Professional Documents
Culture Documents
(3.1*)
07
Strategic companies guarded by new law Private funds for ports Strategy set for tourism
Contents
Trends and prospects for the economy in 2008
Cover Story George Alogoskoufis Strong growth for 2008 Plutarchos Sakellaris Economic reform to enhance growth page Dimitris Maroulis Economy shows growth stamina as external sector lags Loukas K. Papazoglou Fiscal developments, reforms and privatizations take center stage Aris Spiliotopoulos Quality twist for tourism Giorgos Voulgarakis Greece strengthens its role in international shipping Spyros Capralos Greek capital market outlook Vassilis Theodorou A stock-picking year Panagiotis Drossos Foreign investment multiplies Kostas Axarloglou Economic openness and competitiveness Leonidas Korres PPP projects point to new deals on the investment map
(page 17) (page 18-19) (page 20) (page 21-23) (page 24-25) (page 26-27) (page 28-29) (page 30) (page 31) (page 32) (page 33)
Sectors
Greek Economy & Markets 07
A publication of the Agora Ideon forum.
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Greek Economy & Markets 07 is also distributed along with the International Herald Tribune (IHT) and Kathimerini English Edition newspapers in Greece, Cyprus and Albania. The content of the magazine does not involve the reporting or the editorial departments of the IHT.
Real Estate: Dika Agapitidou, George Papageorgiou, Dr Aristotelis Karytinos, Aris Vovos Finance: Gikas A. Hardouvelis, Dinos Kamaris Insurance: Petros Papanikolaou, Eric Kleijnen, Doukas Palaiologos Telecoms: Babis Mazarakis, George Tsaprounis, Ruggero Gramatica Securities: Alexandros Billis, Manos Hatzidakis, Konstantinos Vergos Themes: Dimitris I. Vidakis, Dr Panagiotis Avramidis International trade relations: Yanos Gramatidis, Harilaos Goritsas, Constantine N. Yannidis
November 07/November 06 November 07/November 06 October 07/October 06 October 07/October 06 September 07/September 06 Q3 2007 Q3 2007 2001 September 07/September 06
An impressive reduction in the unemployment rate has been observed in the third quarter of 2007, as it fell to 7.9 percent compared to 8.1 percent in the previous quarter. Furthermore, the gross domestic product increased by 3.8 percent on an annual basis in the third quarter of the year. However, building activity is still sluggish. In September building activity displayed an 8.6 percent drop compared to the same period in 2006. Greeces inflation rate in November picked up to 3.9 percent from 3.1 percent in the previous month.
In the last two years the Inter-Ministerial Public-Private Partnership committee has approved 24 projects with a total budget of billion euros which correspond to 140 new infrastructure sites spreading throughout the peripheral regions of the country. The projects come under the sectors of health, civilization, education, public sector accommodation, the environment and ports infrastructure. Pride of place regarding the number of public works undertaken is held by the education sector. More than 80 new schools have been approved for construction. The budget for the realization of these school complexes exceeds 340 million euros. The total accommodation investment program to be undertaken through PPPs will come to 1.14 billion euros and is expected to be implemented during the 2007-2011 period. Among the most important projects are four new hospitals. These are the new Oncological Hospital of Thessaloniki (330 million euros), the new General Hospital of Preveza (110 million euros), the Paediatric Hospital of Thessaloniki (325 million euros) and the Rehabilitation and Recovery Center of Northern Greece (103 million euros). Public-private partnerships will also help to solve the perpetual accommodation problems faced by almost all prefectural authorities in the country. A significant example is the remodeling of Domboli building complex in the city of Ioannina. Another sector where PPPs are crucial is that of ports growth. The installation of security systems has been approved for 12 Greek ports. It is one of the costliest public projects to have been approved by the committee, since its total budget exceeds 340 million euros.
3.1
Themes
PERIOD
DATE
Note: First column displays economic events and announcements. The second displays the period represented. The third shows the exact day of the event or the announcement.
10
Statistics subject/event
New Orders Index in Industry Commercial Transactions (provisional data) Turnover Index in Retail Trade Producer Price Index in Industry Regional Accounts Road Traffic Accidents April Number of Issued Motor Vehicle Circulation Licenses Informal Ecofin meeting in Slovenia Building Activity National Consumer Price Index Harmonized Index of Consumer Prices Industrial Production Index Commercial Transactions (estimates) Movement of Museums and Archaeological Sites Import Price Index in Industry Labour Force Survey (monthly data) Greek Merchant Fleet Input and Output Price Indices in Agricultural-Livestock Production Turnover Index in Industry New Orders Index in Industry Work Categories Price Indices and Construction Costs Indices for New Residential Buildings Material Costs Index for New Residential Buildings Commercial Transactions (provisional data) Producer Price Index in Industry Road Traffic Accidents Turnover Index in Retail Trade Traffic of Passengers, Goods and Vehicles by Merchant Ships in Greek Ports May Number of Issued Motor Vehicle Circulation Licenses Building Activity National Consumer Price Index Harmonized Index of Consumer Prices Industrial Production Index Commercial Transactions (estimates) Movement of Museums and Archaeological Sites Import Price Index in Industry Eurogroup-Ecofin Meetings in Brussels Labor Force Survey (monthly data) National Accounts (estimates) Greek Merchant Fleet Input and Output Price Indices in Agricultural-Livestock Production Material Costs Index for New Residential Buildings Turnover Index in Industry New Orders Index in Industry Commercial Transactions (provisional data) Producer Price Index in Industry Turnover Index in Retail Trade Road Traffic Accidents June Eurogroup-Ecofin Meetings in Luxembourg National Accounts (provisional data) Number of Issued Motor Vehicle Circulation Licenses Building Activity National Consumer Price Index Harmonized Index of Consumer Prices Industrial Production Index Commercial Transactions (estimates) Movement of Museums and Archaeological Sites Turnover Indices in Motor Trade and Wholesale Trade Import Price Index in Industry Labor Force Survey (monthly data) Production Index in Construction Turnover Indices in Post - Telecoms, Computer and Related Activities and other Business Activities Index of Employed in Retail Trade Turnover Index in Tourism Turnover Indices in Transports Labor Force Survey Input and Output Price Indices in Agricultural-Livestock Production Turnover Index in Industry
PERIOD
January 2008 January 2008 January 2008 February 2008 2004 - 2006 January 2008 March 2008 January 2008 March 2008 March 2008 February 2008 February 2008 December 2007 February 2008 January 2008 February 2008 February 2008 February 2008 February 2008 1st Quarter 2008 March 2008 February 2008 March 2008 February 2008 February 2008 3rd Quarter 2007 April 2008 February 2008 April 2008 April 2008 March 2008 March 2008 January 2008 March 2008 February 2008 1st Quarter 2008 March 2008 March 2008 April 2008 March 2008 March 2008 March 2008 April 2008 March 2008 March 2008 1st Quarter 2008 May 2008 March 2008 May 2008 May 2008 April 2008 April 2008 February 2008 1st Quarter 2008 April 2008 March 2008 1st Quarter 2008 1st Quarter 2008 1st Quarter 2008 1st Quarter 2008 1st Quarter 2008 1st Quarter 2008 April 2008 April 2008
DATE
21/03/08 27/03/08 28/03/08 28/03/08 31/03/08 31/03/08 04/04/08 04-05/04/08 08/04/08 08/04/08 08/04/08 09/04/08 09/04/08 10/04/08 11/04/08 14/04/08 17/04/08 18/04/08 18/04/08 18/04/08 22/04/08 22/04/08 24/04/08 30/04/08 30/04/08 30/04/08 30/04/08 05/05/08 08/05/08 08/05/08 08/05/08 09/05/08 09/05/08 12/05/08 13/05/08 13-14/05/08 14/05/08 15/05/08 16/05/08 16/05/08 20/05/08 20/05/08 20/05/08 26/05/08 29/05/08 30/05/08 30/05/08 02-03/06/08 03/06/08 05/06/08 06/06/08 09/06/08 09/06/08 09/06/08 09/06/08 10/06/08 11/06/08 12/06/08 12/06/08 13/06/08 13/06/08 17/06/08 18/06/08 18/06/08 19/06/08 19/06/08 19/06/08
Note: First column displays economic events and announcements. The second displays the period represented. The third shows the exact day of the event or the announcement.
