Greek Economic Outlook: Positive Sentiment - Improving Prospects

Economic Research & Investment StrategyOctober 2017

Ilias Lekkos Lekkosi@piraeusbank.gr Irini Staggel Staggelir@piraeusbank.grAnastasia Aggelopoulou Aggelopouloua@piraeusbank.grParaskevi Vlachou Vlachoupar@piraeusbank.grDimitria Rotsika Rotsikad@piraeusbank.gr

Short & Long-Term Perspectives of the Greek Economy

Three Challenges to our Outlook

Greek SMEs Panorama

Emerging Trends and Opportunities in the New Greek Landscape

2

A Bird’s eye view of the Greek Crisis

Source: ELSTAT, Economic Research & Investment Strategy

1999:€183bn2016:€184bn

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Real GDP Long-Term Average

2001: €131bn2016: €129bn

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Private Consumption Long-Term Average

2000:€39bn 2016: €40bn

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Public Consumption Long-Term Average

2016: €21bnMin value

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Gross fixed capital formation Long-Term Average

2007:€57bn 2016: €56bn

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Exports of goods and services Long-Term Average

2002: €60bn2016: €60bn

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Imports of goods and services Long-Term Average

GDP is back to 1999

Consumption has returned to its 2001 levelsPublic spending: Close to the 2000 levels

Investments at record low

Imports stabilised at long-term average

Exports are on the rebound due to Tourism

3

Economic Activity Indicators are already on “Growth Mode”

Industrial Production Index, seasonally adjusted Despite fluctuations, we mark the improved positive trend

Retail Trade Volume Index (excl. automotive fuel), seasonally adjusted Return to positive territory

Employment, seasonally adjusted Labour market starts to rebound after the shock

Tourism RevenuesTourism as a key pillar of the economy

Source: ELSTAT, Bank of Greece, Economic Research & Investment Strategy 4

Greece: Macroeconomic Forecasts (Baseline)

2015 2016 2017 2018 2019 2020

Real GDP

(sa data, % change)-0.3% 0.0% 1.2% 2.1% 2.3% 2.7%

Nominal GDP

(sa data, % change)-1.3% 0.1% 2.1% 3.2% 3.7% 4.2%

HICP

(% change)-1.1% 0.0% 1.3% 1.6% 1.8% 1.9%

Gross Fixed Capital Formation

(sa data, € bn)€ 21 € 21 € 23 € 27 € 32 € 37

Savings Rate (households,

% of gross disp. income)-7.1% -9.4% -10.3% -10.2% -9.4% -8.0%

Unemployment Rate

(% of labour force)24.9% 23.5% 21.6% 19.7% 18.0% 16.7%

Non-Residential Real Estate

(% change)-0.1% 0.6% 1.5% 2.2% 3.5% 4.0%

Residential Real Estate

(% change)-5.1% -2.4% -1.7% 0.9% 2.3% 2.7%

…and the same holds for our Short & Medium Term Outlook

Economic Sentiment Indicator (ESI)

vs Real GDP Growth Rate

Source: ELSTAT, Bank of Greece, Economic Research & Investment Strategy 5

6

Total 15 – 19 20 - 24 25 - 29 30 - 44 45 - 64 65 – 69 70 – 74 75+

Years old

1995 49.4% 16.1% 60.8% 77.9% 77.8% 53.9% 13.7% 5.8% 2.0%

2015 52.2% 5.5% 44.1% 84.7% 88.8% 64.2% 9.2% 1.8% 0.7%

2025 57.4% 5.2% 44.1% 85.8% 89.0% 77.8% 53.9% 1.7% 0.5%

Potential & Real GDP in valueFrom a negative output gap, moving towards the historical peak

Participation Rate

Productivity

Unemployment Rate

Population

Source: ELSTAT, AMECO, Economic Research & Investment Strategy

Even modest growth in the long-run requires painful adjustments

Short & Long-Term Perspective of the Greek Economy

Three Challenges to our Outlook

Greek SMEs Panorama

Emerging Trends and Opportunities in the New Greek Landscape

7

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Gross Disposable Income Final Consumption

Gap€1.3bn

Households

Disposable Income vs Private Consumption

(€ bn, current prices)

