Dagong Upgrades the Sovereign Credit Rating of the Republic of Greece
Dagong Global Credit Rating Co., Ltd.
November 1, 2017
Dagong Global Credit Rating Co., Ltd. (hereinafter referred to as “Dagong”) has decided to upgrade the local and foreign currency sovereign credit ratings of the Republic of Greece (hereinafter referred to as “Greece”) from CC to CCC, each with a stable outlook. In the short term, Greek banking system will see improvements to its vulnerabilities; the Greek economy continues to recover, government finance witnesses obvious improvements, and the government debt burden enters a downward channel. However, due to a heavy debt burden, external vulnerabilities are still significant in the country and the government’s solvency is at a low level.
The key reasons for upgrading the sovereign credit ratings of Greece are as follows:
1. Due to the ongoing implementation of austerity measures and structural reform, the Greek banking system’s vulnerabilities continue to improve. The coalition government led by Greece’s left-wing party strives to recover economic growth, achieve fiscal sustainability, maintain financial stability and strengthen public management. The austerity measures and structural reform implemented lead the Greek economy towards steady recovery. In terms of credit environment, given the country’s steady economic recovery, strengthened regulations, capital control and recapitalization, the banking sector in Greece improves while its support to the real economy is stronger，but asset quality and liquidity continue to face some challenges.
2. The short term will witness steady economic recovery, yet in the medium and long term, growth potential will be limited by Greece’s structural problems. In the short term, benefitting from moderate economic recovery within the Eurozone, improvement in the country’s business environment, increases in government consumption and individual consumption, as well as export growth aiding manufacturing recovery and thereby stimulating industrial investment, it is projected that Greece will register a growth rate of 1.3% in 2017 and 1.8% in 2018. In the medium and long term, structural problems such as heavy external dependence, population aging, and weak industrial foundations, will all continue to limit its growth potential. It is forecasted that Greece’s average economic growth will be around 1.5% in the medium and long term.
3. Greece’s finance has witnessed a distinct improvement. The country’s inclusion into the QE program in the Eurozone will help enhance the stability of debt repayment. Due to a set of austerity measures including increasing pension payments, reducing the minimum threshold for personal income tax, increasing tax rates and boosting the efficiency in tax collection and administration, as well as cutting pensions, salaries and social benefits, and so on, in 2016 the Greek general government saw visible improvements in government finance, with deficit shifting to surplus. Benefiting from steady economic recovery and the ongoing implementation of austerity measures, the Greek general government is expected to see a fiscal deficit of 1.5% in 2017 and 1.0% in 2018, while primary fiscal surplus will be 1.8% in 2017 and 2.0% in 2018. Due to lack of market financing, government debt repayment resources rely heavily on external assistance. However, in the short term, Greece is likely to join the QE program in the Eurozone, thus government financing and the stability of debt repayment resources will be likely to improve.
4. The debt burden enters a downward channel, and its solvency grows from a low level. Given the country’s steady economic growth and austerity measures, it is expected that Greeck general government’s debt burden will be eased to 180.1% in 2017 and further down to 177.2% in 2018, thus its solvency will improve from a low level. However, Greece’s debt burden is still heavy with serious asset quality problems, which incurs risks of indebtedness facing the government. In the future, international creditors might push Greece to optimize its debt maturities and reduce its debt burden so as to ease the government’s pressure of debt repayment. In the medium and long term, the Greek general government’s debt burden displays a downward tendency.
In the short term, the Greek economy continues to recover, fiscal deficit remains at a low level, debt burden enters into a downward channel, and government solvency is expected to improve. Therefore, Dagong assigns a positive outlook for the local and foreign currency sovereign credit ratings of Greece in the following one to two years.