III. ECONOMIC TRENDS AND OUTLOOK Major Trends and Outlook Greek economic performance has been disappointing since the end of the 1970's with slow economic growth and high inflation (averaging 18 percent annually in the period up to 1991). Since 1992, inflation has been in a downward course, and real economic growth has been in the range of zero to one percent. In the 1979 to 1991 period, real economic growth (GDP) averaged only 1.3 percent compared to 5.6 percent in the previous 20 year period (1960 to 1979). The same pattern has been evident with respect to fixed investment: in the 1979-1991 period, fixed investment was negative; it averaged a minus 0.8 percent annually. By contrast, in the period 1960-1979, fixed investment was substantial, growing on average by 6.7 percent annually. The table below compares Greek economic performance over the past three decades with the average of industrialized countries which are members of the OECD. Selected Economic Development Indicators Annual Percentage Change GNP Fixed Investment Total Machinery and Equipment 1960-79 1979-91 1960-79 1979-91 1960-79 1979-91 Greece 5.6 1.3 6.7 -0.8 9.1 1.4 OECD 4.2 2.6 4.6 2.6 5.9 4.8 Labor Exports Per capita income productivity (per cent of GDP) OECD =100 1960-79 1979-91 1960 1979 1980 1991 1960 1970 1979 1991 Greece 6.6 0.8 9.1 17.5 20.9 22.7 30 41 47 44 OECD 3.0 1.4 11.2 18.5 19.4 18.8 100 100 100 100 Sources: OECD, Economic Survey (Greece) 1993 Unsustainably high public sector deficits (nearly 14 percent of GDP on average) have played an important role in the deterioration of longer-term trends. Since 1991, the consequent marked increases in public sector debt, together with a narrowing of Greece's industrial base, has made the reduction of the budget deficit the top priority. As a result, Greek governments have moved toward a reorientation of economic policy. However, this reorientation has thus far not led to the desired reduction in the public sector deficit and increase in real economic growth. Moreover, real interest rates remain exceedingly high: nominal interest rates are 10 to 20 percent above the rate of inflation), creating a tremendous burden for both the government budget and private sector companies. Due in part to such high interest rates, inflation has declined dramatically from an average of 18 percent prior to 1991 to about 11 percent in 1994. Slow economic growth for the next two years will also keep the current account deficit at modest levels. In addition, the Greek government has expressed its determination to defend the drachma's parity via a high interest rate policy. On May 16, the government lifted virtually all of the remaining controls on the free movement of capital. To defend the Drachma, the government also raised (short-term) interest rates to triple digit levels. Interest rates have since declined but they remain significantly higher than those prevailing prior to the "drachma crisis." The three-month Treasury Bill rate was 25 percent at the last sale, and the special one-year Treasury Bond carried a 21.5 percent coupon. In late June, companies were borrowing at rates of 30 to 34 percent. High interest rates are a major problem for economic policy. Given the high level of Greece's national debt, interest rates constitute the main item in the government budget, equal to 30 percent of total expenditures and consuming 50 percent of total government tax revenues. Moreover, interest payments are the fastest growing category of budget expenditures. The outlook for the Greek economy depends heavily on the government's success in implementing its budget targets in 1994 and 1995. The government has set ambitious goals. It will soon need to adopt measures to assure that such goals are met. Such measures are essential to convince financial markets of the government's determination. The table below summarizes Greece's recent economic performance (1992 and 1993) and its goals for the future (1994 and beyond). The table also contains the goals which the Greek government adopted in a effort to meet the requirements established by the European Union for Economic and Monetary Union (EMU). RECENT PERFORMANCE AND CONVERGENCE PROGRAM 1994-1999 1992 1993 1994 1995 1996 1999 1. GDP growth pct. 0.9 0.0 1.1 1.2 1.7 3.5 2. Salary increase 11.2 12.8 12.3 8.4 6.5 4.2 (pct. nominal before tax) 3. Deflator pct. 15.8 14.2 10.8 7.9 6.1 3.3 (implicit private consumption) 4. Interest rates 20.0 20.5 18.5 14.1 10.6 6.2 (pct. short-term - 3-month T-Bills) 5. Government finances: (As percent of GDP) - Revenues 34.5 34.0 34.7 36.8 38.1 38.5 - Expenditures 30.7 31.4 31.2 30.8 30.5 29.1 (excl. interest) - Interest paym. 11.8 12.3 13.9 13.6 13.9 7.0 - Net borrowing Requir.(gov'nt) 7.1 12.5 13.2 10.7 7.6 0.9 - Debt (Gov'nt) 85.5 109.7 112.1 115.2 115.3 103.4 The targets are ambitious. Government revenues are projected to register real increases every year and this implies plans to broaden the tax base, clamp down on tax evasion and more taxation. It also implies selling minority stakes in some state-owned companies. The sale of minority stakes in state-owned companies is forecast to yield some 1.8 billion dollars. The convergence program projects a drop of net borrowing as a percent of GDP from the present 13.2 percent to 7.6 percent in 1996 and 0.9 percent in 1999. The government debt as a percentage of GDP is also projected to decline from the present 112.1 percent to 103.4 percent in 1999. (Note: A change in national accounts statistical methodology has recently led to a 20 percent increase in GDP. Before