Isn’t that Enough? What Comes After Austerity?forums.capitallink.com/greece/2016/pres/panagiotou.pdf · 13/12/2016 · CONFIDENTIAL AND PROPRIETARY Any use of this material without

Isn’t that Enough? What Comes After Austerity? A handful of actions to stimulate the economy in the next 18-24 months

CONFIDENTIAL AND PROPRIETARYAny use of this material without specific permission of McKinsey & Company is strictly prohibited

New York, December 12, 2016

CAPITAL LINK CONFERENCE

2McKinsey & Company

Economy-wide Tourism Other

A quick reminder of McKinsey’s work for the benefit of Greece –80% pro bono

▪ Greece 10 Years Ahead.Analyzed barriers to competitiveness and growth; deep-dived into 14 sectors (5 largest & 9 Rising Stars) and determined all reforms

▪ Greece’s Growth Roadmap. Prioritized 6 major investment & growth opportunities, and detailed action lists per Ministry for execution of reforms

▪ Strategic allocation of the 2014-2020 EU structural funds. Quantified investment needs per sector to allocate €21b of structural EU funds to critical investments

▪ Sector restructuring. Assessed sectors’ viability and developed strategy to restore sustainable profitability

▪ Pension reform. Supported the domestic and international authorities, in assessing important trade-offs re: pensions; developed plan for Pillar II

▪ Public debt. Worked with the Public Debt Management Agency to prepare content for international investor roadshows, paving the way for Greece to return to the primary capital markets (in 2H.2014) after five years

▪ Tourism Sector Strategic Plan for 2013-2020 & Operational Plan for 2013-2014. Developed plan for the six core tourism ‘products’ and for all major source markets

▪ Design, setup and launch of “Marketing Greece”.Developed not-for-profit entity with private sector know-how and talent and State endorsement, to take over the marketing strategy development and implementation of promotion activities. Entity financed with €2m from the private sector (www.discovergreece.com)

3McKinsey & Company

Agenda

Consumption

Investments

Exports

Economic context

Actions going forward

4McKinsey & Company

The decrease in investments (~€39b) and private consumption(~€43b) are the major drivers of the output drop

SOURCE: Eurostat; AMECO database

Change in Greece’s real GDP, 2008–15EUR billion, reference year 2010

1 Applied government/household/corporate split from AMECO database to Eurostat total investment levels

-68 -74-25 -52-22

Change from 2008 level, %

+91

ESTIMATES

InvestmentConsumption Exports

0.328.9

7.0

19.4

13.2

11.4

42.5

-26%

Statistical discrepancy

185.1

Real GDP 2015

Net exports

Governmentinvestment1

Household investment1

Corporate investment1

GovernmentConsump-tion

PrivateConsump-tion

Real GDP 2008

249.9

5McKinsey & Company

During the crisis, our economy diverted further away from its target economic model and aspiration

GDP composition Percent

ProductivityUSD PPP/hour worked1

GDP per capitaUSD thousand PPP1

88Consumption (Private & public)

Net exports

Investments(Private & public)

-13

25

90

~0

10

2008 2015 Target model

70-75

0-5

25-30

36 27 39

4538 35

1 Converted to 2015 price level with updated 2011 PPPs

SOURCE: Eurostat; Total Economy Database by The Conference Board; McKinsey analysis

ESTIMATES

6McKinsey & CompanySOURCE: AMECO; EL.STAT.; Ministry of Finance; Press

Greece primary balance surplus vs. significant increase of State arrears; €1.4b in tax returns and €4.8b in expenditures

-6.0

-2.6

0.6

13 15

-6.3

2016E

-6.3 -4.1

-6.9

14

0.4

-5.8

1.5

-7.3

-5.9

12

1.9

-12.3

-9.7

-20.1

-5.1

-15.0

11

Interest expense Primary deficit

1 MoU definition, e.g., excluding Bank recapitalization costs

Primary surplus

Primary balance1

% GDP

+62%3.8

Sep2016

14

0.8

13

4.8

4.33.1

122011

0.9

8.7

7.8

0.7

8.8

9.6

4.8

-60%

June 2016

7.2

1.4

5.9

6.21.3

0.5

Expenditures

Tax returns

Key fiscal metrics evolutionEUR billion

Total balance1

% GDP

-2.5 0.3 0.3 1.1-1.4 0.8

-6.4 -3.2 -3.6 -3.3-9.7 -2.4

Evolution of State arrears to private sectorEUR billion

~80% are owed by State hospitals & social security funds (incl. EOPYY)

