Moody’s has upgraded Greece, Government of local and foreign currency long-term issuer ratings to Ba3 from B1 previously.
Moody’s has also upgraded the local currency senior unsecured debt rating to Ba3 from B1, as well as the foreign currency senior unsecured MTN programme and senior unsecured shelf ratings to (P)Ba3 from (P)B1.
The local currency Commercial Paper rating and the foreign currency other short-term rating have been affirmed at Not Prime (NP) and (P)NP respectively. The outlook remains stable.
The key drivers for today’s rating action are the following:
1. Ongoing reforms support a sustainable improvement in institutional strength and have already brought tangible progress in areas including tax administration and compliance and the fight against corruption. In Moody’s view, the risk of a reversal of these important improvements is low. Moody’s considers this action to be motivated in part by governance-related factors under its ESG framework.
2. The country’s growth prospects over the coming years are positive notwithstanding the negative near term impact of the pandemic, particularly on the tourism sector. Greece’s economy will benefit from ongoing efforts to improve the investment climate coupled with inflows of very substantial European recovery funds. Favourable growth prospects, combined with a return to a prudent fiscal stance, will lead to a gradual reversal in the public debt trend. In addition, Greece benefits from a very favourable debt structure and strong affordability.
The stable outlook reflects Moody’s view that it will take some time before the benefits of the institutional and governance reforms become fully embedded and visible. Also, the banking sector — despite further improvements over the past year — still requires strong action to improve its weak asset quality.
The long-term foreign and local currency bond and deposit ceilings have been raised to A3 from Baa1 previously. The short-term foreign-currency bond and bank deposit country ceilings remain at Prime-2.
RATIONALE FOR THE UPGRADE TO Ba3
FIRST DRIVER: REFORMS ARE BRINGING A SUSTAINABLE IMPROVEMENT IN INSTITUTIONAL STRENGTH
Since the last rating action in March 2019, momentum on the implementation of structural reforms has been strong. Progress continues to be made with regards to outstanding reform commitments agreed between the previous administration and the Eurogroup in June 2018.
These build on the achievements made under Greece’s third adjustment programme between 2015 and 2018, which placed significant emphasis on institutional and governance reforms.
Improvements to Greece’s institutions and governance are visible in areas such as the independent revenue administration which is resulting in higher tax revenues and improved compliance. Ongoing digitization of the public administration and social security system has positive implications for tax compliance as well as the effectiveness of the public administration and contributes to an improving business environment. The government has made important steps towards a more systemic approach to deal with the banking sector’s high level of non-performing exposures (NPEs) through the Hercules Asset Protection Scheme (APS) as well as a new insolvency framework expected to enter into law at the start of next year. Reforms to the judicial system are ongoing, alongside further measures to bring the quality and professionalism of the public administration in line with European peers. Taken together, these reforms help to address drivers of Greece’s economic and debt crisis of the last decade.
While it will take commitment over many years to reap the full benefits of the institutional changes in progress to create a modern and efficient public administration, these improvements are beginning to be reflected in governance indicators. Greece has improved on all Worldwide Governance Indicators that Moody’s considers since 2016, the first full year of the third adjustment programme. The results of the independent tax revenue administration’s (IAPR) key performance indicators show a clear upward trend in tax debt collection and enforcement since 2017. Wider use of electronic payments, alongside increased incentives and continuing improvements in IAPR’s capacity, should further underpin the recent improvements in tax collection.
In Moody’s view the risk of reversal of these reforms in the coming years is low. The current government was elected on a platform of economic and business-friendly reforms and seems likely to use its parliamentary majority to push forward that platform. Over the medium-term, today’s action reflects Moody’s view that governments will continue to aim for compliance with the challenging targets agreed with the Eurogroup and that incentives on both sides are strong enough to avoid the stand-offs seen earlier in the decade.
SECOND DRIVER: EUROPEAN FUNDS AND IMPROVING INVESTMENT CLIMATE WILL BOLSTER GREECE’S INVESTMENT OUTLOOK AND MEDIUM-TERM GROWTH PROSPECTS
Notwithstanding the significant economic contraction resulting from the coronavirus-induced shock, Moody’s expects stronger investment prospects to support the recovery and materially improve Greece’s medium-term growth outlook. The disbursement of EU recovery funds, for which Greece will be the largest euro area beneficiary relative to GDP, will provide significant support to both headline growth and investment. While Moody’s expects Greece’s economy to contract by almost 9% in 2020, a strong recovery is expected in 2021. More importantly for Greece’s credit profile, growth is expected to average around 3.5% over the medium term.
Greece stands to receive €32 billion (17% of 2019 GDP) from the EU recovery funds, of which 60% will be in grants. The funds offer significant potential to redress Greece’s low investment – hitherto the lowest in the EU and a key constraint to the pre-coronavirus recovery trend — and to raise potential growth. Greece is also receiving significant multilateral funds from other sources including the EU’s Structural Funds, the European Bank for Reconstruction and Development (Aaa stable), and the European Investment Bank (Aaa stable), which will also support investment growth. Greece’s inclusion in the ECB’s large quantitative easing programme helps to ensure favourable funding conditions not only for the government but also for the Greek banks and for the economy as a whole.
