Greece remains capable of servicing its debt, according to the European Commission's fourth post-program surveillance report, released yesterday. The report, which assesses Greece's economic and fiscal progress, highlighted several positive trends and ongoing challenges.
The report indicates that Greece's economic activity is expected to improve modestly, with growth rates surpassing the long-term potential in 2024-2025. Greece recorded a 2% real GDP growth in 2023, significantly higher than the EU and euro area average of 0.4%. This growth is projected to reach 2.2% in 2024 and 2.3% in 2025, driven by increased investments and robust private consumption.
Inflation, which has stabilized since mid-2023, is expected to decline gradually to 2.8% in 2024 and 2.1% in 2025. Persistent high food inflation and solid wage growth, due to a tight labour market and a recent minimum wage hike, are factors contributing to the gradual easing of price pressures.
Unemployment in Greece is projected to continue its decline, although improvements are expected to slow due to labor market segmentation. The current account deficit, which saw a marked decrease to 6.3% of GDP in 2023, remains high and is anticipated to narrow only slightly as investment activity increases.
The headline budget deficit improved in 2023 and is expected to decrease further to 1.2% of GDP in 2024 and 0.8% in 2025. This improvement is primarily attributed to the phasing out of energy measures and controlled growth of current expenditure. Fiscal measures in 2024, including reforms in self-employed taxation, are expected to have a positive impact on the budget balance.
The profitability of Greece's banking sector remained strong in 2023, supported by high net interest income and minor deposit repricing. The stock of non-performing loans continued to decrease, driven mainly by sales and securitisations under the Hellenic Asset Protection Scheme. However, challenges persist in resolving legacy non-performing debts due to judicial obstacles affecting liquidation proceedings.
Financial sector policies aimed at addressing legacy issues are progressing on schedule. Nearly all household insolvency cases are expected to be cleared by mid-2024, and the setup of a sale and leaseback organization is anticipated to be completed by autumn 2024. The government is also advancing efforts to enhance the capital market's resilience and efficiency through regulatory and tax reforms.
The Hellenic Corporation of Assets and Participations (HCAP) reported its best financial performance since inception. The government plans to establish a growth investment fund under HCAP's management and improve the operational flexibility and autonomy of state-owned enterprises in HCAP's portfolio.
Privatisation efforts managed by the Hellenic Republic Asset Development Fund are on track, with the oversubscribed initial public offering of a 30% stake in Athens International Airport highlighting investor confidence.
Greece's debt sustainability analysis suggests low short-term risks, high medium-term risks, and low long-term risks. The country was upgraded to investment grade by a third major rating agency in December 2023. Greece's gross financing needs for 2024 and 2025 are expected to remain low, supported by projected primary surpluses and moderate debt amortisation. This positive outlook is bolstered by Greece's substantial cash buffer and continued market access amid narrowing yield spreads.
Overall, the European Commission's report underscores Greece's capacity to manage its debt, highlighting both the progress made and the challenges that remain.
