Troubling times

Greece has seen some green shoots of economic growth, but the situation remains critical

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It may have seemed that Greece could be downgraded no further. But in November the Athens Stock Exchange (ASE) was dropped from developed-market to emerging-market status. The demotion by leading index provider MSCI, places Greece alongside Hungary, Poland, Russia and Turkey in an industry benchmark used by investors.

   Yet, despite Greece’s economic travails, the drop in status seemed oddly counter-intuitive: over the last 12 months, shares on the ASE have bucked Greece’s recession, rebounding by 45% year-on-year.

   Shares in retailer Jumbo and gambling monopoly OPAP have doubled in value in 12 months, while those of Aegean Airways tripled. A the likelihood of a Grexit – Greece being forced out of the Eurozone – receded, deposits and investment returned.

   Greece’s demotion from developed-market status, which it has held since 2001, will give it greater exposure to foreign investors, according to Jonathan Young of investment bank Gryphco.

   Greek companies are more attractive when compared to companies from emerging economies, he explains. Under one estimate by HSBC, Greece’s stock exchange may benefit from an additional €800 million of net capital investment. Emerging economies are considered to have a high growth potential. On its first day of trading as an emerging market stock exchange, on 27 November, the ASE rose 2.1%.

   There are other positive indicators surrounding the economy. Greece is on course to achieve a budget surplus of €812 million (excluding interest payments on its debt and assistance from member state central banks and the European Central Bank); nominal labour unit costs have declined from almost 3% above the eurozone average in 2009 to 7% below in 2012 and are falling, according to data by Eurostat; and the country’s tourism industry is expected to see double-digit growth this year and next.

   Yet these green shoots are at best tentative. The ASE is still only at 22% of its peak value in October 2007. Greece remains mired in recession, although the pace of contraction this year slowed to around 4% of gross domestic product (GDP) year-on-year. Government and Commission estimates that the economy will return to growth next year of 0.6% are optimistic compared to those of analysts such as BNP Paribas or the OECD, which predict that 2014 will be Greece’s seventh year of recession. Total government debt has stabilised at 176% of GDP.

   Above all, Greece’s dire exports are dampening any chance of Greece’s economy recovering. Indeed, according to Daniel Gros, director of the Centre for European Policy Studies, the “crucial factor” in Greece’s extended recession is the “mysterious inability of Greece to export” despite improved competitiveness.

   Falling unit labour costs in Spain and Portugal have seen the volume of their exports grow by around 10% from 2008 to mid-2013, while in Greece exports fell by 17%, according to BNP Paribas figures. Too many Greek exporting companies have gone bankrupt in the face of deep-seated corruption and very tight credit conditions. Yet, with consumer demand having collapsed, business must rely on exports to generate jobs and income.

   Social and political stability is also crucial for any Greek recovery to take off.  The country’s international lenders – the European Commission, the European Central Bank and the International Monetary Fund, the so-called Troika – are wildly unpopular and the government is coming under increasing pressure because of its perceived lack of resistance to the lenders.

   This may be one reason for a worsening in relations. The lenders continue to demand greater efforts towards reform. Greek officials, however, feel they have to spend too long dealing with the Troika rather than getting on with reform, according to a former official.

   For as long as Greece’s unemployment remains disastrously high, instability will never be far away. Close to 27% of the economically active population were unemployed in August, according to Eurostat, including 58% of persons under 25. But if Greek politicians buckle and renege on their commitments, talk of a Grexit will return – at which point investors will race for the door.