We’ve seen a stronger-than-expected economic rebound throughout 2021, and think that the Greek economy will grow by around 6% to 6.5% in 2021 and about 4% to 4.5% in 2022. Key downside risks include first and foremost pandemic developments. Beyond 2022, we view access to EU funds as a key element that will support growth, with the actual magnitude of the impact dependent on the speed of project implementation. For 2022 to 2025 we project average annual growth rates of around 2.5%, with a potential longer-term positive impact after 2025 contingent upon continued structural reforms. Strong real GDP growth together with higher inflation leads to comparatively strong nominal GDP growth of about 6.5% on average in 2021 and 2022, which compares to only 0.7% per year on average during 2015-19. This supports improvements in the government’s fiscal balance/GDP and debt/GDP ratios: We expect the fiscal balance to improve to about 4% of GDP by 2022, from 10.1% in 2020, and the debt burden to decline to 191% from 206%.
The coronavirus pandemic and ensuing government fiscal support have led to a deterioration in Greece’s government finance metrics and we think it will take at least until 2025 before we will see meaningful primary surpluses, and a return of the debt burden closer to its pre-pandemic level. Having said that, as our positive rating actions since June 2017, and particularly the latest one in November 2020, when we upgraded the rating to Ba3 from B1, have shown, we believe, there has been improvement in Greece’s fundamentals in areas such as the institutional and governance framework, which have already brought tangible progress in areas including tax administration and compliance and the fight against corruption. The 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. Also, despite the negative impact from the pandemic we see positive developments in labor market indicators, with unemployment rates at levels not seen since 2010/11, and improving investment rates including foreign investment. Key credit challenges for Greece relate to reducing the very high debt level, which will require a prudent fiscal stance for years to come; maintaining a focus on completing institutional and governance reforms; and continuing the acceleration of the reduction of banks’ nonperforming exposures.
We have a stable outlook on Greece’s Ba3 rating. The stable outlook balances our 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. We also note that the coronavirus pandemic has caused a delay in the completion of some reforms. Greece’s rating would come under upward pressure if further progress on structural reforms yielded tangible results in the form of stronger investment and further lifted and solidified 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.