Investment a vital, but rare, ingredient

While in New York for the United Nations General Assembly last week, Prime Minister Alexis Tsipras appeared bullish about Greece’s prospects. Speaking to Reuters, he suggested that the economy could grow by 0.2 to 0.4 percent of gross domestic product this year even though the official forecasts are for a contraction of 0.3 percent. Tsipras went on to claim that Greece could even beat next year’s ambitious growth target of 2.7 percent of GDP as well.

Speaking to The Wall Street Journal, Tsipras also set out a roadmap that he believes could lead to speedy recovery. This begins with the imminent completion of the bailout milestones that would trigger the release of the next sub-tranche, worth 2.8 billion euros, followed by the wrapping up of the second program review by the end of October, the detailing of debt relief measures before the end of the year and the subsequent inclusion of Greek bonds in the European Central Bank’s quantitative easing program.

“Participation in the QE will be the key to attract investors,” Tsipras told the WSJ. “Everybody will understand that Grexit has passed, that the crisis is over.”

It is vital for any Greek prime minister to set out a positive narrative because convincing people things are turning around is half the battle. One of his predecessors, Antonis Samaras, realized this early on in his premiership and insisted on painting a pleasant picture about Greece’s prospects when appearing on the international stage. This drew much criticism at home, where many shot down his “success story” as fantasy, but it worked relatively well for Samaras with foreign investors. He was even able to return to the bond markets in April 2014 with a 3-billion-euro issue, 90 percent of which went to long-term investors outside the country, albeit with a relatively high coupon of 4.75 percent.

Maybe Tsipras learned the importance of knowing how to speak to an international audience following his appearance in New York last year, when he had an opportunity to pitch Greece to the watching world in an interview with former US President Bill Clinton but fluffed his lines.

However, apart from the delivery, the content of the message also needs to be finely calibrated. There is a thin line between being optimistic and unrealistic.

For example, Tsipras’s assertion that the Greek economy could grow slightly this year, even though Q2 GDP was only up 0.2 percent on a quarterly basis and down 0.9 percent year-on-year, seems extremely optimistic. In a note following the prime minister’s interview, Citigroup suggested that the premier’s projections seemed far-fetched given that to achieve 0.2 percent growth this year, GDP would have to increase by 0.8 percent year-on-year in the last two quarters of 2016.

In both interviews, Tsipras stressed how a positive conclusion to debt relief talks and Greece being accepted into the ECB’s QE program would be catalysts for a recovery as they would restore investor confidence in the country. Of course, attracting foreign investment means more than just tempting hedge funds to buy your bonds with attractive interest rates. For a genuine recovery in Greece, there will have to be investment in the real economy. This presents a much more complex challenge than getting the eurozone to agree to debt relief and the ECB to start buying Greek bonds. Tsipras is correct in saying that the threat of Grexit has to be truly lifted for investors to look at Greece with some long-term confidence, but this has to be accompanied by structural reforms, political stability, a welcoming tax system and an all-round business-friendly environment. These elements are not within Greece’s grasp at the moment.

The importance of investment in driving Greek growth is highlighted by the fact the European Commission projects an 11.6 percent increase in gross fixed capital formation next year, when it sees the country’s economy growing by 2.7 percent overall.

The Organization for Economic Cooperation and Development (OECD) believes growth next year will not be as dramatic. It forecasts that GDP will increase by 1.9 percent but even to achieve this there will have to be a rise of 5.7 percent in investment.

To provide some perspective on the kind of turnaround that will be needed in 2017, it is worth considering Greece’s recent investment track record. Gross fixed capital formation peaked in 2007 when it reached 63.1 billion euros and equalled 27 percent of GDP. By 2014, it had fallen to 21.7 billion euros or just 12 percent of GDP.

In the absence of a confidence fairy to work her magic and turn this dire situation around, Greece will likely need more than just a breakthrough on debt relief and QE to attract the kind of investment that could drive a genuine recovery. It would most probably require a step-change in the way that the country approaches and treats investors. Achieving this will be a mighty challenge for Tsipras.

The size of his task was underlined by the way some SYRIZA ministers agonized over ratifying the concession agreement for the former Athens airport at Elliniko in Parliament last week. Although the deal has some detractors, the Foundation for Economic and Industrial Research (IOBE) suggested in a recent study that redevelopment of the site could bring in billions each year and by 2041 it could drive Greek GDP higher by 7.4 billion euros, or 2.4 percent, compared to a scenario under which no such investment takes place.

If Greece can attract more investment with this kind of impact Tsipras will have every right to feel bullish. Without this sort of stimulus though, there will be little to get excited about.