Recent warnings from EU officials that Greece could miss its fiscal targets this year following a spate of election-related handouts have revived concerns about the fragility of the country’s economic recovery. Meanwhile, a recent report on the corporate sector by the consultancy PwC argues that Greece will be unable to accelerate investment and ensure sustainable medium-term growth rates


By Kerin Hope – Greek Business File_June, July, August issue

Greece’s commitment to achieving a primary budget surplus of 3.5 per cent of gross domestic product until 2022 appeared to falter ahead of the European Parliament elections, following a sharp cut in value added tax and a generous round of extra pension payments. The government argued that the primary budget surplus, before debt servicing, was on track to reach 4.1 per cent of GDP this year, freeing up funds to cover a Euro1bn social package before the European vote and another ahead of national elections due in October.

Pre-elections bonus may deral the budget

EU officials demurred, saying that the pension bonus plus a VAT cut from 24 per cent to 11 per cent on food products, restaurants and catering services, was likely to derail the budget. The cost of the cuts was estimated in Brussels at around Euro 1.4bn. The Bank of Greece warned that “countervailing measures” could be needed in the last quarter to close the gap. Fitch, the international ratings agency, said in a note that the fiscal package increased uncertainty about Greece’s medium- term policy stance and was set to generate tensions with the EU: “The consequences are unclear but a sharp escalation [of such tension] could have an impact on Greek public finances “as the European Stability Mechanism could veto Greece’s plans to repay early its more expensive IMF loans. It could also block further transfers of profits on Greek sovereign bonds bought under a European Central Bank programme, which requires compliance by Athens with its current policy commitments.

Slowdown in tourism

Following three successive years of record visitor numbersa slowdown this year in sales of package holidays and bookings on budget airlines serving Greece points to a “mild decline” in arrivals this year, according to projections by travel agents and hotel operators.  After slumping during the onset of the crisis, tourism earnings jumped more than 50 per cent between 2013 and 2018, while direct spending by visitors increased by more than 10 per cent during the peak season last year, according to the central bank. But tourism now accounts for as much as 25 per cent of GDP, when indirect contributions are included as compared with 20 per cent in 2010. The sector, which is still dominated by local family owned businesses, is also by far the country’s biggest employer. At the height of the season, it accounts for one in three jobs, and one in 10 on a year-round basis. The growing importance of tourism in Greece’s national output compared to other sectors highlights what PwC’s recent report on the corporate sector calls a shrinking of the country’s productive base, which was broadly starved of investment and failed to innovate during the crisis.

Firms became smaller and weaker

The report, based on a survey of almost 3,000 Greek companies, paints a bleak picture of the current state of the country’s corporate sector. It notes: ”The economy did not transform as a result of the economic shock [from the crisis]. Instead it mostly retained its structure, resisted change, was drained of investment, saw its technological base weakened and lost valued added. “Firms became smaller and weaker in capital terms. The productive base of the economy shifted away from services towards industry and tourism and thus towards lower added value and less embedded technology.” Export volumes rose during the crisis by Euro12bn as companies tried to off – set a sharp fall in domestic demand but value added, as a proportion of exports, declined by 11 percentage points. “The expansion to new markets was largely based on low-value products,” the report noted. Yet the rankings of Greece’s top 10 companies by revenues barely changed between 2010 and 2017. Only one company on the list – the supermarket to pharmaceuticals Marinopoulos group – collapsed. However, individual company performance varied strongly: the Viohalco metals processing group and Alfa-Beta Vassilopoulos, a supermarket chain, boosted revenues by 30 per cent. MotorOil group, a fuels refi ner, saw revenues increase by 20 per cent. The remaining companies on the list all suffered a decline in revenues, led by OTE Group, the listed telecoms operator in which Deutsche Telekom holds a strategic stake, with a fall of almost 50 per cent and the state electricity producer PPC with almost 20 per cent. Several large exporters moved their corporate base to other EU countries during the crisis, to help ease a rising tax burden and reduce their financing costs. Among the top 10, Viohalco moved its headquarters and stock market listing to Belgium, while CCHBC, the Coca-Cola franchise holder for much of Central and Eastern Europe, is now based in Switzerland with its main listing in London. Coming out of the crisis, Greece has about 2,100 investible companies with their own growth strategies, with annual revenues amounting to about Euro110bn, according to the report.

The “zombie and almost zombie companies”

Yet their potential growth – and that of the economy – is held back by the presence of some 750 “zombie and almost zombie companies” as PwC terms them. These unprofitable entities have clung to life with some Euro15bn of loans trapped on their balance sheet and another Euro10bn owed to third parties. They should be swiftly eliminated as their presence “distorts the market due to unfair competition and drains liquidity” that should be available to healthy companies. Greece’s prolonged crisis forced many companies to adopt a survival strategy: accumulating cash, cutting costs and putting sizeable investments on hold. As a result most companies now face a choice between accelerating growth or improving operating margins. The trade-off between growth and profitability varies according to sectors: construction and the food and beverage industry will generate higher margins through boosting growth, while companies in the tourism and healthcare sectors should mainly focus on cutting costs before adopting growth strategies, the report concludes.