Non Financial Corporations

Net vs Gross Fixed Capital Formation

(€ bn, current prices)

The Consumption to Investment Rotation Challenge

Gap€-10.6bn

-10.0

-5.0

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Gross Fixed Capital Formation Net Fixed Capital Formation

Disinvestment

through depreciation

Source: ELSTAT, Economic Research & Investment Strategy 8

The €14bn Fiscal Consolidation Challenge

in € mn 2015 2016 2017 2018 2019 2020 2021

Me

asu

res

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U

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15

-20

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Wage measures and non-wage benefits 0 71 173 102 13 42 -17

Pension reforms 0 187 540 658 398 489 214

Measures on social security contributions and social benefits 293 1,020 -965 348 -15 -45 -30

Other reforms 10 60 7 241 -22 0 0

Measures on the revenue side of State Budget 985 2,066 2,033 454 -59 -12 -16

Total 1,288 3,404 1,788 1,803 315 474 151

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asu

res

MTF

S2

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1 Pension reforms - - - 0 2,493 90 140

Measures on social security contributions and social benefits - - - 59 79 2 3

Measures on the revenue side of State Budget - - - 0 0 1,920 138

Total 0 0 0 59 2,572 2,012 281

Total Measures in a yearly basis 1,288 3,404 1,788 1,862 2,887 2,486 432

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MTF

S 2

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Social welfare - - - - -1,850 650 30

Investment - - - - -300 0 0

Employment - - - - -260 0 0

Health system - - - - -240 0 0

Counter measures on the revenue side of State Budget - - - - 0 -3,415 -2,174

Total Counter Measures in a yearly basis 0 0 0 0 -2,650 -2,765 -2,144

Final Impact of Total Measures in a yearly basis 1,288 3,404 1,788 1,862 237 -279 -1,712

Final Impact of Total Measures in a gross cumulative basis 1,288 4,692 6,480 8,342 8,579 8,300 6,588

€ 9.2 bn

€ 4.9 bn

€ 14.1 bn

€ -7.6 bn

€-0.4 €0.9 €3.2 €6.6 €6.8 €7.1 €7.4MOU Primary Balance Budget Targets in bn

-0.25% 0.5% 1.75% 3.5%

2015 2016 2017 2018 and beyond…

0.5%

The fiscal path based on primary surplus targets (as % of GDP) of:

4.2%

Source: MinFin, Economic Research & Investment Strategy 9

Expected over performance in fiscal targets has led to the introductions of the “countermeasures” in order to hedge the risks from excessive policy tightening

2021Primary Balance Budget Target

€7.4 bn(3.5% of GDP)

Source: MinFin, Economic Research & Investment Strategy 10

The Greek Economy Liquidity Challenge

2017

Jan – Aug 2018

Financing Needs & Sources (in € bn)

Source: European Commission, Economic Research & Investment Strategy 11

Short & Long-Term Perspectives of the Greek Economy

Three Challenges to our Outlook

Greek SMEs Panorama

Emerging Trends and Opportunities in the New Greek Landscape

12

SMEs are the backbone of the Greek economy

Source: European Commission, Economic Research & Investment Strategy

SMEs are highly important to the Greek ‘non-financial business economy’.

They generate three quarters of added value and almost 90% of employment, compared to an average of 60 % and two thirds respectively throughout the rest of the EU.

SMEs are largely concentrated in wholesale and retail trade, where almost 40 % of SME employment and added value is generated.

Greece has the highest number of SMEs in proportion to the total number of enterprises amongst all other European countries.

Greece is ranked second in terms of value added after Malta.