Themes
Each month the National Statistics Service and the Ministry of Economy and Finance issue the latest data on the state of the countrys economy. Figures such as building activity, the import price and new order indices in industry, the national consumer price index as well as the turnover index in retail trade help analysts and services to make the right decisions and act on them accordingly. In October the draft budget will be submitted to the Greek Parliament followed by the state budget for 2009 in November. In the last month of the year (12/08) the Hellenic Stability and Growth Program 20082011 will be updated.
Statistics subject/event
New Orders Index in Industry Greek Merchant Fleet Material Costs Index for New Residential Buildings Commercial Transactions (provisional data) Producer Price Index in Industry Turnover Index in Retail Trade Road Traffic Accidents July Number of Issued Motor Vehicle Circulation Licenses National Consumer Price Index Harmonized Index of Consumer Prices Eurogroup-Ecofin meetings in Brussels Building Activity Movement of Museums and Archaeological Sites Industrial Production Index Commercial Transactions (estimates) Import Price Index in Industry Labor Force Survey (monthly data) Input and Output Price Indices in Agricultural-Livestock Production Greek Merchant Fleet Turnover Index in Industry New Orders Index in Industry Material Costs Index for New Residential Buildings Work Categories Price Indices and Construction Costs Indices for New Residential Buildings Commercial Transactions (provisional data) Producer Price Index in Industry Turnover Index in Retail Trade Road Traffic Accidents Traffic of Passengers, Goods and Vehicles by Merchant Ships in Greek Ports August Number of Issued Motor Vehicle Circulation Licences National Consumer Price Index Harmonized Index of Consumer Prices Building Activity Commercial Transactions (estimates) Industrial Production Index Import Price Index in Industry Movement of Museums and Archaeological Sites National Accounts (estimates) Labor Force Survey (monthly data) Input and Output Price Indices in Agricultural-Livestock Production Turnover Index in Industry New Orders Index in Industry Material Costs Index for New Residential Buildings Commercial Transactions (provisional data) Greek Merchant Fleet Producer Price Index in Industry Turnover Index in Retail Trade Road Traffic Accidents September National Accounts (provisional data) Number of Issued Motor Vehicle Circulation Licenses National Consumer Price Index Harmonized Index of Consumer Prices Industrial Production Index Commercial Transactions (estimates) Movement of Museums and Archaeological Sites Turnover Indices in Motor Trade and Wholesale Trade Labor Force Survey (monthly data) Building Activity Import Price Index in Industry Production Index in Construction Turnover Indices in Post - Telecoms, Computer and Related Activities and other Business Activities Informal Ecofin meeting in France Index of Employed in Retail Trade Greek Merchant Fleet Labour Force Survey Input and Output Price Indices in Agricultural-Livestock Production Turnover Index in Industry New Orders Index in Industry Material Costs Index for New Residential Buildings Turnover Indices in Transport Turnover Index in Tourism Commercial Transactions (provisional data) Road Traffic Accidents Producer Price Index in Industry Turnover Index in Retail Trade July 2008 July 2008 July 2008 May 2008 June 2008 June 2008 June 2008 April 2008 2nd Quarter 2008 May 2008 June 2008 June 2008 June 2008 July 2008 June 2008 June 2008 July 2008 June 2008 June 2008 2nd Quarter 2008 August 2008 August 2008 August 2008 July 2008 July 2008 May 2008 2nd Quarter 2008 June 2008 June 2008 July 2008 2nd Quarter 2008 2nd Quarter 2008 2nd Quarter 2008 July 2008 2nd Quarter 2008 July 2008 July 2008 July 2008 August 2008 2nd Quarter 2008 2nd Quarter 2008 July 2008 July 2008 August 2008 July 2008 05/08/08 07/08/08 07/08/08 07/08/08 08/08/08 08/08/08 08/08/08 11/08/08 11/08/08 12/08/08 13/08/08 19/08/08 19/08/08 22/08/08 25/08/08 28/08/08 29/08/08 29/08/08 29/08/08 03/09/08 05/09/08 08/09/08 08/09/08 09/09/08 09/09/08 10/09/08 10/09/08 11/09/08 12/09/08 12/09/08 12/09/08 12/09/08 12-13/09/08 15/09/08 18/09/08 18/09/08 19/09/08 19/09/08 19/09/08 22/09/08 22/09/08 22/09/08 25/09/08 26/09/08 29/09/08 30/09/08 June 2008 June 2008 June 2008 April 2008 March 2008 May 2008 May 2008 May 2008 April 2008 May 2008 May 2008 May 2008 May 2008 June 2008 2nd Quarter 2008 May 2008 June 2008 May 2008 May 2008 4th Quarter 2007 04/07/08 07/07/08 07/07/08 07-08/07/08 08/07/08 10/07/08 10/07/08 10/07/08 11/07/08 14/07/08 15/07/08 17/07/08 21/07/08 21/07/08 22/07/08 22/07/08 25/07/08 29/07/08 30/07/08 31/07/08 31/07/08
PERIOD
April 2008 April 2008 May 2008 April 2008 May 2008 April 2008 April 2008
DATE
19/06/08 19/06/08 20/06/08 25/06/08 27/06/08 30/06/08 30/06/08
Note: First column displays economic events and announcements. The second displays the period represented. The third shows the exact day of the event or the announcement.
