Wednesday, 30 April 2014

Greece - please repeat all together now: E-X-P-O-R-T-S!

Greece achieved a (better than expected) primary budget surplus, accounting for 0.8% of GDP in 2013. The current account is balanced. And April 2014 marked the return of the Greek sovereign to international financial markets with the issuance of an almost 7x over-subscribed 5-year EUR 3bn bond (4.95% yield). Not bad. Is all fine and dandy now?

At the root of Greece's problems was its high external debt and consequent dependency from international financing. The only way to effectively solve an external debt problem in a sustainable way - i.e., avoiding its recurrence a few years down the road after an implicit or explicit debt restructuring - is by improving competitiveness and turning continuous current account deficits into continuous current account surpluses or at least into a sustainably balanced current account.

The improvement in the Greek current account has been remarkable. No doubt about it:

      Source: IMF

Similarly to the other GIPS, the adjustment in the current account couldn't have taken place without a very significant downward adjustment in imports.....

      Source: IMF

However, the contribution of the Greek export sector to the current account adjustment has been much more subdued than in the case of other GIPS......

     Source: IMF

And the question is: how can a country that underwent a massive reduction in unit labour costs (ULC) over the past 5 years......

     Source: Eurostat, ECB, Ameco, Tortus Capital

......bringing them down to pre-Euro levels.......

     Source: OECD

....have had such a dismal export performance?

The answer can only be that either (i) the structural reforms agreed with the Troika have not been properly implemented at the micro-level or (ii) we are dealing with a economic abnormality that a process of reversion to the mean will correct over the next 24 months.

If the latter holds true, prepare yourself for a cheerful upside surprise in Greek export-led economic growth over the next 2 years. Investors in general, and equity investors in particular, will enjoy many happy days over the next 18-24 months. And beyond.

If the former proves to be the correct explanation, as soon as the economy starts to grow again - and it doesn't need to grow much - a rebound in imports will follow and current account deficits return. Five years of austerity and social unrest would have constituted an inglorious effort. Greece's imbalances much more serious and deeply ingrained than thought. And international investors - even taking into account that 85% of the public debt is held by the Troika - forced to review their positions in the country. Under this scenario, they will most likely still enjoy 18-24 months of happy Greek investment return days - driven by further Troika held public debt restructuring via maturity extensions and lowering of interest rates. But not beyond.

So, the message for investors in Greece is straightforward: focus on the evolution of exports and inflows of foreign direct investment (FDI) - the key driver to enlarge and broaden the country's export basis - over the next 18-24 months. All the rest are details.

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