7McKinsey & Company

Consecutive tax increases have taken us to a 55% personal tax burden excluding the rise in indirect / consumption taxes…

SOURCE: KPMG

Tax surchargesMax %

10

16

32

35

35

40

40

43

45

45

45

48

52

Greece 2008

Netherlands

Ireland

Portugal

Spain

Germany

Cyprus

Italy

Bulgaria

Poland

Romania

Turkey

Greece 2016

Personal Income Tax Top marginal tax rate %

1 Μax levy 3.5% >EUR 7,420 plus solidarity surcharge 2.5%-5%; 2 Plus USC top rate (other income tax of 8%) and 3% on those who have non-PAYE income >€100k.; 3 2.2-10% solidarity tax; 4 5.5% solidarity tax; 5 1.6-4.2% regional/municipal taxes

Top taxable income threshold, in EUR 000

66

80

254

60

75

33

60

20

flat

flat

40

11

n.a.

n.a.

n.a.

n.a.

n.a.

91

103

n.a.

45

n.a.

64

n.a

10

16

32

35

35

51

40

47

45

51

55

57

52

Estimated tax burdenMax %

Social security contribution% of average wage

13

17

14

8

15

4

16

10

6

21

16

11

28

75

34

PRELIMINARY

8McKinsey & Company

Tax revenuesEUR billion

SOURCE: Bank of Greece – Governor’s Annual Report; Budget 2017; Team analysis

…without the expected outcome despite also higher property and consumption taxes

6 5

8 9 12 10 10 9 9 9

16 1516

1514 13 12 12

6 78

99 10 10 9

4 43 3

3 3

11 119

810

8 8 8

3 33344

2015

Other direct1

Corporate

44Personal

Otherindirect3

Other consumptiontaxes2

-2% p.a.

11

2

09

5150

10

4951

2008

VAT

14

44

13

45

2

12

47

Dire

ct ta

xIn

dire

ct ta

x

-2.9-2.9

-1.3-1.3

+3.4+3.4

-3.7-3.7

+0.8+0.8

-3.5-3.5

Absolute change2008-15

1 Property taxes, previous years taxes and n.e.c. ; 2 Fuel, tobacco, car taxation, n.e.c. ; 3 Trade taxes, import taxes, transaction taxes, previous years taxes

Increases in property and other direct

taxes as well as consumption

taxes (i.e., hikes in tobacco, fuels

etc.) have held back a further

decline but have not increased tax revenues

11McKinsey & Company

0.7

0.6

0.4

4-1 0 2 51 3 108 976

0

-0.3

-0.4

-0.1

-0.5

0.3

-0.2

0.5

-0.6

0.2

0.1

Sweden

Cyprus

Greece (10.9% gap)

Italy

Malta

Portugal

United Kingdom

Spain

Ireland

NorwayFrance

Romania

Latvia

Poland

Finland

GermanyBelgium

Slovakia

Denmark

Austria

Slovenia

Switzerland

Luxembourg

Hungary

Netherlands

Czech Republic

Croatia

Bulgaria

Lithuania

Estonia

Structural reform imperativeInverse average country score for competitiveness and growth drivers (European average=0)

Lowerneed

Higherneed

Investment and job creation imperativeOutput gap (inverse) as % of GDP1

Greece has the largest output gap among EU-30 countries confirming the imperative need for investment boost and job creation