In the past, Greece has at times failed to deliver on public investment plans, and private investment has been weak. Key reforms that have been implemented in the recent past are a new investment licensing framework which among other things significantly eases the administrative burden on new investments and removes key impediments, in addition to the rollout of digital tools. The first results are visible; according to the World Bank’s Doing Business surveys, starting a business is now more efficient in Greece than anywhere else in the EU. Inward foreign direct investment last year reached the highest level since at least 2002, partly driven by several successful privatizations and more recently in the real estate sector. Microsoft Corporation’s (Aaa, Stable) recent decision to locate three data centres in Greece is one indication of the country’s improving attractiveness for foreign investment. The government is also close to updating the public procurement law, which will be important if the country is to make full use of the available EU recovery funds.
Moody’s projects Greece’s debt ratio to increase significantly this year, to around 200% of GDP, before declining again from next year onward on the back of the expected economic recovery. However, the debt ratio itself is of more limited relevance than for other countries, given the very long maturity structure of the debt and the significant and repeated debt relief provided by Greece’s euro area creditors. Debt affordability, as measured by interest payments in relation to government revenue, is much stronger (forecast at 6.2% for 2021) than the median of Ba-rated peers (10.9%) and is expected to continue to improve, supported by very favourable financing conditions.
The banking sector remains very weak, characterized by weak asset quality and a large share of lower quality capital in the form of deferred tax credits. Non-performing exposures remain very high, at a ratio of 36.7% as of June 2020, and are likely to grow given the economic impact of the crisis. However, even here improvements are evident. NPEs declined by €15.7 billion in the twelve months to June 2020. The Hercules APS scheme in operation since December 2019 is an important step in cleansing banks’ balance sheets of non-performing assets. The government acknowledges that more is needed and has indicated that it will likely push ahead with a complementary proposal from the Bank of Greece which would cover a larger amount of NPLs and would also aim to tackle the large amounts of deferred tax assets on the banks’ balance sheets.
RATIONALE FOR STABLE OUTLOOK
The stable outlook balances Moody’s view that while a reversal of the improvements seen in recent years is unlikely, it will take some years before the benefits of the institutional and governance reforms become fully embedded and visible. The rating agency also notes that the pandemic has caused the delay in the completion of some reforms. A resurgence of the pandemic in Europe, notwithstanding Greece’s more favorable performance during the “first wave”, could create a further backlog in the measures intended to be implemented during 2021.
ENVIRONMENTAL, SOCIAL, AND GOVERNANCE CONSIDERATIONS
Moody’s takes account of the impact of environmental (E), social (S), and governance (G) factors when assessing sovereign issuers’ economic, institutional, and fiscal strength and their susceptibility to event risk. In the case of Greece, the materiality of ESG to the credit profile is as follows.
Environmental considerations are not currently material to the rating, although Greece has some exposure to physical climate risk related to heat and water stress.
Social factors are material in determining Greece’s credit profile. The most relevant social factors relate to the impact of an ageing population and significant emigration on labour supply and potential growth. The fiscal impact is less of a concern given material pension reforms over the past several years. Moody’s also regards the coronavirus outbreak as a social risk under its ESG framework, which is negatively affecting Greece’s growth and fiscal metrics. An important mitigating factor are the very substantial funds that Greece stands to receive from the EU.
Governance factors are material in determining Greece’s credit profile. While Greece’s institutions remain weaker than most European peers, there have been significant improvements, reflecting the implementation of important governance reforms in the public administration. These governance reforms have been a key driver for the rating upgrade.
• GDP per capita (PPP basis, US$): 31,572 (2019 Actual) (also known as Per Capita Income)
Real GDP growth (% change): 1.9% (2019 Actual) (also known as GDP Growth)
• Inflation Rate (CPI, % change Dec/Dec): 1.1% (2019 Actual)
• Gen. Gov. Financial Balance/GDP: 1.5% (2019 Actual) (also known as Fiscal Balance)
• Current Account Balance/GDP: -1.5% (2019 Actual) (also known as External Balance)
• External debt/GDP: [not available]
Economic resiliency: ba1
Default history: At least one default event (on bonds and/or loans) has been recorded since 1983.
On 03 November 2020, a rating committee was called to discuss the rating of Greece, Government of. The main points raised during the discussion were: The issuer’s economic fundamentals, including its economic strength, have not materially changed. The issuer’s institutions and governance strength, have materially increased. The issuer’s fiscal or financial strength, including its debt profile, has not materially changed. The issuer’s susceptibility to event risks has not materially changed.
FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS
Greece’s rating would come under upward pressure over the medium term if further progress on structural reforms yields tangible results in the form of stronger investment and further lifts and solidifies medium-term growth prospects. A more rapid reduction in the public debt ratio than currently foreseen would also be positive for the rating, as would the resolution of the banking sector’s continuing asset quality issues.
The rating would come under downward pressure if progress in reforming Greece’s institutions were to be reversed, putting at risk the agreement with the euro area creditors.
A prolonged resurgence of coronavirus infections could also put downward pressure on the rating if it led to an extended period of GDP contraction and a further material rise in public debt.
Moody’s Investors Service
Project Financial Modelling
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