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Greece Macroeconomic Outlook 2016

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WP_20150824_055Based on recent domestic developments and the progress in implementing the fiscal consolidation and structural reforms agenda agreed with official creditors, this report provides a detailed analysis of Greece’s macroeconomic outlook for 2016.

On the economy’s short-term performance, our in-house econometric models for nowcasting Greek GDP signal a continuation of the domestic recession in Q4, with the respective range of year-on-year real growth estimates falling between -1.5% and -0.8%. Barring any major revisions in past GDP data, this would translate into a full-year contraction between -0.30% and -0.15% in 2015, with the respective carry over impacts into next year coming in between -1 and -0.5 percentage points. For next year, a simulation exercise for real GDP growth in Greece is conducted in order to account for latest developments, both on the domestic front and the euro area. In more detail, a quantification of trends in GDP components is conducted, with economic rationale invoked for each, and total growth extracted from there. The simulation exercise points to a mid-point real GDP forecast of around -1%, as recessionary pressures in domestic demand, consumption in particular, due to the impact of fiscal measures on disposable incomes are only partially counterbalanced by more benign developments in the external sector. This estimate is provisional since the detailed specification of measures is not finalized yet. No extra measures are assumed for the achievement of the 2016 target apart from those agreed already. Significant uncertainty to the growth outlook remains. Risks to the baseline forecast are assessed, including the final outcome for 2015 GDP growth, which constitutes the basis for the projection, the timeliness and outcome of negotiations on the 1st programme review and the degree of political ownership in implementing the reforms.

Taking into account recent developments, this note also presents revised projections on the general government borrowing needs and sources of funding over the entire time horizon of the new bailout programme and beyond. Moreover, it provides an updated analysis of public debt dynamics and the potential (cash flow and stock) impact of new debt relief, which is expected after the successful completion of the 1st programme review. In more detail: a) under the present baseline macro scenario, the overall amount of official creditor loans needed to cover Greece’s public sector borrowing requirement over the 3-year horizon of the new bailout may prove lower than expected i.e.,  €70bn or less vs. c. €84bn envisaged initially; b) 2016 is expected to be more manageable than this year in terms of debt service payments; and c) a new relief package including significant maturity extensions and payment deferrals on old and new EU loans in the context of the three bailout programmes could go a long way towards improving the long-term sustainability of fiscal accounts.

As regards the fiscal consolidation and structural reforms conditionality underlying the new bailout programme, Greece has already completed 60 out of a total of c. 220 agreed milestones. These include, among others, a number of key financial sector reforms required for the successful completion of the bank recapitalization as well as several contentious and politically sensitive issues such as the protection of primary residence foreclosures and the framework for the resolution of certain categories of bank non-performing loans. Assuming that the ESM approves the release of the pending €1bn loan installment in the coming sessions, the achieved progress will have paved the way for the release of €21.4bn in ESM funding under the new bailout programme. This consists of the €16bn disbursed in three tranches since mid-August to mainly cover debt service payments and around €5.4bn for the recapitalization of Greece’s four systemic banks. Nevertheless, a number of challenges lie ahead, primarily pertaining to the 1st programme review and the implementation of several other reforms scheduled for 2016. In this context, the timely completion of the 1st review is of key importance for the initiation of official discussions on debt relief, the re-introduction of a Greek collateral waiver and the IMF’s financial participation in the programme. Among the stickiest issues as regards the conditionality attached to the 1st programme review are the planned overhaul of the social security system, additional labour market reform and certain amendments to the current income tax system. However difficult the implementation of these reforms may be, it is deemed necessary for stabilizing sentiment, attracting increased flows of investment and eventually boosting the economy’s medium-term growth potential.

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GREECE MACRO FOCUS December 21, 2015

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