SOURCE: European Commission; McKinsey Global Institute

Higherneed

Lower need

UK & Ireland

Baltic Southern

Central & Eastern Nordic

Continental

1 Positive values indicate an economy running below potential

Structural reform need vs. output gap in EU-30


Agenda

Economic context

Consumption

Investments

Exports



Austria8.3

Netherlands 9.09.4

Luxembourg

Ireland 11.3

8.2

Denmark

UK

Belgium17.6

Slovakia

12.0

Poland

18.2

12.3

Italy

Finland13.2

Portugal

Sweden

Czech Rep. 15.1

Hungary

12.4France

GreeceSlovenia 23.3

12.2

14.1

16.2

Spain20.6

21.922.4

30.6

Malta

Estonia

Germany

Lithuania

23.6

Romania

Cyprus25.8

Croatia28.0

27.7

24.324.8

26.2

23.3

Bulgaria

Latvia

Shadow Economy% of GDP

SOURCE: Schneider F. (2015), Size and Development of the Shadow Economy of 31 European and 5 other OECD Countries from 2003 to 2015

Among WEU Greece remains a champion in shadow economy with tax evasion estimated to ~€10-15b of annual state revenues

While shadow economy in

Greece is estimated at

~22%, tax evasion is

estimated at ~6-9% of GDP

(~€10-15b)

ESTIMATES

16McKinsey & CompanySOURCE: European Commission

Greece has ‘lost’ potential VAT revenues of ~€32b or 18% of GDP in 2010-14VAT Gap benchmarking 2014% of expected VAT revenues

1

4

7

9

9

10

12

14

20

24

28

28

35

37

38

Luxemburg

Sweden

Finland

Spain

Ireland

Bulgaria

Greece

Malta

Romania

Italy

Lithuania

Poland

Germany

Portugal

France

Wor

st 3

Bes

t 3

VAT Gap Greece evolution% of expected VAT revenues

8.5 8.5 6.1 6.1 6.3 6.3 4.9 4.9

xxxx VAT Gap, EUR b

6.4 6.4

Gre

ece’

s pe

er c

ount

ries

28

3431

36

29

13 20142010 1211

ESTIMATES


VS3

VS2

VS1Higher

Lower

Lower Higher

Likely amount of tax evasion

Probability of tax evasion/fraud

PC3

PC2

PC1Higher

Lower

Lower Higher

Willing-ness to pay

Ability to pay

Higher

Lower

Value at stake

Lower Higher

Probability of collection/ rehabilitation

▪ Combining VS1, VS2 with PC1, PC2, PC3

▪ Segment-specific strategies developed with clear implications to the collection strategy

▪ Centralized collections

▪ Limited direct collector involvement (seek to automate)

▪ De-prioritise

▪ Primarily centralized collections

▪ Moderate intensity direct collection and potential escalation to regional collectors

▪ Cross functional teams

▪ Intense collections efforts (e.g., fast track to legal)

Application of proven Advanced Analytics know-how

▪ 25–30 indicators, e.g.,– Own/family assets– Transaction patterns– Past and current tax

reporting– Profession– Residence

▪ Applied only to VS1 and VS2 cases which are most relevant

▪ ‘Ability to pay’ assessed through analysis of tax payers financials/assets

▪ ‘Willingness to pay’ assessed based on analysis of past behavior and direct contact with tax payer

Determine value at stake Determine probability of collection/rehabilitation Segment and prioritize cases

II IIII

SOURCE: McKinsey analysis

SIMPLIFIED

18McKinsey & CompanySOURCE: ECB; F. Schneider, “Size and Development of the Shadow Economy of 31 European and 5 other OECD Countries from 2003 to 2015” (2015)

1 Friedrich Schneider

Direct link between tax evasion and cash based transactions

0.5

3.0

2.5

0

2.0

1.0

0312826222120 302724 2923 25

1.5

1413 1916151211109 1817

2015 payment cards per capitaUnits

2015 shadow economy% of GDP

Cyprus

Poland

Malta

Italy Latvia

Greece

Slovenia

UK

Sweden

Slovakia

Spain

Portugal

Romania

Netherlands

LithuaniaIreland

Hungary

France

Estonia

CroatiaBelgium

Bulgaria

GermanyDenmark Finland

Austria

Czech Rep.