99.7

99.75

99.8

99.85

99.9

99.95

Greece EU

Number of SMEs (% of total number of enterprises)

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Greece EU

Number of people employed (% of total number in enterprises)

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Greece EU

Value added (% of total value added)

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Γενική ρευστότητα: 0,7

Άμεση ρευστότητα: 0,4

Outperformers(8.6%)

a

676

b

2,817

c

3,189

d

1,214

good performers(35.7%)

medium performers(40.4%)

Underperformers(15.4%)

Even in 2015, the SME Universe exhibits a staggering degree of differentiation

SMEs (until €50mn turnover)

unrated based on the initial

sample, 2015

with non-calculable ratios:

9,820

Outside the acceptable ratio limits:

6,045

Source: ICAP DATA, Economic Research & Investment Strategy 14

where our rating system can identify a substantial number of “bright spots”, “lost cases” and “turnaround candidates”

Γενική ρευστότητα: 0,7

Άμεση ρευστότητα: 0,4

Outperformer “a”• High levels of efficiency with the EBITDA margin

amounting to 24% and the return on equity to 19.3% on average

• None of the outperformers has interest coverage ratio less than 1

• Only a 0.9% of them has positive EBITDA and net losses before taxes

• High liquidity, with current assets covering around 3.9

times current liabilities

• Low levels of leverage, since its debt only amounts to half of equity

• High level of debt servicing, since EBITDA covers financial expenses by 21.4 times

Good performer “b”• More conservative, but satisfactory level of operating

profitability, with EBITDA margin at 15.4%

• Profitable efficiency of equity, with the return on equity at 13%

• Only a 0.7% of the good performers has interest coverage ratio less than 1

• A 7% of them has positive EBITDA and net losses before taxes

• Lower, but satisfactory level of liquidity, since the current assets amount to 2.5 times the current liabilities

• Higher debt levels, as liabilities exceed equity by 1.2 times

• Adequate debt service ability, since EBITDA covers financial expenses by 11.9 times

Medium performer “c”• Low levels of efficiency and profitability, since the EBITDA

margin is limited to 7.3% and the return on equity to 4.1%

• 22.1% of the medium performers has interest coverage ratio less than 1

• 17.7% of them has positive EBITDA and net losses before taxes

• Satisfactory, but limited liquidity, with current assets covering current liabilities by 1.5 times

• High net debt level, which exceeds EBITDA by 13.6 times

• Low level of debt servicing, since EBITDA covers financial expenses by 3 times

Underperformer “d”• Loss making, with EBITDA margin at -9.1%.

• Inefficient management of equity, with a negative return on equity at -16.1%

• Almost all of underperformers (82.5%) have interest coverage ratio less than 1

• The 18.3% of underperformers has positive EBITDA and net losses before taxes

• Liquidity difficulties, since the current liabilities exceed the current assets (current ratio: 0.7 times)

• Overleveraged, with debt 3.5 times higher than equity and net debt 25 times higher than EBITDA

Source: ICAP DATA, Economic Research & Investment Strategy 15

Fundamental data of average SME per final rating of our rating system, 2015

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Figures of average SME in thousand euros, 2015

Source: ICAP DATA, Economic Research & Investment Strategy

Short & Long-Term Perspectives of the Greek Economy

Three Challenges to our Outlook

Greek SMEs Panorama

Emerging Trends and Opportunities in the New Greek Landscape

17

Trends & Opportunities

Emerging Trends

&

Opportunities

Emphasis on export-oriented sectors: Tourism, farming, food processing, oil refining, basic metals &

minerals, chemicals, pharmaceuticals

Even in sectors with a competitive advantage Greece needs infrastructure upgrades, i.e. 5-star resorts,

yachting, convention centers, marketing & branding

In sectors with less stellar prospects such as retail and wholesale trade, fish-farming, passenger shipping,

telecoms, consolidation will create sectoral champions with improved margins

Privatized assets & natural resources development will require substantial investment (equity or loans)

Clusters can be created around privatized assets, i.e. ship-repair zone, logistics, cargo management, cruise

tourism

Regulatory pressures to liberalize industries such as electricity, natural gas, waste processing &

management, renewable energy

Banks commitment to reduce NPLs & Non Core Assets will create opportunities in real estate,

insurance and leasing, hotels and in over-indebted but viable companies

Greece needs to reorient itself from a consumption-based to an export-based

economy

Greece has a number of competitive advantages but needs to move up the

Value Added Chain

In several sectors and for a variety of reasons, a massive consolidation

process has started

More funding, either in the form of equity or loans, will be required

Greece is facing regulatory pressures to liberalize and privatize a number of

sectors

Greek banks have committed to reduce NPLs and restructure their balance sheets

Source: Economic Research & Investment Strategy 18

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