Can FDI put profits behind Greece's recovery?

Greece is back on investors’ radars, and with good reason. After shedding nearly one-third of its GDP since 2008, the economy is expanding once more with GDP up by 1.4% in 2017, and rising 2.3% in the first quarter of 2018 – the strongest growth in 10 years.

Through a massive austerity programme, driven by the ‘troika’ of the EU, the European Central Bank and the IMF, Greece has moved from a double-digit budget deficit in 2008-09 to a surplus in the past two years. The current account deficit was at 0.8% in 2017. At last, the economic climate is starting to normalise again for the southern European country.

Recovering confidence

At the peak of the crisis, the yield on 10-year Greek bonds sat at about 16% to 18%, then dropped to roughly 10% for a lengthy period. However, since the end of 2017, this figure has fallen to just below 4%, an 11-year low. Although German bonds remain at 0.4%, the improvement signals rising business confidence in Greece.

Enterprise Greece, the country’s investment promotion agency, says 2017 witnessed a 30% rise in FDI in the country – the highest since the crisis began – thereby almost reaching the pre-crisis number of foreign investments.

However, Constantina Kottaridi, an economics professor at University of Piraeus, notes: “While the crisis caused some investments to leave, it wasn’t too traumatic because pre-crisis Greece didn’t have lots of FDI. We’ve not been good at attracting it, historically. However, most of our foreign investors were strategic ones, given the location of Greece, and many never left.”

Greece’s fiscal consolidation has improved thanks to the recently struck debt deal with the troika in June 2018. Maturities on the older bailout loans will be deferred by 10 years, while a 10-year grace period will apply for interest and amortisation payments. This leaves Greece with small debt repayments until after 2030.

The troika holds 77% of Greece’s €343bn debt. The country is set to exit the bailout plan and stand on its own feet on 20 August, regaining some control of its own finances and signalling a vote of confidence for investors.  

A private affair

At the behest of the troika, Greece has been privatising state-owned assets since 2011 in order to pay off its debt and reform its public sector. Leading this programme is the Hellenic Republic Asset Development Fund (HRADF).

HRADF chief executive Riccardo Lambiris says: “Privatisation has been one of the key pillars of the structural reforms implemented by the country and it has been difficult in the past to explain to the Greek people. HRADF’s message is about developing assets, not selling them. It's about adding value to all stakeholders – the country, local communities, investors – and increasing FDI, new technology and jobs.”

Some 40 assets have been privatised since 2011, resulting in current and future proceeds of €8bn. In 2017, Germany’s Fraport took over 14 of Greece’s regional airports for the sum of €1.23bn. Mr Lambiris says: “Fraport has improved the finances and is constantly working to improve the quality of services. Some island airports are being turned from relatively simple airports into multi-dimensional hubs with customary international facilities. It is now easier for Greeks to understand the benefit of privatisation and there is increasingly more support for it.”

For decades, Greece’s political spectrum remained suspicious of foreign capital. “After the dictatorship in the late 1960s and early 1970s, Greek people accused foreigners – especially Americans – of having blessed and supported the autocracy. However, the political spectrum has, at last, acknowledged that foreign investment will be the Holy Grail of recovery. Even the current leftist government is running after it,” says Andreas Yannopoulos, founder of political consultancy Public Affairs & Networks.

Political u-turns

Greece’s economy stabilised in 2014 and whatever happened after that was mainly due to politics, according to Panos Tsakloglou, a professor at Athens University of Economics and Business. The current Greek government, led by a nominally left-wing party, Syriza, came to power in 2015 on an anti-EU agenda, demanding major debt write-offs from the troika and seeking strong fiscal expansion.  

In mid-2015, the crisis climaxed as Greece teetered on the brink of an EU exit. Meanwhile, the economy nosedived. However, despite support for a ‘Grexit’ referendum, Syriza suddenly changed its tune and signed the third economic adjustment programme with the EU.

“Trust is hard to build, but very easy to destroy. In the past couple of years, a number of ministers have tried hard to build investor confidence, but many people don’t believe the sincerity of government intentions and Syriza does not have enough FDI knowhow. Thus, the likely election of the liberals – the New Democracy party – in 2019 can be a catalyst for business confidence,” says Mr Tsakloglou.

Mr Yannopoulos agrees. “We are now entering a period of political stability. All indications show that New Democracy will mostly likely win,” he says. “This is a big asset for Greece. There will be stability ahead and no surprises from the leftist government. For investors, this is more important than anything else.”

Banking on FDI

The financial crisis saw huge capital flight from Greece’s banking system. In 2009, the total deposits in the Greek banking system were about €220bn; currently the figure stands at roughly €140bn.

Subsequently, one of the biggest problems for Greece’s economy is non-performing loans (NPLs). As many companies and borrowers collapsed during the crisis, Greek banks took control of their assets out of necessity. However, the banks are now struggling under the pile of NPLs, which they are unable fund and are now looking to sell off. At the same time, a large proportion of Greek savings remains stored outside of the Greek banking system, as confidence has not been fully restored.

“Thus, foreign investment is the silver bullet,” says Mr Panos. “It can fill part of the financing gap we have and recover the banking system. FDI will encourage Greek savers since ‘even foreigners are injecting capital’. This would mean more liquidity and the availability of cheaper loans for the private sector. Moreover, it can help reduce the country’s perceived risk, therefore reducing the cost of capital and refinancing of Greek debt.”  

Significant opportunities exist for foreign investors. For example, New York-based private equity firm Amerra Capital is expanding its presence in Greece’s aquaculture by acquiring two ailing fish farming companies for hundreds of millions of euros.

“NPLs are holding down Greece,” says Amerra Capital managing director Thor Talseth. “Businesses have been underfinanced for 10 years, so FDI is essential. Amerra saw an opportunity. These two assets are fundamentally very good, they just need a new owner with capital and expertise,” he adds.

“We have been in Greece for three years and have seen how much the economy has improved since the Grexit scare. Although there are challenges, it’s a much more stable situation. Political stability and banking functionality have returned, despite the NPLs. The [troika’s] relief packages have provided necessary capital for Greek banks to start being banks again.”