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Statistics subject/event
October Draft Budget for 2009 Submitted to the Greek Parliament National Reform Program 2008-2011 Submitted to EU Number of Issued Motor Vehicle Circulation Licenses Eurogroup-Ecofin Meetings in Luxembourg Building Activity National Consumer Price Index Harmonized Index of Consumer Prices Movement of Museums and Archaeological Sites Industrial Production Index Commercial Transactions (estimates) Import Price Index in Industry Labor Force Survey (monthly data) Greek Merchant Fleet Input and Output Price Indices in Agricultural-Livestock Production Turnover Index in Industry New Orders Index in Industry Material Costs Index for New Residential Buildings Work Categories Price Indices and Construction Costs Indices for New Residential Buildings Commercial Transactions (provisional data) Producer Price Index in Industry Turnover Index in Retail Trade Traffic of Passengers, Goods and Vehicles by Merchant Ships in Greek Ports Road Traffic Accidents November State Budget for 2009 Submitted to the Greek Parliament Eurogroup-Ecofin meetings in Brussels Number of Issued Motor Vehicle Circulation Licenses Building Activity National Consumer Price Index Harmonized Index of Consumer Prices Industrial Production Index Commercial Transactions (estimates) Movement of Museums and Archaeological Sites Import Price Index in Industry Labor Force Survey (monthly data) National Accounts (estimates) Input and Output Price Indices in Agricultural-Livestock Production Turnover Index in Industry New Orders Index in Industry Greek Merchant Fleet Material Costs Index for New Residential Buildings Commercial Transactions (provisional data) Producer Price Index in Industry Turnover Index in Retail Trade Road Traffic Accidents December Update of the Hellenic Stability and Growth Program 2008-2011 Eurogroup-Ecofin meetings in Brussels National Accounts (provisional data) Number of Issued Motor Vehicle Circulation Licenses National Consumer Price Index Harmonized Index of Consumer Prices Building Activity Movement of Museums and Archaeological Sites Industrial Production Index Commercial Transactions (estimates) Turnover Indices in Motor Trade and Wholesale Trade Import Price Index in Industry Labor Force Survey (monthly data) Production Index in Construction Index of Employed in Retail Trade Turnover Indices in Post - Telecoms, Computer and Related Activities and other business Activities Input and Output Price Indices in Agricultural-Livestock Production Turnover Index in Tourism Turnover Indices in Transports Labor Force Survey Greek Merchant Fleet Material Costs Index for New Residential Buildings Turnover Index in Industry New Orders Index in Indursty Commercial Transactions (provisional data) Producer Price Index in Industry Turnover Index in Retail Trade Road Traffic Accidents
PERIOD
DATE
10/08 10/08 03/10/08 08/10/08 08/10/08 08/10/08 10/10/08 10/10/08 10/10/08 10/10/08 13/10/08 16/10/08 17/10/08 20/10/08 20/10/08 21/10/08 22/10/08 27/10/08 30/10/08 30/10/08 30/10/08 31/10/08 11/08 03-04/11/08 05/11/08 07/11/08 10/11/08 10/11/08 10/11/08 10/11/08 10/11/08 11/11/08 12/11/08 14/11/08 14/11/08 19/11/08 19/11/08 20/11/08 21/11/08 25/11/08 28/11/08 28/11/08 28/11/08 12/08 01-02/12/08 04/12/08 05/12/08 08/12/08 08/12/08 09/12/08 10/12/08 10/12/08 10/12/08 10/12/08 11/12/08 11/12/08 15/12/08 15/12/08 16/12/08 16/12/08 16/12/08 16/12/08 18/12/08 18/12/08 19/12/08 19/12/08 19/12/08 24/12/08 30/12/08 30/12/08 31/12/08
September 2008 06-07/10/08 July 2008 September 2008 September 2008 June 2008 August 2008 August 2008 August 2008 July 2008 August 2008 August 2008 August 2008 August 2008 September 2008 3rd Quarter 2008 August 2008 September 2008 August 2008 1st Quarter 2008 August 2008
October 2008 August 2008 October 2008 October 2008 September 2008 September 2008 July 2008 September 2008 August 2008 3rd Quarter 2008 September 2008 September 2008 September 2008 September 2008 October 2008 September 2008 October 2008 September 2008 September 2008
3rd Quarter 2008 November 2008 November 2008 November 2008 September 2008 August 2008 October 2008 October 2008 3rd Quarter 2008 October 2008 September 2008 3rd Quarter 2008 3rd Quarter 2008 3rd Quarter 2008 October 2008 3rd Quarter 2008 3rd Quarter 2008 3rd Quarter 2008 October 2008 November 2008 October 2008 October 2008 October 2008 November 2008 October 2008 October 2008
Themes
The acquisition of a stake higher than 20 percent in companies of strategic importance that manage national infrastructure networks will require approval from the inter-ministerial committee on privatization, according to the Finance Ministry.
Greeces Finance Ministry has introduced a law which protects the interests of strategic state-owned companies and limits the stake held in them by investors to 20 percent, unless given previous approval by an inter-ministerial privatizations committee. The acquisition of a stake higher than 20 percent in companies of strategic importance that manage national infrastructure networks will require approval from the interministerial committee on privatization, Finance Minister George Alogoskoufis told reporters. Alogoskoufis pointed out that there are similar limits imposed in other privatization cases in the EU where the companies being sold manage infrastructure networks. The acquisition of shares in these companies... cannot be done without imposing control procedures for the protection of national and social interests, he added. The amendment was submitted to Parliament where the ruling New Democracy Party holds a majority. The minister added that the government considers listed OTE, one of the most heavily traded stocks on the Athens Stock Exchange, as a strategic enterprise
Strategic companies
Specifically, Greek Minister of Economy and Finance, made the following statement regarding the new legislation for the participation of private investors to companies of national strategic importance: Privatizations have become a common practice throughout the European Union and often pertain to companies (S.A.s) which own or manage national infrastructure networks. Nevertheless, it is imperative to establish an approval mechanism which will safeguard national interests when individual investors or legal entities acquire a substantial percentage of the capital of such companies. Taking into consideration the national interest, the interest of society at large and the need for the smooth operation of markets, the Greek government tabled a new piece of legislation to the Greek parliament today. The legislation specifies the following: 1. In the case of companies (S.A.s) of national strategic importance, especially when they own or manage national infrastructure networks, the acquisition of voting rights in such companies, through the 20% of the share capital or more, requires the approval of the Interministerial Privatizations Committee. This approval is granted if certain criteria, as specified by the new legislation, are fulfilled to protect the public interest. 2. Certain decisions of great strategic importance within these companies pertaining to issues mentioned in the new legislation, should be approved by the Minister of Economy and Finance so that the public interest is safeguarded. This is an important institutional step for Greece and for the safeguarding of the national interest and is in full force as of the time of submission to parliament.