such adjustment government debt as a percentage of GDP was much higher, i.e. 135.8 percent in 1993. If one also includes the debt of other public entities, total Greek public sector debt was measured at 160 percent of GDP, using the old system of national accounts.). Principal growth sectors Services has been the largest and faster growing sector of the Greek economy and accounts for about 66 percent of GDP. Tourism is booming, and Greece has been traditionally strong in shipping. Substantial funds from the European Union (about 10 billion dollars) will go to major infrastructure projects (road and train network, ports, the Athens and Thessaloniki metros, a new airport, bridges etc.). The industrial sector accounts for 23.7 percent of GDP. In the manufacturing sector (13 percent of GDP) food industry is one of the most profitable and high growth areas with increased presence in the Balkan countries. High-tech, especially telecommunications equipment, is also a fast growing sector. Textiles remains an important sector as well as cement and building materials. Other important sectors include, machinery and transport equipment and electrical appliances. Construction activity (7 percent of GDP) is also a growing sector mainly due to large infrastructure projects (building activity for houses has declined). Agriculture (10.3 percent of GDP) receives substantial support from the European Union but it is a slow-growth sector. Government role in the economy The central government plays traditionally a very important role in the Greek economy via budget expenditures which amount to 31.2 percent of GDP, excluding servicing of debt. With debt-service included, government expenditures are 45.1 percent of GDP. The government also controls 52 public enterprises, 6 public organizations, which include the largest social insurance funds, and about 75 percent of the banking system. Despite the recent revision of national accounts, which boosted GDP by 20 percent, some 15 percent of economic activity may still remain unrecorded (parallel economy). The government plans to sell a minority stake in the Hellenic Telecommunications Organization (OTE) by the end of 1994. There are also plans to sell stocks of state refineries and lift restrictions in oil exploration. Balance of payments situation. Greece's balance of payments is characterized by chronic trade deficits and strong invisible receipts. Net transfers from the EU and tourism receipts are the fast growing items. In 1993, Greece had a 700 million dollar deficit in its current account. Prospects for the current account in 1994 appear favorable. Greece will continue to rely heavily on invisible receipts to cover its large trade deficits. The large inflow of EU funds until the end of the 1990's will provide additional foreign exchange funds during the period in which Greece will be striving to bring its economic performance closer to that of the other EU member countries. Trade and investment barriers Greece does not have any trade barriers other than those imposed by the EU. It maintains, however, specific barriers in services such as law, accounting, aviation, tourism and motion pictures. -- Greece maintains nationality restrictions on a number of professional and business services, including legal advice and accounting. These restrictions do not apply to EU citizens. The U.S. companies can circumvent these barriers by employing EU citizens, the most prominent example being in auditing. -- The Greek flag carrier Olympic Airways has a partial monopoly to provide ground services to other airlines. Some foreign airlines may self-handle. -- Greek residents are limited to the amount of foreign exchange they can take with them on each trip abroad (2,000 ECUs) for tourist purposes. -- Greek film production is subsidized by a 12 percent admissions tax on all motion picture theaters. The government sets a maximum price (currently 20,000 dollars) for the purchase of a film. Investment barriers. There are no mandatory legal prerequisites for investments. However, local content and export performance are taken into consideration by Greek authorities when evaluating applications for tax and investment incentives. -- Greek authorities also continue in some cases to withhold refunds on royalties. -- U.S. and other non-EU investors receive less advantageous treatment than domestic or other EU investors in (1) the mineral sector where restrictions continue to apply, (2) banking, where only 40 percent of the share of Greek state banks is open to non-EU residents, and (3) land purchases in border regions. Labor force Greece's labor force is estimated at 4.08 million of which 3.66 million are employed and 412,000 unemployed (10.1 percent of the labor force). The unemployment rate is projected to be 10.4 percent in 1995 dropping gradually thereafter to 7.9 percent 1999, the last year of the 1994-1999 convergence program. Of the 3.66 million employed, about 60 percent are salary and wage earners (20 percent in manufacturing), 20 percent are farmers and the balance are self-employed and entrepreneurs. Of the salary and wage earners 10 percent are unskilled workers getting the minimum wage and 30 percent are union members. It is estimated that presently there are in Greece about 500,000 immigrants, mainly from Albania, most of whom work without a permit. Major Local and Third Country Competitors The EU countries are the major suppliers of goods and services to Greece with Germany, Italy, France and the UK holding the lead. Japanese and other Far East suppliers lead in