EU average:18.3%

EU Average: 1.5

Research has shown

that increasing electronic

payments by ~10% p.a. for at

least 4 years in a row can shrink

the shadow economy by

up to ~5%

Payment cards penetration vs. shadow economy


144

88787475

+64%

20152011 201420132012

9.2

2012

+61%

2014

4.4

2015

5.7

20132011

4.54.0

SOURCE: ECB payments statistics 2015

# of payments made through cardsMillions of transactions

# of e-money payment transactions1

Millions of transactions

1 A transaction whereby a holder of e-money transfers e-money value from his/her own balance to the balance of the beneficiary, either with a card on which e-money can be stored directly or with e-money accounts.

Despite the major uplift in plastic money transactions resulting from the 2015 capital controls…

Lift of capital controls not expected to

reverse payment trends. However, the penetration of POS in retailers/

freelancers and its evolution is a key factor for Greeks’

payments practices

20McKinsey & CompanySOURCE: ECB payments statistics 2015

Number of Card payments1 per capita yearNumber of transactions per capita

…Greece remains very low relative to other European countries…

8

11

13

37

44

45

52

64

87

133

154

224

290

300Denmark

UK

Sweden

Portugal

France

Euro area

Italy

Greece post capitalcontrols (2014)

Cyprus

Hungary

Bulgaria

Greece post capitalcontrols (2015)

Germany

Spain

1 Payment transactions performed using cards with a debit, credit or delayed debit function at a terminal or via other channels


Agenda

Consumption

Investments

Exports

Economic context



Over the next 8-10 years Greece has an annual GVA upside >€50b(~€55b GDP) and >640 thousand new jobs

Tourism

TBD

>51.5

8.0

1.5

R&D & innovation

Other (e.g., Industry& manufacturing, basic materials)

Retail

Upside quantified

Crops Agriculture 4.5

Rising stars 6.5

Food processing

Energy

2.0

9.0

20.0

122

122

140

225

-10

>640

TBD

51

-7

SOURCE: McKinsey “Greece 10 Years Ahead” & “Growth Roadmap”

Incremental GVAEUR billion

Incremental EmploymentThousand jobs

1 Including energy efficiency measures, economy-wide 2 Rising Stars: Aquaculture, Medical Tourism, Generics Pharma., Cargo Hub, Long term & Elderly Care, Waste Mgmt, Classical Greece, Specialty Foods

ESTIMATE


~€150b of total additional

investments needed in

the next 8 years

Capturing the upside would require an additional (vs. the 2013-2014 all-time low) annual investment of ~€19b

SOURCE: AMECO; McKinsey analysis

Average annual investmentsEUR billion, 2010 prices

Average annual incremental investments by sector EUR billion above the 2014-2015 all-time low, 2010 prices

1.7

1.8

11.0

Tourism

By sector where the investment occurs

Energy

2.8

0.91.1

Other

Retail

0.6

By sectorgenerating the demand

FoodManufacturing

Rising Stars

0.9Agriculture

~19 ~19

4.4

1.8

1.6

7.1

0.71.52121

24

53

45

20122000-04

2004-08

~40

2014 Target2015


Net new private investment capacity

Multiplying effect of Structural Funds

Multiplying effect from privatizations

Privatization receipts

Structural Funds (GR)

Structural Funds (EU)

Total 2016-23 incremental investment needs

Private investments

2016-23 incremental investment needs above 2014-15 (all time low)EUR billion

Incremental investments to come ~25% from public and ~75% from private funds, beyond Privatizations and Structural Funds

SOURCE: Eurostat; IMF; McKinsey analysis

~150

~30-35

~5 ~110-115~5-10

~8-15~7-10 ~75-95

ESTIMATES


40% of a sizeable sample of major companies are in need of imminent corporate restructuring; ~460 Groups and ~1,400 companies

692

1,153

461

Groups identified in need for imminent restructuring (financial and /or operational)

‘Healthy’1 (641) or in progressed liquidation2 (51)

Total sample of Groups analyzed (>€20m turnover and >€10m exposure)

19.9

36.2

2.2

14.7

17.7

21.5Total exposureEUR billion

NPE exposureEUR billion1 <20 % NPE or <50% NPE and Debt/EBITDA <4.52 Groups with at least 1 company (consisting of >20% of Group exposure) under bankruptcy, denounced & >2 years dpd in at least one bank