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in the development of the telecommunications sector in Greece. Alogoskoufis also stressed that no further privatization of OTE will take place without a specific decision by the relevant inter-ministerial committee on privatizations. The government is also not discussing any issue of comanagement with any institutional investor or any other investment company, he said. In order to clarify what the law means for shareholders, the CEO of OTE, Panagis Vourloumis, explained that the law intends to provide an orderly framework for its privatization. he law intends to provide an orderly framework for privatization. It will be discussed and voted in Parliament soon and there may be amendments. If passed, which we expect, it will be applicable as of the date it was tabled, the OTE CEO said. We believe that this development does not affect in the least the value of OTE which will depend on the effectiveness of the management in carrying out the business plan, as it has been doing in the past, he added. In response to recent comments made by MIG on OTE, Execution Limited analyst Will Draper pointed out that the attack was not justified and that a little more patience and diplomacy are needed. Execution Limited has a fair value of 35 euros on OTE shares. We can understand that MIG is seeking better representation on the
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Themes
board for its 19-20 percent stake. We can also understand that it wants more involvement in OTEs corporate actions. But to show its teeth in this way publicly undermining an excellent CEO is clumsy and unlikely to lead to the desired result, said Draper. We still believe MIG can act as a very positive catalyst for OTE, by shaking out value in real estate for example, but it perhaps needs to exercise a little more patience and diplomacy, he added. OTE has a market capitalization of 11.7 billion euros and its shares are traded on the Athens bourse. OTE Group is Greeces leading telecommunications organization and one of the pre-eminent players in Southeastern Europe, providing top-quality products and services to its customers. Apart from serving as a full service telecommunications group in the Greek telecoms market, OTE Group has also expanded its geographical footprint throughout Southeast Europe during the last decade, acquiring stakes in the incumbent telecommunications companies of Romania and Serbia, and establishing mobile operations in Albania, Bulgaria, the Former Yugoslav Republic of Macedonia and Romania. At present, companies in which OTE Group has an equity interest employ over 30,000 people in six countries, and our portfolio of solutions ranges from fixed and mobile telephony to Internet applications, satellite, maritime communications and consultancy services.
MIG has attacked OTE's CEO on three counts, none of which are justified. Let's take a look at the criticisms: 1. The CEO ought to work for the shareholders and not boss them around. Vourloumis was appointed in May 2004 when the stock was at eur11.50. Since then it has more than doubled and outperformed the sector by three times (OTE +116.9%, SXKP +42.9%), creating eur6.6bn of market cap in the process. Vourloumis has been responsible for the VRP, fixed network upgrade, expansion in Balkans, broadband invigoration, buy-in of Cosmote minorities and reinstatement of dividend: all value accretive initiatives in our view. It is simply not credible to say he has worked against shareholders interests. It is not obvious that removing him would lead to better share price performance: his relationship with the Govt and Unions is critical, and we need some stability at Cosmote until the new team beds down. 2. The loan taken out to fund the Cosmote buy-in is bad. OTE took a strategic decision to buy-in Cosmote. Yes, they should have done it earlier and yes they paid a full price. But the deal still makes great sense financially and strategically. It will allow OTE to better offer converged fixed/mobile services, will generate synergies (we estimate NPV of eur0.5bn), it will raise leverage, and it will make OTE more attractive/valuable to a strategic investor. OTE has financed the buy-in via a bridging loan and we refinance this with long term debt or a loan. It has not decided which, has not disclosed the terms of the bridge so MIG has no basis for criticising. Historically OTE has been an adept borrower - 4.6% for its 10 year even at below A grade credit rating - so we are not concerned here. It is true that credit markets have tightened and therefore OTE will have to pay more than a year ago, but this will not be anywhere near enough to undermine the rationale for the buy-in. 3. The sale of InfOTE needs some explanation. Well there was never any disclosure on InfOTE so we cannot comment on the multiple, although the company has described it as fat. To us eur300m looked like a very good price for something that we a) thought was very small, b) will have a negligible impact on financials, and c) was not even in our sum of the parts. So as far as we are concerned this is eur0.60/share of value creation. In conclusion we can understand that MIG is seeking better representation on the Board for its 19-20% stake. We can also understand that it wants more involvement in OTE's corporate actions. But to show its teeth in this way - publicly undermining an excellent CEO - is clumsy and unlikely to lead to the desired result. We still believe MIG can act as a very positive catalyst for OTE, by shaking out value in real estate for example, but it perhaps needs to exercise a little more patience and diplomacy. Our OTE fair value is euro35 and we have a BUY rating on the stock. Execution Limited analyst Will Draper
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Cover
The 2008 budget includes a set of welfare measures, including the next phase of the tax reform, the increase of low pensions and the establishment of a fund which will gradually allocate 2 billion euros per year to support poor households.
he reforms program and the fiscal consolidation under way since March 2004 have given a significant boost to the Greek economy. Growth is being fueled by private investment and exports. Unemployment is reduced and social cohesion is enhanced. Within the framework of our reforms program we have placed emphasis on entrepreneurship, competitiveness and the international orientation of the Greek economy. Such reforms include: The reduction of corporate taxation from 35 percent in 2004 to 25 percent in 2007 and the reduction of personal income tax rates; The introduction of incentives for private investment in the form of subsidies of up to 60 percent of the total sum; The new legal framework for public-private partnerships; The new exports policy; The establishment of an investment-friendly environment in Greece and the support of Greek businesses operating in the broader region of Southeast Europe and the Eastern Mediterranean; The new privatizations agenda especially in the banking sector; The establishment of a more efficient mechanism for the absorption of EU funds; The new digital strategy for propagating new technologies in Greece. Despite the financial crisis and the high oil prices, growth is expected to remain strong in 2008 and the following years. This growth will stem from the reforms program under way and will be based on the following: In the period leading to 2013, Greece will receive signif-
icant EU funds, exceeding 24 billion euros. At the same time, major infrastructure projects of the Third Community Support Framework are expected to be completed. The implementation of several approved public-private partnership projects begins in 2008. These projects are estimated at 3.1 billion euros. Additional major projects are also under way and are expected to fundamentally transform the transport network in Greece. Within the framework of the new Investment Incentives Law, private investments of up to 8.78 billion euros are already being implemented. These investments boost regional development in Greece and capitalize on the country's comparative advantages. Growth within the broader region of Southeast Europe, where Greece plays a key role, continues to be robust, maintaining a fertile market for Greek products and services. The solid progress of the Greek economy allows for the gradual implementation of important measures which strengthen social cohesion and improve the welfare state. The objective of our policies has been to disseminate the fruits of economic progress in Greek society as a whole. The 2008 budget includes a set of welfare measures, such as the next phase of the tax reform, the increase of low pensions and unemployment benefits, and the establishment of the Social Cohesion Fund, which will gradually allocate 2 billion euros per year to support poor households. The prospects of the Greek economy remain positive. So far, our economic policies have led to tangible results. We are committed to continue working toward a more dynamic economy and a fair society.
