Greece: Staff Concluding Statement of the 2023 Article IV Consultation Mission

November 14, 2023

Greece’s economic outlook has improved notably with real GDP expanding
beyond its pre-pandemic trend level. The public debt-to-GDP ratio has
declined below its pre-pandemic level with debt financing risks
contained in the medium term due to the favorable debt structure. The
banking system has remained resilient with improving balance sheets.
However, the economy is facing macro-financial challenges amid the
significant monetary policy tightening, persistent core inflation, and
rising real estate prices. Structural imbalances arising from low
household savings and still low level of investment as well as a
structural shift from climate change are weighing on medium-term growth
prospects. Achieving higher and greener

growth and ensuring fiscal sustainability while safeguarding financial
stability requires the right policy mix aimed at continuingfiscal
consolidationin a growth-friendly manner, strengthening
financial system resilience, and accelerating pro-growth reforms

.

Robust Recovery amid High Inflation

1.

Economic activity has remained robust in 2023.

Real GDP continued to expand at a solid pace in the first half of 2023 by 2½
percent (seasonally adjusted annualized rate). Private consumption was
buoyant on the back of increasing real wages and a gradual decline in
pandemic-induced excess household savings. Fixed investment growth remained
robust driven by the ongoing Next Generation EU (NGEU)-funded investment.
High frequency data suggests that overall economic momentum remained robust
in the third quarter despite a series of natural disasters (heatwaves,
wildfires, and floods). The unemployment rate declined to 10 percent in
September, a decade low. Headline and core inflation decelerated to 3.8 and
3.6 percent (y/y), respectively, in October due to normalizing energy
prices and base effects, but remain high amid the tightening labor market.
Residential real estate prices have increased by more than 50 percent since
the trough in 2017 but still remain below their pre-Global Financial Crisis
levels.

2.

Much-needed continued progress in structural reforms has improved
investment and productivity growth.

Good progress has been made in the digital transformation of the economy,
including the integration of various government services. Labor market
reforms such as the modernization of labor legislations and of public
employment services have facilitated labor market adjustment since the
pandemic. The enhanced competition authority’s actions have contributed to
increasing market competition. On the back of this progress, Greece’s
potential growth is estimated to have turned positive in 2022, for the
first time since the sovereign debt crisis.

3.The banking system has remained resilient
underpinned by policy support and balance sheet strengthening.Asset
quality further improved, with the NPL ratio declining below 5 percent in
2023Q2 in systemically important banks, supported by continued
securitizations under the Hercules program. The lower NPL ratio, coupled
with higher net interest margins, has contributed to a strong rebound in
bank profits, bolstering capital adequacy. Amid continued deposit inflows on
the back of strong growth, the banking system has also maintained sizable
liquidity buffers despite substantial repayments of ECB’s targeted
long-term refinancing operations (TLTRO).

4.Real GDP is projected to grow robustly by 2.5
and 2.0 percent in 2023 and 2024, respectively, before moderating toward the
medium term.Private consumption will be supported by positive real
wage growth, while investment activity will continue to expand with the
implementation of the National Recovery and Resilience Plan (NRRP). However,
against the backdrop of demographic headwinds, the expiration of NGEU
funding in 2026, and still low potential growth, GDP growth is forecast to
moderate to about 1¼ percent in the medium term. Headline inflation is
projected to reach 2 percent by end-2025 as pressures on core inflation
will dissipate only gradually despite continued normalization of food and
fuel prices.

5.Risks are more balanced for growth but tilted
upward for inflation.A potential escalation of Russia’s war in
Ukraine and the conflict in the Middle East could disrupt trade and trigger
renewed energy and food price pressures and undermine confidence.
Higher-than-expected persistence in euro area inflation and
higher-for-longer interest rates would weigh on regional and domestic
demand. More frequent extreme climate events could disrupt tourism and
overall activities. In contrast, acceleration of ambitious structural
reforms, in tandem with stronger-than-expected market reactions to the
investment grade upgrade, could further improve growth prospects. Inflation
could remain high resulting from weather-related shocks as well as domestic
pressures from recent and expected wage and pension increases.