~€15-20b in GVA, ~1,400 companies and ~85,000-110,000 employees


Analysis of Greek corporates with >€20m turnover and >€10m exposureNumber of Groups

ESTIMATES


Significant impediments identified for restructuring Corporates across 3 dimensions; new legislation under way addressing some

Tax & Accounting

▪ Tax and accounting disincentives for creditors and debtors pose constrains in the restructuring process:

– Very high real estate taxes negatively affecting the liquidity of the real estate market and made foreclosures more difficult and less attractive for creditors; creditors also approach repossessions with caution due to the high liability they will inherit from past and future real estate taxes

– There could be significant tax impact for debtors, as the benefit from write-offs / write-downs is considered taxable income, creating disincentives or unnecessary burden

Market

▪ Lack of a formalized coordination mechanism between the various creditors (incl., bank, state, commercial / suppliers) prolongs and sometimes blocks the restructuring process due to the absence of a uniform approach / process and a coordinated decision making process and due to the gaps in capabilities with regards to sophisticated restructuring

Legal & Regulatory

▪ Based on the current context, significant legal and regulatory impediments hinder the effective and fast restructuring of large corporates. Some of the most important ones include: – Limitations in the empowerment of creditors’ rights (e.g., shareholders’ consent required for debt-to-

equity swap, limited ability to effect restructuring plan / change in management) create bottlenecks in the process and disincentives for cooperation of involved parties

– Potential liability of banks’ personnel for proposing, assessing or approving restructuring solutions (e.g., new financing in distressed company) penalize business judgement and make liquidation a “safer” option

– Potential liability of interim management appointed by creditors or new shareholders (under debt-to-equity swaps) for past liabilities of the company, limit the attractiveness of the position

– Constraints / omissions in the regulatory framework for servicing and selling NPLs result in disincentives for potential private players that could play an active role in large corporate restructuring

– Limited incentives for out-of-court settlements (e.g., time to allow restructuring) do not allow for negotiations / time for alignment between various stakeholders and drive many companies to liquidation


NOT EXHAUSTIVE

Addressed by upcoming legislationIn progressImpediments for restructuring Corporates in Greece


Agenda

Consumption

Investments

Exports

Economic context


30McKinsey & CompanySOURCE : Bank of Greece; PanHellenic Exporters Association; McKinsey analysis

Trade balance evolution 2008-15EUR billion

The improvement in trade balance between 2008-2015 was driven ~90% by drop in imports and especially by industrial products

Trade balance of goods 2008

1.4

Delta exports fuel

3.4-44.4

Delta exports other goods

0.9

Delta exports ships

-17.2

-41.5

Trade balance of goods 2015

16.4

Delta imports other goods

5.6

Delta imports fuel

2.3

Delta imports ships

Increase of exports:11% of improvement in balance

Drop in imports:89% of improvement in balance

Import drop excl. fuel was mainly driven by industrial products and esp. machinery & transport equipment

ESTIMATES


Strong growth on arrivals but receipts still far away from the €19-20b target due to declining per visit / arrival yield

SOURCE: Bank of Greece; UNWTO

Number of arrivals, incl. cruisesMillions

Receipts, incl. cruisesEUR billion

Spend per visit,incl. cruisesEUR

3.6 3.5 3.1 3.1 2.8 3.3 3.5European market share1

Percent

1 Based on international tourism receiptsNote: Data includes cruises

13.4 14.10.40.4

12.210.40.4 0.410.510.4 9.611.6

Cruises

2.516.414.9 1.415.0

20.1 2.224.3

2.215.9 16.9-6.4% p.a. 26.1

+9.8% p.a.

541552604616639640697730

-4.5% p.a. -4.1% p.a.