George Alogoskoufis
Minister of Economy and Finance
www.mnec.gr
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Cover
The Greek economy has been fortified to a large extent by the new growth model which is based on the pillars of fiscal consolidation and structural reform.
Plutarchos Sakellaris
Professor at Athens University of Economics and Business and Chairman of the Council of Economic Advisers
the oil-producing countries of the Middle East). In fact, countries that record surpluses are lending funds to the countries that record deficits, in order to allow the latter to maintain their living standards. But this situation is not sustainable, as debts have to be repaid eventually. Thus, the potential for trouble lies in how these major macroeconomic imbalances will unwind. How will the indebted economies both the private and the public sector find the resources to pay off their debts? Will the necessary adjustment, which may affect the world economic growth, be gradual or abrupt? Regarding the financial system, the developments since this summer prove that we had not grasped the dimensions of the unstable equilibrium that had developed. Thus, the domino-style reaction that started in August was, to some extent, not predicted. The problems began a while back in the highrisk subprime-mortgage market in the US. The modern methods of securitization redistributed this risk from the banks where these loans originated to other investment vehicles, many of which were owned or guaranteed by other banks. That was a way for these banks to evade rules of prudential supervision. The lack of transparency regarding the composition and quality of the vehicles' assets was the catalyst for the developments that followed. In this way, when difficulties arose for US debtors to service their debts, the problems of an individual economy spread to the world economy, as these vehicles have international ownership. At the same time, the lack of transparency damaged the relationship of trust among banks, resulting in a considerable increase in the cost of funds on the interbank market. Overall, I would say that there are four risk factors that may affect the world economy in 2008: 1. The developments in exchange rates, which are related to the macroeconomic imbalances that I described above; 2. The high prices of oil, raw materials and basic food items due to the strong international demand; 3. The condition of the financial system, and 4. The fears for economic protectionism or geopolitical upheaval. Among these factors, the most serious one, in my opinion, is the one related to the conditions in the financial system. The persistence of the high cost of banks for borrowing in the money market will eventually affect the rest of the economy, as it has a negative impact on the cost and availability of borrowing for households and firms. A further
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risk factor for the Greek economy in particular is the economic environment in our neighborhood. We should monitor closely developments in the wider region of Southeastern Europe, as a large part of our economic activity is related to the economies of our neighbors. International organizations estimate that these conjunctural developments will have limited impact on the Greek economy. Nonetheless, the government is following closely the developments in the international environment to ensure that the impact on economic growth and living standards will be minimal. The Greek economy has been fortified to a large extent by the new growth model that the government has been implementing since it came into office. The new model is based on the pillars of fiscal consolidation and structural reforms. As a result, the growth rate of the Greek economy remains at high levels, but what is more important is that the qualitative aspects of this growth are different than in the past. In the last few years, growth has mainly been based on exports and private investment, with housing
investment playing a diminishing role compared to investment in equipment. Therefore, efforts to create a more productive and outward-looking economy are bearing fruit. The government is continuing to implement important reforms so as to strengthen growth and social cohesion. These reforms are necessary in order to tackle existing problems and face the challenges arising from world economic developments. Some of the measures that the government is implementing include: The establishment of a National Social Cohesion Fund in order to fight poverty through actions targeted at specific social groups; Pension reform, which aims at making the system more fair, sustainable and efficient; Intensifying the efforts to combat tax evasion, corruption and smuggling so that all contribute to the financing of the social safety net according to their actual means; The third phase of the tax reform, which provides for the simplification of real estate taxation in parallel with lowering the tax burden for individuals, which was initiated this year and
will be completed in 2009. The central tax rate will be 25 percent, down from current rates of 30 percent and 40 percent; The full implementation of Law 3249/2005 for Public Enterprises and Entities and the introduction of relevant measures regarding the transparency of financial statements of hospitals, insurance funds and local authorities. On these grounds, the Greek economy is moving into 2008 with considerable ammunition. Its growth potential is solid and based on: Effective use of the structural funds of the next programming period, which will amount to more that 24 billion euros; A broad program of public investment, which will amount to 9.3 billion euros in 2008; Private investment projects which have already been approved within the framework of the Investment Law of 2005 amounting to 8.78 billion euros, and Public-private partnership projects already approved by the Interministerial Committee amounting to more than 3.1 billion euros, which will be undertaken starting in 2008.
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Cover
Investment growth is expected to continue at a healthy pace in 2008 and 2009, supported by EU financing and will continue to feature as a primary driver for growth in this period.
Dimitris Maroulis
Alpha Bank economist
www.alpha.gr
ment, through the substantial increase of net current revenue growth (which averaged an annual rate of 5.9 percent in the 2002-2007 period, way below the 7.8 percent annual growth of nominal GDP) and the deceleration of current primary expenditure growth (which averaged an annual rate of 9.9 percent in 2002-2007). There is ample room for combating tax and social insurance contribution evasion, increasing the current revenue-to-GDP ratio above the 35.7 percent reached in 2007, compared with 44.7 percent in the eurozone. On the other hand, current primary expenditure can be contained through: (1) an appropriate adjustment of public sector employment, wage and pension policies, (2) better control of healthcare payments and (3) rationalization of transfers to social insurance funds and social contributions, which, without extensive restructuring of the social security system, are set to register explosive growth in the years to come. In this regard, the government is currently in the process of reviewing the Greek pension system with the aim of finalizing the necessary reform legislation by the first half of 2008. Such reform should entail: (1) The stabilization of national pension payments in the medium and long term at a level not far above the current level of 12.6 percent of GDP, whereas, void of necessary reforms, pension payments are projected to reach 16 percent of GDP in 2020 and 20 percent of GDP in 2030. Stabilization of pension payments in terms of GDP requires the continued healthy growth of GDP, taking into account the projected negative employment growth due to the aging of the Greek population and particular parameters of the pension system. Growth needs to be based on productivity improvements necessitating the reform of the labor market, the education and healthcare systems as well as the central government. Maintaining healthy employment growth requires a well designed immigration policy. (2) Increasing pension savings in combination with a substantial reduction of the general government debt/GDP ratio, which today still stands at 92 percent of GDP. Pension savings can be boosted by substantially reducing tax and social security contribution evasion. However, evasion of social security contributions can be tackled by establishing a tighter link between pension contributions and pension benefits. (3) The current attempt at the rationalization of the government-backed Greek pension system by: (a) consolidating the highly fragmented pension fund market and (b) the tightening of early retirement provisions and rationalizing the list of occupations benefiting from lower retirement age limits due to associated health-risks or onerous physical conditions,' as well as the disability pension code, should contribute not only to the achievement of substantial efficiency gains, but also to the fairness of the system.
