Thursday, January 26, 2017

Another Boost For Foreign Investment?

There has been extensive discussion in this blog about foreign investment. Of late, the discussion has focused on the question whether foreign investment is a rip-off of the country or a benefit for it. One case in point has been the Trainose deal where - in the opinion of some - immense value of the Greek nation was given away to an Italian investor for a song, i. e for 54 MEUR.

The Ekathimerini now reports that this give-away deal may not come to fruition after all. Allegedly, the Greek government has neglected to amend to ministerial decision for the transaction in accordance with the agreement between the two parties upon signing.

If that is true, it certainly brings to mind the not too distant episode where the government tried to pull a fast one on Cosco only to be caught in the act by the Chinese investor.

"How can Greece attract foreign investors?" is a question very frequently asked. The much easier to be answered question is "How to scare foreign investors away?"

Tuesday, January 24, 2017

Why A Current Account Deficit Again?

The improvement in Greece's current account over the last years has got to be one of the great success stories amid the financial catastrophe. The current account deficit had gotten as huge as 36 BEUR in 2008. A staggering figure both in absolute amounts as well as in relation to GDP (about 15%). Anyone predicting at the time that Greece would succeed in bringing the current account into balance would have been considered a dreamer.

However, and literally on a straight line, Greece reduced the current account deficit from year to year only to reach a surplus of 206 MEUR in 2015! A smashing success in terms of numbers. Not in terms of economic effects because the improvements came mostly via curtailing imports instead of expanding exports.

And now it looks very likely that the current account may again have returned to deficit in 2016. The final figures are not out yet but by end of November 2016, there was already a deficit of 171 MEUR (a surplus of 990 MEUR a year earlier) and December is typically a negative month. Thus, 2016 will in all likelihood see a current account deficit between 500-1.000 MEUR.

What is happening here?

It seems prudent to wait with a detailed analysis until the figures for the full year are out. Based on the figures for 11 months, a few observations can be made: (1) it seems that tourism, while a record year in terms of number of visitors, was not such a record year in terms of net receipts; (2) it seems that regular exports (excluding oil and shipping) declined whereas regular imports increased; and (3) other income from abroad which is not specifically defined in the preliminary figures seems to have declined significantly, too.

But those are only the answers. What are the reasons for these declines?

Skeptics about Greece's enormous current account improvement have always argued that it came about by way of killing demand for foreign products and not as a result of structural changes (import substitution, export promotion). The warning was that the current account would quickly return to deficit once the economy stabilized because demand for foreign products would then return.

Could it be that Greece's return to a current account deficit in 2016 signals that the economy (the official one, the black one or both) has stabilized in 2016? That perhaps demand returned and was directed at foreign products?

Friday, January 20, 2017

Primary Surplus 2016: Ministry of Finance vs. Bank of Greece

If the numbers below are too small to read, one has to follow this link.

The above is the preliminary budget execution bulletin for 2016, as published by the Ministry of Finance. Whenever there is a table with many numbers, the first questions are: Where is the bottom line? Where are the numbers that matter?

The bottom line is the second line from the bottom where it says "State Budget Primary Balance". One has to hasten to add that this is NOT the (in)famous "primary balance" which is always cause for contestation between Greece and its creditors. It is "only" the primary balance of the "state", not of the "general government". The figures for the general government have not yet been published (they include, in addition to the state, local governments, social security funds and other non-consolidated items). For 2016, it can be expected that the "general government" will look even better than the "state" alone.

The bottom line says that the "state" recorded a primary surplus of 4,4 BEUR in 2016. In the previous year, in 2015, the equivalent number was 2,2 BEUR. The target for 2016 had been a primary surplus of 2,0 BEUR.

In short: the Greek state doubled its primary surplus from 2015 to 2016! And it exceeded the target by 1,2 BEUR!

Assuming a GDP of about 180 BEUR, the state's primary surplus represented 2,4% in 2016. The percentage for the general government can be expected to be even higher.

All of this would be fine and dandy if the Bank of Greece had not come out with the following press release on January 19, 2017 (i. e. yesterday):

"In January-December 2016, the central government cash balance recorded a deficit of €3,569 million, compared to a deficit of €3,359 million in the same period in 2015. During this period, ordinary budget revenue amounted to €48,941 million, compared to €45,607 million in the corresponding period of last year. Revenue of €43 million regarding Securities Markets Programme (SMP) income transfers from the Bank of Greece is excluded. Ordinary budget expenditure, including expenditure of about €3,850 million for the repayment of arrears, amounted to €51,143 million, from €48,043 million in January-December 2015."

