In upgrading his prospects of Greek debt from stable to positive, in the grade BBB-, the credit rating agency advanced Standard & Poor’s.
The positive outlook reflects S&P’s expectation that the tight fiscal regime will continue to reduce public debt, while growth is expected to continue to outpace that of the Eurozone.
Key points of the evaluation of the house:
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• The Greek authorities are undertaking a broad structural reform agenda and face long-term bottlenecks
• Despite somewhat softer recent economic data, economic growth outpaced the Eurozone average, “a trend we expect to continue”
• Greece’s previously very high net public debt as a percentage of GDP is declining and is expected to continue to do so “if our expectations of fiscal discipline and relatively strong nominal GDP growth materialize.
“We could upgrade the ratings over the next 24 months if Greece’s net public debt-to-GDP ratio declines further to approach other countries’ levels. We believe that the authorities could achieve this through a combination of structural reforms that strengthen the competitiveness of the Greek economy, the full utilization of the large resources of the NextGenerationEU program and solid fiscal surpluses over a long period,” the house says.
“We could revise the outlook to stable over the next 24 months if Greece’s fiscal performance and external imbalances, such as the high current account deficit, worsen significantly beyond our expectations. This could happen, for example, if geopolitical and exogenous pressures hit Greece more than we assume today,” he adds.
Reforms in key areas
S&P says there are now credible plans to implement reforms in key problem areas where progress has been limited so far, such as on Justice and Health reforms.
“In our view, the main risk to their implementation is the prevalence of reform fatigue before sufficient action has been taken, particularly if the improvement in economic performance is not felt throughout society,” he notes.
Weaker financials
It reports that despite slightly weaker economic data in recent quarters, real GDP growth was relatively robust at 2% in 2023. On the other hand, government revenues did not weaken, but rose by 6.2% on a consolidated basis in 2023. “In our view, this can be explained by the combination of still high inflation last year (the consumer price index rose 4.2%) and dividends from fiscal reforms, particularly in the areas of digitization and fiscal compliance” .
In the medium term, especially if the reform momentum is maintained, “we believe that Greece could grow faster than the Eurozone. We forecast real GDP to grow by an average of 2.4% over 2024-2027, reflecting a tangible pick-up in investment activity driven by NextGenerationEU plans, improved household and banking balance sheets and the fact that the Greek economy is still about 22% smaller than its pre-debt crisis peak,” he says.
He notes that Greece, like other small open economies, remains exposed to the changing winds of the global economy and ongoing geopolitical risks, such as a possible economic slowdown that could affect the important outbound sectors of tourism or shipping, or other a sudden spike in energy prices.
“These developments could slow down the improved dynamics of Greece’s credit indices. Our ratings are still constrained by the still high level of public debt and the relatively weak external liquidity position of the economy,” the house says.
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