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The 2008 budget shows the target for the general government deficit next year is 1.6 percent of gross domestic product while public debt is projected at 91 percent of GDP.
Loukas K. Papazoglou
General Secretary of the Treasury
www.mof-glk.gr
ture is projected to decelerate significantly (+7.3 percent compared to 11.7 percent in 2007) reaching 19.8 percent of GDP. The improvement in tax revenue collection is mainly the result of further tackling tax evasion through intensifying fiscal and customs audits and the restructuring of the system related to fuel distribution. In parallel, providing tax incentives for consumers to request receipts and comply with their tax obligations is a measure along the same lines. At the same time, the tax base in property taxation is broadened, through the introduction of a real estate tax. Fiscal consolidation continues while maintaining high growth rates. The effort to improve the quality of public finances is of considerable importance. The government aims at introducing program budgeting, in order to evaluate the effectiveness of public expenditure and to implement a new accounting system that will support the state budget for the most accurate and concise presentation of public finances. The 2008 state budget is accompanied by a special report, consisting of: A presentation of the state's budget, structured in functions and programs, the National Plan of Programs;
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A description of the aforementioned programs; Pilot planning for the function of Culture, Religion and Sport.' Furthermore, according to Law 3513/2006, two new units, subordinate to the General Directorate for the Treasury and Budget have been established in the General Secretariat for Fiscal Policy within the General Accounting Office: The unit for the government budget reform, responsible for the introduction of a program budget structure in a multi-annual budget framework and the development of an assessment framework for the performance and the outcome of the programs and policies of the government;
The unit for the Government Accounting System Reform, responsible for the transition from the existing accounting system to an accounting system on an accrual basis. By the end of 2006, a substantial step had been taken for the reorganization of the existing auditing system for public expenditure. In particular, according to Law 3492/2006, the responsibilities of the Ministry of Economy and Finance as an external auditor are being reinforced on the basis of the principles of efficiency and effectiveness. In particular, a General Directorate for Fiscal Audits (GDFA) has been established in the General Accounting Office/General Secretariat for Fiscal
Policy. This General Directorate, apart from scheduled and non-scheduled audits, will also audit the administration and control systems of the agencies that manage public funds using its specialized personnel and other experts. The GDFA will also draw up an annual report which will include the conclusions of the audits, the evaluation of the findings of the supervised actors' internal control units and relevant recommendations
Privatization policy
The primary goal of the government elected in March 2004 with regard to privatizations was decreasing the state's participation in economic
16.44% 10.00%
34.00% 38.70%
Feb 2006 May 2006 May 2006 May 2006 May 2006 Aug 2006
Recapitalization Accelerated bookbuilding Trade sale to ELTA (1) Trade sale to PSB Initial public offering Trade sale to Credit Agricole through public offer
10.70% 20.00%
28.03% 34.37%
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activity and achieving better utilization of state property. The new era of privatizations is characterized by moving away from the accounting approach in favor of methods that maximize social welfare. In this respect, it is very important to emphasize the maximization of the value of state-owned enterprises before the actual privatization process. Thus, the government chose to privatize mature enterprises first, the value of which was widely recognized in the market. During 2004-2006, total privatization revenues in Greece reached 4,595 million euros, substantially reducing public debt. More specifically, a series of privatization transactions was successfully carried out in the 2004-2005 period, generating revenues of 2,855 million euros, while 2005 was a particular success, exceeding the target revenue from privatizations by 31.3 percent. During 2006, the privatization program focused on further liberalizing financial markets through the reduction of the state's participation in the banking sector. In particular, with the restructuring and IPO of Postal Savings Bank, the restructuring and further privatization of Agricultural Bank of Greece (ATEbank) and the full privatization of Emporiki Bank, the banking sector in Greece was substantially reformed, while the corresponding privatization revenues reached 1,740 million euros exceeding the national budget target of 1,650 million euros. In 2007, the government proceeded further toward reducing its share in the banking sector through the sale of 20 percent of Postal Savings Bank via an accelerated bookbuild offering. In addi-
tion, 10.7 percent of the Hellenic Telecommunications Organization (OTE) was similarly sold, thus resulting in revenues from privatizations reaching a total of 1,632 million euros, coming within reach of the 1,700-million-euro budget target. The table below summarizes the privatization transactions carried out during 2004-2007. It is important to point out that despite the considerable progress made so far in the field of privatizations, the government's effort will continue at the same pace and with the same focus. In particular, the government's privatization policy includes the following: -Tourist Development Company (TDC) The Interministerial Privatization Committee (IPC) has decided to develop certain assets of the company, such as the Faliro Marina, the Corfu Casino, the Golf Club of Afandou on Rhodes and hotels in various places of tourist interest in Greece. The process for many of the aforementioned projects is well advanced. -Public Gas Corporation (DEPA) The IPC has decided to proceed with the listing of DEPA on the Athens Exchange. The listing will follow the restructuring of the company, the legal unbundling of the transportation activity and the corresponding formation of the subsidiary companies pursuant to Law 3428/2005 for the Deregulation of the Gas Market in Greece. The privatization program also includes the exploration of the optimal way to further privatize Athens International Airport, as well as examining the most appropriate methods for bringing out the value of
state participations in listed and non-listed companies. In addition, the government recently introduced a modern and flexible regulatory framework for publicprivate partnerships (PPPs) and public finance initiates (PFIs). The establishment of such a regulatory framework, which underlines the government's intention to promote PPPs/PFIs as a method of privatization, could drastically transform the privatization framework in Greece while attracting foreign and domestic direct investment. Privatization is a method of reallocating assets and economic activities from the public to the private sector. Even though there was much controversy about privatizations, mainly during the 1980s and 90s, nowadays they are widely accepted as a major means of economic policy and structural reforms, even more so since it has been adopted across the world and by different political regimes. The driving force behind the increasing popularity for pursuing privatizations is that, undoubtedly, the private sector has performed far better in a globalized competitive environment than the public sector, offering products and services of better quality and lower prices. Both empirical and theoretical studies support the fact that privatization increases profitability and efficiency at the microeconomic level. Apart from that, in the case of Greece it is evident that the privatization program has had a positive impact on the reduction of public debt, the attraction of foreign direct investment, and the increase in the liquidity and capitalization of the stock market.