Here is the table published by the Bank of Greece which shows a primary surplus in the state budget for 2016 of 1.948 MEUR, compared with a comparative figure for 2015 of 3.490 MEUR.

I am sure that there are convincing explanations why there is, in actual fact, no discrepancy between the figures, only between reporting formats but it would certainly be helpful to be informed about what these discrepancies/explanations are.

Friday, January 13, 2017

Foreign Investment - A Long Shot?

This rather pessimistic commentary by Alexis Papachelas of the Ekathimerini concludes with the following paragraph:

"Greece has become cheap, it has potential and a capable manpower; but in order to lure investors it will have to implement reforms and inspire confidence, and it will need a government that speaks the same language as investors."

There, in only one sentence, everything is said! I would only add: Greece also needs a society which sees the positive aspects of foreign investments.

The economic ingredients all speak in favor of Greece: yes, Greece has become rather cheap and, of course, Greece has a capable manpower and potential. So why are foreign investors not lining up to put their money into the Greek economy, into real investments instead of only financial speculations?

To blame it all on "those old-school leftists, revolting against every privatization and investment plan, by whom the Prime Minister is surrounded" is simplifying things. Yes, the PM's aides are "constantly trying to douse the flames that continue to erupt here and there. Perhaps it is even against the PM's political DNA, which makes him feel more at home in Havana or when promising handouts to the electorate." But even if there were a center-right government tomorrow, I am not sure that things would change radically overnight. Yes, there would be more visits and photo-op's with visiting potential foreign investors and a few of them might even put their money into projects which promise good short-term returns.

But will those potential investors really see Greece as a great place to do business in the longer term? Some of them, like Cosco, most certainly will because Greece offers them a long-term perspective (entry to Europe via the South-East) which is promising enough to outweigh any short-term hurdles and/or disappointments. But how about the regular non-European foreign investor who is screening European countries with a view of determining the best place to build his new plant? How about the European foreign investor who wants to take advantage of Greece's cheap labor, its capable manpower and its potential?

I have no doubt that the country's elites, political and otherwise, when visited by potential foreign investors, will express great interest, if not even enthusiasm about a potential investment. The question I have, however, is whether those elites really represent the general feelings among Greek society. Is Greek society really convinced that foreign investments can be a very good thing for the country? Or is there a general view that foreign investors, after all, are here for profit and the profit which they will take abroad is profit which, without them, would stay in Greece?

I think only real results would change any prejudices among Greek society, if at all. Only if there is a significant number of foreign investments which truly show what long term benefits they are for the Greek economy and for the prosperity of Greeks, only then is Greek society likely to give up any prejudices which there may be.

It's really a matter of education. As long as society feels that a most valuable train company is given away to Italians for a song; that the most profitable regional airports are given away to the Germans for nothing; in short: that this is a sell-out of valuable Greek assets to greedy foreigners; well, as long as that is the general feeling in society, foreign investment will never flourish.

Thursday, January 5, 2017

State Investment In Banks: Money Gone Up In Smoke?

My neighbor Yiannis, the theoretical Marxist, is furious. He has found out that most, if not all, of the 25 BEUR which the Greek state borrowed offshore in order to invest in Greek banks as part of the bank recapitalizations may turn out to be worthless. Let me clarify: only the investment may turn out to be worthless; the loans will continue to remain 100% obligations on the part of the Greek state.

Yiannis asks me two very simple questions: Where did that money go? And, as he suspects, if the money simply went up in smoke, why should Greek tax payers pay for it?

No money ever goes up in smoke; it only changes owners. But who are the new owners of that 25 BEUR which the Greek state is no longer owner of? That's where it gets a bit tricky.

The Greek state invested in banks, the value of which went towards zero and, in consequence, the value of the Greek state's investment also went towards zero. But who got that money?

Nobody got that money! The answer is that some parties who still have money today would no longer have that money if the Greek state had not invested the 25 BEUR. That's where the money is! Had the Greek state not invested the 25 BEUR, the 4 large Greek banks (and others) would have gone bankrupt and the creditors of those banks (bondholders, savers) would have lost a lot of money (in sum certainly more than the 25 BEUR which the state lost). Not to mention the collateral damage involved when the largest banks go bankrupt.

So I told Yiannis that he himself was one of the beneficiaries. Yes, as a tax payer he is now responsible for paying off that 25 BEUR in debt but, in exchange, the value of all his bank deposits remains in place.

Yiannis said he had no bank deposits. I told him he was out of luck.