automotive products, personal computers, consumer electronics, machine tools and domestic air conditioning (room units). Canada and the Scandinavian countries are major exporters of lumber and paper pulp. Local manufacturing is competitive in apparel, processed foods and beverages, cement and tobacco. Distribution of Goods and Services Greece has improved its distribution infrastructure during the last two years through new construction, modernization, expansion and upgrading of its road and highways, railways, ports, airports, and heliports network. In addition, cellular telephony has been introduced and the installation of new digital communications systems is proceeding. Distribution enterprises are constantly improving their services. Major Infrastructure Projects Underway Over the next decade, Greece will be pursuing several major projects which will require significant foreign technology and equipment. In March 1994, the Government announced a number of priority infrastructure projects expected to be completed by 1999. Total estimated cost of these projects is $8 billion to be financed largely by the EU under the Second Delors Financial Package. Tendering procedures for implementation of these projects is expected to start immediately. The priority major infrastructure projects include: (A) Transportation Projects 1. The Patras - Athens - Thessaloniki - Evzoni Highway, linking the Patras port in Peloponnese with the town of Evzoni, on the border with the Former Yugoslav Republic of Macedonia. The cost for the construction of the first 338 kilometers, financed under the Second Delors Package, is estimated at $1.1 billion. Construction of some sections is underway. Completion date is expected by 2000. 2. The Egnatia Highway: The highway will link the port of Igoumenitsa in the west with the Greek-Turkish border in the east. The project will be implemented in two phases with a total estimated cost of $2.4 billion. The 1994 - 1999 budget for Phase One is $1 billion. International tenders for Phase One of this project are underway. Completion of Phase One is expected by 1999. 3. The Stavros-Elefsis Highway linking Stavros Agia Paraskevi, a suburb at the north-eastern exit of Athens, with Elefsis, at the western exit of Athens. Estimated cost: $840 million. The project will be financed by the EU, the Greek state and by private consortia on a self-financing basis. It is expected to be completed by 1999. 4. The Rio-Antirio bridge linking the mainland with the north coast of Peloponese. Evaluation of offers was completed in May 1994. The international consortium "GEFYRA" was selected. Contract is expected to be ratified by the Greek Parliament by the end of July 1994. Estimated cost of the project is $800 million. The Greek state will provide 40 percent of the financing with the contractor providing the balance. Expected completion date by the end of 1998. 5. An underwater tunnel linking the two cities of Akto and Preveza at the seaward exit of the Amvrakikos gulf in western Greece. The international consortium Christiani/Nielsen/TEG was selected for the construction of the tunnel. Estimated cost is $60 million. Project will be financed by the Greek state and by the contractor. Expected completion date is the end of 1998. 6. The Thessaloniki Subway: The nine kilometers long, 14 station subway system will pass through the center of Thessaloniki linking the eastern and western suburbs of the city. Evaluation of offers of two shortlisted consortia and selection of the contract winner will be completed by the end of July, 1994. Estimated cost is $328 million. The Greek state will pay 50 percent of the cost while the remaining 50 percent will be provided by the contractor. Project will be completed in two phases. The first phase is expected to be completed by the end of 1998 at an estimated cost of $160 million. 7. The new Athens Spata Airport: In October 1993, the new government cancelled the previous government's decision to award the contract to the consortium led by the German firm Hochtief and requested submission of new proposals. The two short-listed consortia, Hochtief and Societe Auxiliaire/Aeroport De Paris, submitted revised proposals in May 1994. The project was to be completed by 1999. However, considerable slippage of the timetable is expected. Estimated cost of the project is $1.8 billion. 8. Railway Modernization: The 1994 - 1999 expansion and modernization program is estimated at $2.8 billion. Included are two double tracks linking Athens - Thessaloniki - Idomeni and Athens - Corinth - Patras. Both are expected to be completed by 1999. The program also includes the construction of a new freight terminal at Elefsis (outside Athens). Thirty percent of the funds for the two lines will be provided jointly by the EU under the Second Delors Package, the European Investment Bank and the Greek State. 9. Expansion and Modernization of Ports: The modernization of ports is crucial for a country where over 70 percent of all imports and exports depend on sea transportation. The Ministries of Public Works and Merchant Marine have prepared a priority program for the upgrading and expansion of 16 major ports, as well as for the creation of one major port, Europort, near Thessaloniki in northern Greece. 