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The new broader strategic positioning of our country demands that we portray Greece as a destination of diversity and contrast, leaving each and every visitor with the sense that they have experienced something truly unique and unforgettable.
ourism is a national priority for Greece due to its great contribution to the country's economy. It is neither abstract nor mutable. Its development is perceptible through the rhythms of the economy, outlining an important aspect of our country's general profile. The income from tourism alone exceeds the amount of 11.5 billion euros and represents 18.2 percent of the gross national product. Furthermore, it serves for the creation of new jobs. Tourism development in Greece has opened up thousands of employment posts over the past few years, especially for the younger generation, and we are proud to say that the tourist sector now provides jobs directly or indirectly to more than 850,000 citizens. Considering the above, it is clear to see that tourism development is a stake of national importance. Our efforts are focused on three main goals: firstly, to enhance quality at all levels and in all aspects of the Greek tourism industry; secondly, to establish the country within the top world rankings of preferred year-round tourist destinations; and last, but not least, to attract and encourage more investment and new business ventures. To attain these goals we must take into consideration the fact that the tourism
Aris Spiliotopoulos
Minister of Tourism
www.mintour.gr
environment needs to grow, with new destinations and new services that will boost the market and lead to shifts in traditional destinations. At the same time, tourism itself is shifting geographically, economically, socially and in terms of the age of travelers. The top requisite and common denominator in all these shifts is quality and customized options. Alongside quality and customized options, new trends in demand are surfacing, trends that lead to the formation of new consumer attitudes and the emergence of new customer groups. Were we to rest on our laurels of traditional advantages and numeric data of recent times, the results yielded would not come up to expectations nor would they correspond to the expected gains of an increase in revenues and new employment opportunities. Times are demanding and it is imperative that we methodically create a newly minted, contemporary, attractive and effective tourist model, a model that will prioritize Greece's new key position as a preferred tourist destination. To this end, we ought to be realists and willing to comprehend that nothing can yield fruit if we haven't invested first. That is why we start with the country's promotion abroad. This entails dealing not only with investment in our international image abroad, but with its reformation as well. So, we start with promotion that is inspired by vision, imagination and inventiveness. And so far we have presented the modern image of Greece, the image of a country with four seasons where everyone can have a truly special experience. The new broader strategic positioning of our country demands that we portray Greece as a destination of diversity and contrast, leaving each and every visitor with the sense that they have experienced something truly unique and unforgettable. That is our strategy for the new image of Greece, as a destination of global appeal. Sea tourism, cultural tourism, rural tourism, guided tourism, health and wellness tourism, MICE (meetings, incentives, conferences, events) tourism, luxury tourism, city breaks, and seaside tourism: These nine strategic branches are the ones in which Greece will invest in the following years, in order to transform the country into a yearround destination and enhance the tourism product. We cannot speak of a national strategy for tourism without having constructed a new image of Greece, a new international identity with new aesthetics that go far beyond the sun and sea' model. Our aim is to become a preferred destination for potential visitors and, in time, to transform that preference into a solid intention to travel to our country. In order to maximize the returns of the country's
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tourism industry, we are implementing new marketing designs and new media plans to meet the demands of the increased competition. This year, we are taking the promotion of Greek tourism to a whole new level: We are no longer investing in traditional forms of advertising alone, but also in new creative communication channels, where the Internet and digital technologies have the leading role. Now, Greece can finally claim its place as a superior destination of the highest standard. At the same time traditional advertising is being reinforced and renewed as well: Greece will be promoted in the most prominent and prestigious international press. The most popular travel magazines will include thematic features on our country. Moreover our presence will be felt in the traditional markets of Europe and the United States, in developing ones such as Russia and Arab nations, and in emerging ones as well, such as China and India, associating tourism with culture. We will attract, we will create and we will support international sporting and
cultural events that will be hosted here. We intend to show the world that Greece has the same capacities, services and infrastructures as the other developed countries in the European Union. In 2008 we will be present in China with exhibitions, taking advantage of the Cultural Year of Greece in that country and the Olympic Games in Beijing. We will support international film productions that will promote the image of Greece in theaters worldwide. This national effort is a vital wager for our country that will transport Greece from the 20th to the 21st century. We all hope that this effort will touch the hearts and minds of those who choose to visit our country. We are very optimistic that we can make it no matter how high our expectations are. Tourism is a great force in the context of which there is much more to unite than to divide us. After all, tourism is Greece itself, and Greece is a matter that concerns one and all. Greece is who we are. We can have more and we deserve more. It is a cause worth striving for to the best of our abilities.
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The Ministrys action plan includes boosting Greek shippings competitiveness, making it a world leader, protecting the number and quality of Greek maritime jobs, while creating better infrastructure.
