An analysis by Morgan Stanley sees the country’s economy stabilizing and returning to growth faster than previously projected. However, it notes, despite the rebound, growth prospects are not yet sustainable.
Morgan Stanley economists say the Greek economy “has started to leave the economic crisis behind it”.
“GDP will generally remain stable this year – compared to our previous estimates for a 1% drop yoy – and it should grow by approximately 1.8% in 2017 or 0.7% more than we previously anticipated”.
The report sees the Greek economy growing even further in 2018 as prospects and market conditions improve.
“Our first estimate for 2018 for growth above 2%. The bond market has so far reacted quite well to this incremental normalization of the macroeconomic situation, with the 10 year bond yield dropping initially by 150 base points. However, austerity – although gradually decreasing – and political instability are still substantial and viable growth continues to be elusive. In the context of strict austerity time will be needed before a “real” normalization and growth”.
Morgan Stanley also points to political risks and the questions that must be answered by the country’s financial team.
“The Greek economy has returned to growth in the past, allowing the country to regain access to bond markets. Therefore, it is surely not the first time that GDP is picking up pace – or so it seems – and market conditions are improving. The question therefore is what could support growth. This seems to be the key question long term”.
“But there is a better question still: Where will growth come from in the short term? This is more important because in the next many quarters growth will not depend so much on specific sectors driving recovery, such as structural changes on the supply side of the economy, where demand will come from, etc”.
“All these things will gradually become all the more important. The first part of GDP recovery though – the first increase by 10 percentage points after a 25% drop – will come from the lifting of restrictions such as capital controls, lack of funding, accumulation of State arrears, political uncertainty, etc.”.
“Greece must wait, possible until after the German elections next year, form more maturity extensions, namely another dose of debt re-profiling. In spite of short term debt relief (decided at the 5 December Eurogroup meeting), without significantly larger debt maturity extension and grace periods, the role of the IMF will probably remain uncertain and, more importantly, the debt trajectory may not be manageable, thus risking the postponement of the inclusion of Greek bonds in the European Central Bank (ECB) quantitative easing (QE) scheme at the end of 2017 or even at the end of the bailout program in 2018. But, because the ECB will have already started to turn off the QE tap, there could be little time left for the ECB to acquire Greek government bonds.”
According to MS, political instability is not positive considering the fact that it could make decision making and relations with official creditors unpredictable.
Overall, the lack of a clear stabilization trajectory for Greece and successive rounds of austerity could possibly contribute to the declining popularity of the Syriza led government which is lagging behind New Democracy in polls. However, Morgan Stanley adds, the market does not consider this negative since ND is more pro-European, pro-market and pro-business that the current administration./ΙΒΝΑ