10. Athens Subway Expansion Project. The project began in 1993. It includes the extension of the new Athens Subway (Metro) network, currently under construction, by 12 additional kilometers. Estimated cost of the Metro extension project is around $1 billion. Financing is expected to be provided by the EU under the Second Delors package. (B) Telecommunications Projects Jointly funded by the EU, Greece has embarked on an ambitious modernization of its telecommunications infrastructure. Immediate plans include the purchase and installation of over one million new digital switches, the installation of new local digital networks in all major Greek cities, known as the CRASH PROGRAM, the deployment of submarine fiber optic cables and the installation of new earth to satellite stations. Greece has also announced plans to launch its own telecommunications satellite. It is estimated that over $1 billion will be invested over the next three years in telecommunication projects. The recently deregulated Greek cellular telephony market is growing rapidly. In 1994, at least $40 million will be spent for the importation of terminal equipment such as hand-held telephones, car accessories, batteries and chargers. Over $80 million is also expected to be spent in infrastructure equipment and works. The two cellular telephony providers in their first year of operation have over 35,000 subscribers each. (C) Power Projects The Public Power Corporation (PPC) announced its ten-year revised development program in February 1994. The total cost of the program is projected at $4 billion. Financing will be provided by the PPC, the EU Regional Development Fund, and the European Investment Bank. The plan calls for the conversion of two coal units to combined cycle, the construction of three natural gas power stations, five lignite-fired power stations, a bituminous coal-fired unit, three major and twenty-five smaller hydro-power stations, solar and wind energy units, a third high-voltage power line to link the Kozani-Ptolemais power generation center with southern Greece, the modernization of the nation's electricity network, and the acquisition and maintenance of submarine transmission cables connecting the mainland with major islands. Tenders for s3ome of the above projects were issued in 1992 and 1993 but were cancelled. New tenders are expected to be issued soon. (D) Irrigation Projects The Acheloos river diversion, estimated to cost $540 million, will be split into a number of subprojects to be tendered separately. These include: a) An irrigation project requiring the river's diversion to the Thessaly valley, through a tunnel 18.5 Kilometers long. Cost: $140 million; estimated completion period: 40 months; b) The Sykia dam project which is estimated at $140 million. Contract is expected to be awarded by October 1994; c) The construction of dams in the areas of Smokovo, Palioderhi, Kaloudas, Pinios river, Pili and Mouzaki; and d) The supply and construction of hydro-electric plants to be installed at the above dams. (E) Hospital Projects The Ministry of Health and Welfare plans to construct and equip many new hospitals throughout Greece and to expand and modernize existing ones. These include the construction of the Western Attica Hospital, at an estimated cost of $120 million, the Hania Hospital at around $92 million, the Rhodes island Hospital at approximately $90 million and the Alexandroupolis Hospital at $128 million. The government has also announced the total reorganization of the National Health System (ESY). Overall, demand for sophisticated, advanced equipment is expected to be high. (F) Environmental Projects 1. The Psitalia waste treatment plant. The project includes the construction of the second phase of the waste treatment plant on the island of Psitalia off Piraeus. Work will start by September 1994. Estimated cost of the Second Phase is $120 million. The project will be financed by the EU. Expected completion date by the end of 1999. 2. The Thessaloniki waste treatment plant includes the construction of the second phase of the waste treatment plant in that city. Selection of the company and award of the contract is expected by mid-1994. Estimated cost of the second phase of the project is $64 million. The project will be entirely financed by the EU. Expected completion date by the end of 1997. (G) Industrial Projects 1. The Natural Gas project. The construction of a natural gas pipeline from the Greek - Bulgarian border to Attica is expected to be completed by 1995. Gas will be supplied by Russia. The cost of the project, which started in 1990, is estimated at $1.4 billion. Financing is provided by the European Investment Bank and the EU. 2. The Alumina project. The much delayed project to build, in cooperation with the Russians, a 600,000 ton-per-year alumina plant at an estimated cost of $400 million near Thebes, is being re-activated. Agreement between Greece and Russia is expected to be signed by mid 1994. Salomon Brothers is preparing the final study for the implementation of the project. The plant will be completed by 1997. The Russians will absorb the total alumina produced for a period of twenty years. Funding to be provided by the Second Delors Package. Significant opportunities for goods and services will arise following the finalization of the agreement. (H) Tourism Projects Greece has recently modified its tourism policy. In June 1994 the Ministry of Tourism issued a tender for the award of ten casino licenses to private operators. Tender evaluation and award procedures are expected to be completed by September 1994. In addition, the government is planning to privatize state-owned or state-controlled hotels, marinas, and other tourism resorts. The privatization of these activities is expected to generate major opportunities for the supply of goods and services.