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Practical directionsfor fuelling economicgrowth in GreeceA PwC Greece point of view31 October 2013

From publicconsumptionto privateinvestmentinvestment

A PwC Greece point of view

Agenda

1. The context

2. Rebuilding trust

3. A simple strategy for long term growth

4. Changing the architecture of the State

5. The impact

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1. The context

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Grexit - the Perfect Storm

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223 233 231 222209

194 183

8,3% 7,7% 9,4%12,5%

17,5%

24,2%27,0%

10

15

20

25

30

100

150

200

250

300

GDP & Unemployment Rate

Grexit avoided - but conditions remain tough

Unemployment %

GDP,Current

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8,3% 7,7% 9,4%

7,0% 4,5%

-0,9% -3,9% -6,1% -7,1%-5,5%

-30

-25

-20

-15

-10

-5

0

5

10

-250

-200

-150

-100

-50

0

50

100

2007 2008 2009 2010 2011 2012A 2013F

%

€B

illio

n

5Source: EΛΣΤΑΤ, International Monetary Fund (WEO April 2013)

GDP Δ %

CurrentPricesy-o-y change

Longest recession in modern history

60

80

100

120

140 1930’s Great Depression vs Greek Recession in 2008

US GDP

Greek GDP


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Source: ELSTAT

0

20

40

1 2 3 4 5 6 7 8 9 10 11 12 13

Years since start of contraction

For Greece 2008=100

For US is 1929=100

359%250%

300%

350%

400%

450%

20

12T

ota

lD

eb

t%

GD

PGreece is not over indebted!

1.016%

240%227%

899%

443%


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117%84%

124%90%

157%

82%

127%103%

116%

137%

51%

111%

61%

60%

0%

50%

100%

150%

200%

250%

Ireland Cyprus Portugal France Greece Germany Italy USA

20

12T

ota

lD

eb

t%

GD

P

7

Source: IMF (JEDH, Fiscal Monitor)

227%208%

188%

Private Debt

Public Debt

193%

163%


-5,1-6,2

-4,2-5

0

5

10

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012A2013E2014E2015E

Is there light at end of tunnel?

PrimaryGovernmentdeficit/surplus

Generalgovernmentspending

?

PwC

-5,1-6,5 -7,6

-9,9

-13,8

-10,9-12,6

-15,2

-23,1

-36,0

-23,9

-19,7

-12,5

-8,4-6,2

-4,2

-40

-35

-30

-25

-20

-15

-10

€b

n

8Source: International Monetary Fund (WEO April 2013)

spendingincluding netinterest

16%

7%

4%

18%

60%

70%

80%

90%

100%

Co

mp

os

itio

no

fS

tate

De

bt

%State debt burden is not as heavy as it looks

OtherT-bills

PSI

Total Government DebtPost PSI €340bn

~ €167,4bn value of Debt at 5%discount factor


PwC

13%

34%

8%

0%

10%

20%

30%

40%

50%

60%

2012

Co

mp

os

itio

no

fS

tate

De

bt

%

9

ECB

EFSF

IMF

Bilateral Loans

Source: GS Global ECS Research

>71% held by officialsector

20%

25%

30%

35%

But, even after PSI and “Whatever it takes”, the marketsdo not trust Greece

PSI

WHATEVER IT TAKES”

MARIO DRAGHI

“WHATEVER IT TAKES”

10y

rG

ov

er

nm

en

tB

on

ds

Yie

ld


PwC

0%

5%

10%

15%

20%

Jan12

Feb21

Mar12

Apr12

May12

Jun12

Jul12

Aug12

Sep12

Oct12

Nov12

Dec12

Jan13

Feb13

Mar13

Apr13

May13

Jun13

Jul13

Aug13

Sep13

Greece 10,2%

Portugal 7,1%

Ireland, Spain, Italy 4,0% to 4,5%

10

10y

rG

ov

er

nm

en

tB

on

ds

Yie

ld

Trust gap

The trust premium paid by the private sector


5

6

7

8

9

10

%BOND YIELDS

ELPE

TITAN

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-

1

2

3

4

5

01/3

1/1

3

02/0

7/1

3

02/1

4/1

3

02/2

1/1

3

02/2

8/1

3

03/0

7/1

3

03/1

4/1

3

03/2

1/1

3

03/2

8/1

3

04/0

4/1

3

04/1

1/1

3

04/1

8/1

3

04/2

5/1

3

05/0

2/1

3

05/0

9/1

3

05/1

6/1

3

05/2

3/1

3

05/3

0/1

3

06/0

6/1

3

06/1

3/1

3

06/2

0/1

3

06/2

7/1

3

07/0

4/1

3

07/1

1/1

3

07/1

8/1

3

07/2

5/1

3

08/0

1/1

3

08/0

8/1

3

08/1

5/1

3

08/2

2/1

3

08/2

9/1

3

09/0

5/1

3

09/1

2/1

3

09/1

9/1

3

09/2

6/1

3

10/0

3/1

3

10/1

0/1

3

10/1

7/1

3

10/2

4/1

3

10/3

1/1

3

%

COCA-COLA HBC

OTE

Investment is the driving force, inhibited by lack of trust


10%

15%

20%

25%

30%

Investment of%GDP - Greece

Investmentof %GDP –EU average

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Source: ΕΛΣΤΑΤ, IMF

-10%

-5%

0%

5%

10%

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

%GDP - Greece

GDP %change

2. The Challenge

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Rebuild Trust, Mobilise Capital

