The strong improvement of Greece’s public finances is highlighted by the stability program, which stipulates a significant further reduction of its debt, the credit rating agency reports Fitch in his report.

“The programme’s projections, even if some of them turn out to be optimistic, reinforce our view that the debt-to-GDP ratio will continue to decline in the medium term,” he notes.

The stability programwhich was submitted to the European Commission in April, forecasts real GDP growth this year at a rate of 2.3%, which is lower than last year’s 5.9% but stronger than the 0.8% rate Fitch forecasts for the Eurozone in 2023.

It also forecasts a primary surplus of 1.1% of GDP this year and a deficit in the overall budget balance, which includes interest on public debt service, at 1.8% of GDP against a primary surplus of 0.1% of GDP and a deficit of 2 .3% in 2022, respectively.

Steady economic growth, boosted by investment and exports, will help sustain primary surpluses, which will reach 2.5 percent of GDP in 2026, according to the plan.

Fitch notes that the upgrade which upgraded Greece’s debt in January to BB+ with a stable outlook, one step below investment grade, reflected its expectation of better results and forecasts for deficit and debt in 2022-2024, thanks to stronger nominal GDP growth, the “under-execution” of the budget and the favorable structure of debt servicing.

It points out that the fiscal results for 2022 recorded in the stability program were even better than Fitch’s estimates, with the overall and primary balance exceeding its expectations recorded in the Sovereign Data Comparator in March by more than one percentage point.

Despite the better starting point, the stability program’s forecasts may turn out to be optimistic, the house notes, in part because the forecast for real GDP growth of 2.3% comes mainly from the expected increase in investment and the contribution of 1.8 percentage points in the projected 2023 growth.

Specifically, investment as a percentage of GDP is expected to increase to 15.3% this year from 13.7% last year, assuming the effective implementation of the Greek recovery and resilience plan.

For the elections

However, says Fitch, “the extended political cycle could delay payments from the Recovery and Resilience Fund”, negatively impacting growth.

Polls, he adds, give New Democracy a firm lead over SYRIZA for the May 21 elections, but show that no party will have an absolute majority, making second elections possible.

He also notes that the more constructive relations between Greek governments and international creditors have been underpinned by the more stable political framework, which has contributed to the upward dynamics of Greek debt. “Our baseline scenario is that national policies will remain broadly stable after the 2023 election,” Fitch says, but notes that elections inevitably mean some degree of uncertainty for fiscal policy.

Fitch reports that the stability program forecasts have been made on the assumption of no policy changes and do not include the fiscal measures announced by the government before the election of 0.1% of GDP for 2024 and 0.3% for 2025 and 2026.

More broadly, continued spending cuts may prove more difficult after temporary pandemic support measures are fully withdrawn and if revenue growth slows significantly, he notes.

“As in other countries, the fiscal benefit from high inflation boosting revenues will not last, which the stability program recognizes as it projects revenues to fall from 50.2% of GDP in 2022 to 47.1% in 2023 “, the report notes.

However, he adds, the stability program underlines the authorities’ broad commitment to fiscal prudence.

It also notes that any smaller-than-expected primary surpluses would not derail debt reduction.

Fitch expects the debt ratio to decline at a slower pace over the medium term, unlikely to fall to 135.2% of GDP in 2026 as projected.

“In our last assessment, we emphasized that confidence in a continued steady downward path of public debt to GDP over the medium term” is a key parameter of positive assessments, the report concludes.