3.5

2008 2009 2010 2011 2012 2013 2014 2015

Key metrics for tourism in Greece


Overview of the “Greek Foods Company”Objectives Description of major activities

▪ Define the network of primary production/processing units per category▪ Pool the production of primary units (primarily small & medium) and

establish/negotiate the terms of cooperation with them▪ Undertake productivity and know-how support programs for primary units

Secure high quality sourcing at scale

▪ Plan and coordinate trade marketing and promotion initiatives▪ Set-up and operate a limited retail store network (“Greek Corners”) in

selected high traffic locations (starting with priority 1 markets only)▪ Provide input and contribute to the “Greek Diet” international campaign

Pursue focused commercial initiatives

▪ Design the logistics and product flows network▪ Manage the domestic logistics chain including distribution and storage▪ Execute exports (or facilitate in case of direct exports) to priority markets

Effectively manage logistics

▪ Define the suitable market coverage model per country (and category)▪ Define wholesaler and retailer network candidates per country and

understand consumer preferences via extensive market analysis and research▪ Establish and manage wholesale and retailer networks per country/region

Establish strong international access

▪ “Greek Foods Company” scope covering both agriculture & processed priority categories▪ Private sector ownership or PPP with majority private sector participation▪ Greek primary production/processing companies and cooperatives taking a stake

SOURCE: McKinsey “Greece 10 Years Ahead”

NOT EXHAUSTIVE


1 Domestic consumption of oranges, peaches, nectarines, grapes, cotton, apples, potatoes and kiwis2 Share of Greece in total imports of oranges, peaches, nectarines, grapes, cotton, apples, potatoes and kiwis

SOURCE: UN Comtrade; FAO; EL.STAT.; McKinsey analysis

Priority 1▪ Germany &

Austria▪ Balkans (e.g.,

Romania, Bulgaria)

▪ UK▪ Scandinavia▪ Netherlands▪ North America

Priority 2▪ France &

Belgium▪ Italy▪ Turkey▪ Russia▪ Australia

Greece should focus efforts in primary markets to increaseshare and try to further penetrate high growth markets

Focus/target markets

Primary markets Secondary markets

ESTIMATES

4.0

3.0

4.5

2.5

1.5

0.5

3.5

0.010

10.10 10010

1.0

2.0

Turkey

Scandinavia& Netherlands

China & Japan

Germany & Austria

Russia

France & BelgiumUK

Greek Diaspora & tourist arrivalsMillions

IberiaAustralia

Share of Greece in total imports of selected foods2

Percent

Italy

N. America

Balkans

Prioritization matrix for food exports


Agenda

Consumption

Investments

Exports

Economic context



A handful of actions to stimulate the economy in the next 18-24 months


ActionsObjectives

Consumption Stop eroding incomes and rejuvenate consumption

Inject liquidity reducing state arrears

▪ Prioritize arrears payments based on market impact; offset tax payables with tax receivables

1

Seriously tackle tax evasion across segments

▪ Apply proven Advanced Analytics know how; aggressively boost non-cash transactions

2

Execute tax reform in line with the anti-tax-evasion impact

▪ Gradually reduce personal, corporate and VAT tax rates to pre-crisis levels

3

Cautiously rejuvenate lending to corporates and households

▪ ‘Cherry-pick’ new risks and pursue sector-wide project to address ‘strategic defaulters’

4

ExportsCapture low hanging fruit (i.e., tourism, foods)

Start recovering tourism affluence mix (spent per visit)

▪ Materially invest in campaigns focused on high value target markets (e.g., N. America, Middle East, China)

8

Capture readily available food export opportunities

▪ Launch a “Greek Foods Company” (incl. consolidating existing platforms) and focus on identified target markets

9

InvestmentsGet serious with corporate restructuring and new projects

Remove barriers and accelerate corporate restructurings

▪ Complete necessary adjustments and execute new restructuring legislation; push operational turnarounds

5

Direct funds to identified high GVA projects

▪ Mobilize EU funds and attract equity/debt from private funds towards value-generating sectors & large projects

6

Free up barriers to investments in high priority sectors

▪ Effectively re-launch the ‘one-stop shop’ for barrier removal backed by legislation

7


Documents

Isn’t that Enough? What Comes After Austerity?forums.capitallink.com/greece/2016/pres/panagiotou.pdf · 13/12/2016 · CONFIDENTIAL AND PROPRIETARY Any use of this material without