Investment is dependent on trust bythe markets

Rebuilding trust requires significantinstitutional reforms now

GDP

growth

Production

increase

Capital


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Capitalapplication

Capital mobilisation

Trust

Trust and confidence in Greece will be growing consistently, only if we reforminstitutions to provide long term incentives to:

- investors for putting their money into the country

- business people to keep expanding their business

- civil servants to have their work driven by outcomes

Reforms are key to gaining the trust of the marketsagain

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- civil servants to have their work driven by outcomes

- citizens to stay within the spirit of the law

- politicians to think and act to the benefit of the nation

Having a complete agenda and moving along in a clear, systematic andinternally consistent manner should give a huge initial push and will beinstrumental in building again our growth momentum

15

3. A simple strategy for long termgrowth

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Capital is attracted only by the country’s comparativeadvantages


Trade passage between the East and Europe (goods, energy) Global tourist destination

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Energy Pipelines

Shipping Trade Routesfrom/to East

tourism

60%

70%

80%

90%

100%

Ex

po

rto

rie

nta

tio

n(%

of

ex

po

rts

)Mobilise capital into sectors with export potential andscale

0,3%0,4%

Tourism attracts investment of0,4% of GDP

Manufacturingattracts

Shipping attractsinvestment of 0,3% of

GDP


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0%

10%

20%

30%

40%

50%

0% 5% 10% 15% 20% 25%

Ex

po

rto

rie

nta

tio

n(%

of

ex

po

rts

)

Size of sector as % of GDP

18

Sources: ΕΛΣΤΑΤ, BCG research, World Travel and Tourism Council

0,2%0,5%

Constructionattracts investment

of 0,2% of GDP

Energy attractsinvestment of2,3% of GDP

attractsinvestment of3,0% of GDP

Services attractinvestments of 0,5%

of GDP

For capital to have a swift impact on the economy, itneeds to be focused on large projects in sectors ofeconomic importance

StrategicAreas tourism

internationaltrade

energyenergy

interconnections

large

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large tourismprojects

InvestmentFocus

largeinfrastructure

projects

transportation& logistics

manufacturingconstructionSectors

Stimulatedserviceshospitality

Infrastructure through PPP can mobilise about €17bn

Tourist ProductUpgrading

• Key marinas• Mega yacht marina in

Lavrio• Regional airports

Upgrading of island

EnergyInterconnections

• Electricityinterconnection ofAegean islands, Rhodesand Crete

• Investment in

Transit Transport

• Transshipmentfacilities in the Piraeusand Thessaloniki ports

• Through roads(Egnatia)


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• Upgrading of islandports

• Kastelli airport

• Investment intechnology insensitiveRES (geothermal/off-shore wind parks) tosupport inter-connections

• Gas pipeline inter-connections to Turkey,Italy and the Balkans

• Gas storage facilities inthe North

(Egnatia)• Connecting roads to

Bulgaria, FYROM,Albania

• Motorways

€3bn

€12bn

€2bn

Action

• Market Greece as 5+ stardestination and experience

• Streamline permit process

• Facilitate scale in hotel

Tourism needs scale, new products and new markets, andit can mobilise around €20bn of investment up to 2025

Benefit

• Capture more value

• Large integrated resorts

• New destinations

• Higher price


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• Facilitate scale in hotelmanagement and marketing

• Release hotels from bankbalance sheets and separate realestate from hospitality servicesthrough hotel REITS

• Develop second home market

21

• Higher price

• Longer stays

• Business clarity

• Scale enhancement

• Permanent stays

• Construction driver

Concessionary funding properly managed willfacilitate capital mobilization

Concentrate concessionary funding (new ΕΣΠΑ approx. €15bn) to areas which yield non Greek income with large economic multipliers

Make concessionary capital available in the form of co- funding withfinancial institutions and investors


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financial institutions and investors

Rather than grants, concessionary funds as loans will help to re-circulate capital in the economy upon repayment

Outsource concessionary funding administration

Currently, approximately €35bn corporate NPLswith another €10bn+ expected in the near future,keep the underlying assets out of market

Active management of NPLs would mobilizeincremental cash capital to the tune of 20% of thewrite off value for the business

Active management of corporate NPLs could attract€7bn of new cash capital

Liberate Corporatezombie assets• Housing• Hotels/resorts


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Losses incurred by banks from NPLs should begiven full or partial tax credit, consistent withBasel III, which will soften the effect onregulatory capital

23

• Hotels/resorts• Physical

production assets

Infrastructure and tourism investments with theirmultipliers feed growth into other sectors of theeconomy

Infrastructure investments have a significant economic multiplier of ~2xand spread economic demand to adjacent sectors like cement and steel andthe whole country. Investments add permanent output and employment

