-month period. DBRS Morningstar’s outlooks and ratings are under regular surveillance.

For further information on DBRS Morningstar historical default rates published by the European Securities and Markets Authority (ESMA) in a central repository, see: https://cerep.esma.europa.eu/cerep-web/statistics/defaults.xhtml. DBRS Morningstar understands further information on DBRS Morningstar historical default rates may be published by the Financial Conduct Authority (FCA) on its webpage: https://www.fca.org.uk/firms/credit-rating-agencies.

The sensitivity analysis of the relevant key rating assumptions can be found at: https://www.dbrsmorningstar.com/research/410739.

This rating is endorsed by DBRS Ratings Limited for use in the United Kingdom.

Lead Analyst: Nichola James, Managing Director, Co-Head of Sovereign Ratings, Global Sovereign Ratings
Rating Committee Chair: Thomas Torgerson, Managing Director, Co-Head of Sovereign Ratings, Global Sovereign Ratings
Initial Rating Date: August 16, 2013
Last Rating Date: September 16, 2022

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