Growth-friendly Fiscal Consolidation

6.Growth-friendly fiscal consolidation can further
strengthen public debt sustainability while supporting inclusive and green
growth.With still very high debt, continued fiscal consolidation
with the primary surplus increasing to 2.1 percent of GDP in 2024, up from
projected 1.1 percent in 2023, would help further reduce the public
debt-to-GDP ratio, while limiting additional pressure on inflation. Amid
strong revenue growth, maintaining a primary surplus of about 2 percent of
GDP in the medium term would further improve public debt sustainability,
while providing additional space for domestically financed public
investment and critical social spending. This would contribute to narrowing
Greece’s large investment gap while keeping the public debt-to-GDP ratio
firmly on a declining path.

7.Containing spending pressures is critical to
maintain fiscal space for crucial social and capital expenditure.Spending
pressures should be resisted in non-discretionary areas such as public
sector wages and pensions, which are still at elevated levels in
cross-country comparison. In contrast, investment needs are large,
including for green and digital transition. Critical social spending such
as targeted social transfers, healthcare, and education should be protected
or expanded for more inclusive growth. Ongoing efforts to strengthen the
social safety net, including via a single portal for benefits, will better
protect the vulnerable.

8.Advancing fiscal structural reforms would
enhance fiscal governance and improve the efficiency of fiscal policy.The
authorities’ ongoing efforts to address tax evasion, including targeted
reforms for the self-employed, are important and welcome. Continued efforts
to promote digital transactions and rationalize tax incentives would
improve the efficiency of revenue collection. Given the planned large
investment under the NRRP, public investment management should be further
strengthened.

Safeguarding Financial Stability

9.The monitoringand managementof
risks associated with interest rate, liquidity and funding, and credit
exposures should be strengthened, underpinned by a strong
bank capital base.In an environment of
higher-for-longer interest rates, banks’ interest-rate risk and the
appropriateness of their risk management strategies need to be closely
monitored.Supervisors should monitor and stress-test bank
funding and liquidity conditions as the
replacement of TLTRO with more expensive market funding may pose
challenges. Proactive management of credit risks is warranted to ensure that
banks maintain comfortable capital buffers. Supervisors should also ensure
that banks adapt their business models to ensure sustainable profitability,
while temporarily elevated profits should be used to build capital buffers
and restore quality of capital.

10.The macroprudential policy toolkit should befurtherstrengthened
and more actively used to enhance resilience of the banking sector.Complementing
organic bank capital accumulation and issuances, the activation of a
positive neutral countercyclical capital buffer would help guard banks
against potential systemic shocks. Borrower-based measures for mortgage
loan borrowers—such as ceilings on loan-to-value ratio and caps on debt
service-to-income ratio—would enhance household resilience and consequently
contain vulnerabilities in the banking system against the potential housing
boom.

Implementing Reforms for Higher and Greener Growth

11.

Comprehensive reforms to address structural supply impediments would
lift medium-term growth prospects while alleviating inflationary
pressure.

• Accelerating regulatory reforms to support
  business.Regulations should be rationalized to facilitate firm
  entry and exit as well as job transitions in all sectors, which will
  help improve business dynamism and productivity. The authorities’
  current efforts in digitalization could sharpen the focus in serving
  small- and medium-sized enterprises to maximize the economic and
  employment benefits.
• 
  Ensuring higher labor participation and a better skilled workforce.
  
  Scaling up the lifelong learning system, including on digital and green
  skills, could reduce skill shortages and help address the bottlenecks
  for youth and women employment. More targeted policy support, such as
  improving the availability and affordability of childcare and reducing
  the marginal income tax of second earners, would help raise female
  labor force participation.
• 
  Strengthening judicial system reforms and out-of-court proceedings.
  
  Further progress to accelerate debt resolution through
  restructurings under the out-of-court workout platform and through the
  formal proceedings under the new insolvency code would contribute to
  improving business dynamism. It will help increase financial sector
  resilience as well by further reducing bank NPLs and distressed debt
  recovered by credit servicers.

12.Concerted efforts are needed to achieve the
authorities’ ambitious climate goals and green transition.Given the
dominance of fossil fuels in energy, a strong implementation of the
authorities’ policy framework for renewables, including measures to
streamline the licensing framework for new investment and better integrate
renewables in the electricity grid, would accelerate the progress while
boosting energy security. The authorities should consider raising the
carbon tax (including excise and feebates) in non-ETS sectors such as
transport to further incentivize rapid and efficient green transition as
energy price continues to normalize.

In closing, the mission would like to thank the Greek authorities for
their kind hospitality and for the open and productive discussions.

IMF Communications Department

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