Tourism has an economic multiplier of ~2x, linked mainly to food supplychain subsectors, but also transport and construction. Investments addpermanent output and employment


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permanent output and employment

Concessionary funds facilitate large scale investments and fill in thelending gap left by the Greek banking system

Bank assets released provide a capital attraction and much needed liquidity,mainly to the real estate sector

Economic benefits flowing to other sectors and across Greece, will lead tohigher consumption, stimulating the retail sector

Subsectors with export orientation, will be boosted with this opening ofthe economy

4. Changing the architecture of theState

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Rebuilding trust is key to attracting investment

State clearly the new objective

Get the institutional debris out of the way

Clarity of vision anda purpose

Remove constraintsto business andoffer incentives


PwC

Kill institutional volatility (120-150 new laws p.a.)

Reform/upgrade the state apparatus

Improveinstitutionalstability

26

Increase speed ofresponse and theefficiency of thestate

Changing architecture of the public sector is anecessary condition for capital to be systematicallyattracted to Greece The State must withdraw as market participant and develop its role as market regulator

and facilitator

Allow markets to decide on resource allocation, by removing obstacles and installing

proper regulation

The State apparatus must become smaller and swifter

Public


PwC 27

Publicsector

Trading publicsector

Non tradingpublic sector

Less laws

Robust taxregime

Lawenforcement

Bettermanagement

Privatisations

PPPs

Trusts/Foundations

Speedyjudiciary

Law codification, relevance, enforcement and speed

Stable tax system and selective tax incentives

Better management of the non trading public sector with private sectorinvolvement

Privatisation or ring fencing of public trading assets

Four pillars are critical in supporting the newarchitecture


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Privatisation or ring fencing of public trading assets

28

Less constraintsand more incentives

for business

Institutionalstability

Speed andefficiency of State

apparatus

Law codification, relevance, enforcement and speed to get the frame of referenceright for business:

Establishment of limits in the number of new laws or amendments toexisting laws (for example, ministers can introduce 1 law/amendment per yearper Ministry)

Laws not to be amended/altered within the first 3 years from effectingthem. This could be a constitutional provision

Change in bankruptcy law to facilitate resolution of zombie companies and

Most of the reforms have been on the table for years,but some will change totally the way “business” is done


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Change in bankruptcy law to facilitate resolution of zombie companies andthe release of the assets back in the economy

Stable tax system with selective tax relieves to facilitate capital attraction and landdevelopment:

Abolition of all taxes that apply on capital raising, e.g. the 1% capitalduty, (we are one of the very few EU countries still having this tax) or the 2,4%stamp duty on loans (a big headache for MNCs trying to fund their localsubsidiaries)

Conclusion of bilateral tax agreements with key rising counterparties(e.g. China, India, Gulf Countries), which will make Greece a favourabletrading partner and a country of choice for inward investment

Significant reduction of real estate transfer taxes and abolition of annualproperty taxes on real-estate development investments

Better non trading public sector management to improve responsiveness:

Secondment of mid to high level managers from the private sectorand second senior civil servants into the private sector

Add an output linked element to the remuneration of civil servants

Introduce accruals accounting to all services

Integrate all IT systems which cover the totality of the non trading

Most of the reforms have been on the table for years,but some will improve the way “business is done(continued)


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Integrate all IT systems which cover the totality of the non tradingpublic sector

Privatise or ring fence public trading assets to add value to the servicesoffered and contain meaningless spending

Public hospitals, universities, school clusters, cultural organisations,museums can all be turned into trusts/foundations, and managedwithin a given, for each case, policy framework

The trust/foundations may be directly funded by the State or whennecessary the State will subsidise the demand for their services so thatthe choice remains with the people

Output and prices to be regulated by the relevant Ministry or aRegulator

5. The impact

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20%

25%

30%

The full application of this strategy could mobiliseca €45bn of investment in the period to 2025 witha positive impact on GDP and unemployment

Official Unemployment % estimate

Target Unemployment %

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-10%

-5%

0%

5%

10%

15%

2013F 2014F 2015F 2016F 2017F 2018F

Source: EΛΣΤΑΤ, Bank of Greece, International Monetary Fund, Ministry of Finance

Target Unemployment %

Official GDP Δ% estimate

Target GDP Δ%

Trust building

Concentration of capital resources on infrastructure and tourism

Scale in tourism

Concessionary funds as loans

The game changers


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Concessionary funds as loans

De-trapping assets from the banks

Better public sector management

33

Thus a new virtuous circle will start

Debt Containment to

Development

Publicly funded consumption to


We have to shift the political agenda from…

PwC 34

Publicly funded consumption to

privately funded investment

A slow, investment inhibiting and medling publicsector to

a relevant and business facilitating State

“Οι καιροί ού μενετοί της ημετέρας

βραδύτητος”

Θουκυδίδης

Final thoughts


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“The Long March starts with a first step”

Mao Jedong

Thank you

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Practical Directions for fuelling economic growth … · Practical directions for fuelling economic growth in ... Trade passage between the East ... Practical Directions for fuelling