Giorgos Voulgarakis
Mercantile Marine Minister
www.yen.gr
ate solutions, the most important of all being the decline in seagoing employment on the one hand and the comprehensive programs of Greek shipping companies on the other, which aim at job creation via the establishment of academies for foreign officers in the Far East and the promotion of a skilled and trained work force. In addition to that, two-thirds of Greek-owned ships do not sail under the Greek flag, a fact that marks the priority that should be given to issues concerning the shipping register. Another crucial area is the new environment for shipping companies where new criteria should be set regarding sector differentials that unavoidably vary as time passes. Thus, the setting up of cohesion criteria is more than important and a basic precondition for a better modus operandi in concert with shipping regulations and structures that will suit today's needs. Finally, one of the greatest challenges is the issue of ports that undeniably play an important role alongside logistics. Paramount importance is attached to ports, since they constitute the best ways of promoting a country's development and prosperity. Shipping's contribution to international development is enormous, serving 90 percent of global trade by carrying huge quantities of cargo cleanly and safely. There are new trends paving the way for the future of shipping and these are: Global trade is going to be increased (China's demand for iron and copper set the pace in Asia); The unified European market is wider in shipping competition (Denmark's aspirations, which plan to put its strength in a modern project); Stricter legislation; Merging trends; Change of policy in shipping banks and stock market prospects. Greek shipowners take these trends into account. The year 2007 has been a milestone since 850 new ships are being built around the world. Overall investment in new and used ships will probably surpass $15.5 billion. The shipping industry has been investing based on financial support programs, mainly loans from foreign banks. Lately, however, major developments have been achieved with new management trends and funds have been derived from the international stock markets in New York, Oslo, Amsterdam, London and Cyprus. The 25 new Greek shipping companies listed on international stock markets have helped Greek shipping to become more comprehensive in character and establish itself quickly in the new markets. Annual turnovers have been estimated to reach $400 billion, at a time when challenges in
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the global world are at their most acute. Great efforts have been made to avoid distortions of the past, to open up the shipping sector, and to gain ground for the purposes of achieving the objectives of boosting competition in the field. Certain measures have been taken to produce steady evolution in different aspects. The new framework had to satisfy the following concerns: 1. Increased competition in the national registry; 2. Establishing the advancement of P&I Clubs legislation in Greece; 3. Adopting the 3450/2006 and 3490/2006 laws, which upgrade the status of the Merchant Marine Academies, supervised by the Ministry of Mercantile Marine, the Aegean Sea and Island Policy; 4. Reducing income taxation for seafarers; 5. Securing Greek shipping competitiveness; 6. Modifying the framework of maritime cabotage in order to achieve higher objectives; 7. Proceeding to seaplanes, providing a stimulus for the advancement of sea transport; 8. In the prospect of transport corridors and port policy, we signed up the of 3-billion-euro Protocol financing port infrastructures; 9. The Ministry has a wider scope since it merged with the Ministry of the Aegean Sea and Islands, given the range of responsibilities involved. Finally, four major pivots should be highlighted:
Further support of shipping and development, given the linkage with the national economy; 2) Introduction of innovative measures and actions to move toward differentiation of Greek shipping products and services; 3) Cooperation between the ministries of Mercantile Marine and the Aegean Sea that can generate positive outcomes and support for the economy of the aforementioned area; 4) Deliberations with all interested parties. We do not wish others to be distrustful of our suggestions and our efforts made to build a stronger regime that will govern the activities of the field. The government shares a common target: to provide better-paid work for seafarers, more revenues and cleaner seas. The Ministry is willing to pursue a new course the course of the Maritime Cluster Manager. This sets a new tone in cooperation. We have been elaborating a plan that will reduce juxtapositions and will summon into being a unique outfit linking shipping to other fields of the economy, entering thus the heartlands of national interest and attracting new funds from foreign countries. Part-time investment does not assure financial solidarity and the priority given to economic cohesion has been translated into a stable and reliable business environment.
1)
Specifically, our action plan includes various aspects, such as boosting Greek shipping competitiveness, making it a leader in the world, protecting the number and quality of Greek maritime jobs, creating the infrastructures necessary for better planning, organization and control of freight transport operations, and adopting concrete actions in further using ships in logistic services. Other facets of this plan involve upgrading ports, port-building facilities, developing modern port infrastructure so as to meet the requirement of supply of services to passenger ships and cargoes, enhancing port competitiveness that will give access to markets and support of sea tourism, recreational diving, cruise ships, yachting, marinas-mooring etc. Providing research and innovation for all shipping and shipbuilding industries, guaranteeing navigation safety, police surveillance and protection of the marine environment through the coast guard and ensuring sustainable transport operations for islands that will boost their local economies are also targets of primary importance. Finally, playing a key role in the international forums so as to support Greek shipping and increase our efficiency in the protection of the marine environment are great challenges but are also the tributaries down which we should paddle to seek a better tomorrow for a better future.
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2008 is seen as being a very important year for European capital markets. Pressure from the EU is forcing European exchanges and clearing houses to increase their transparency and reduce transaction costs.
Spyros Capralos
Athens Exchange Chairman
www.axa.gr
uring the last four years we have seen tremendous progress in the Greek economy and the Greek capital market. The Greek economy continues to maintain one of the fastest growth rates in Europe. The stability provided by the euro, the progressive income tax reduction for companies from 35 percent to 25 percent in 2007, enhanced transparency from the adoption of International Accounting Standards as well as proximity to the countries of SE Europe and the Balkans which are also developing rapidly and in which Greece has an important business presence have all contributed toward the strengthening of the development potential of the country. The Greek economy is expected to keep on developing at a faster pace than most other European countries. On the other hand there are a series of considerations that we need to take into account, both domestically as well as internationally, that could put a damper on this optimistic outlook. Oil prices have increased considerably, and many believe that the day is not far off when the price of oil will surpass the $100 mark. The full effects of the oil price increase have not yet been felt, but it is certain that they will negatively impact both the growth rate and inflation. Additionally, European exports and marketplaces as a whole are expected to be affected by the slide of the US dollar vs the euro. Finally, following the strong performance of capital markets in the first half of 2007, the subprime loan crisis hit exchanges. Most capital markets are far from their highs set earlier in the year, while price volatility has increased and the willingness of investors to take on risk is at historic lows. The financial sector in North America and Western Europe has been the hardest hit, and many believe that we have not yet reached the end of the tunnel. Without any doubt, this imported' crisis is one of the main reasons behind the volatility that characterized ATHEX last August and November. As far as we are aware, it is quite encouraging that Greek banks have had little exposure to subprime loans or similar products, and are thus expected to weather the crisis. The mood therefore regarding the economy and the business environment, despite the potential problems, is one of reserved optimism. On the other hand, we believe that 2008 is going to be a very important year for European capital markets. Pressure from the EU is forcing European exchanges and clearing houses to increase their transparency and
reduce transaction costs. The Markets in Financial Instruments Directive (MiFID) came into effect on November 1, 2007 and allows the internalization of trade, meaning that trade can be executed without necessarily going through an exchange. The Code of Conduct, on the other hand, signed one year ago in Brussels, is a voluntary agreement between European exchanges and clearing houses that aims to liberalize charges, eliminate cross-subsidies and allow interoperability between clearing houses. The basic aim of both the MiFID and the Code of Conduct is to increase transparency, reduce the cost of transactions for the benefit of investors, and increase the level of services provided. For traditional exchanges, life is expected to become more difficult and demanding, but also to provide opportunities to those that are able to take advantage of them. On the one hand, just as the telecommunications market opened up a few years ago and became more competitive, so too must exchanges offer better, faster and cheaper services in order to respond to the demands of this new environment. Only the exchanges that invest in their infrastructure, mostly in technology, in their human resources and in product development will survive in this environment of increasing competition. The Hellenic Exchanges Group at the beginning of this past year took a significant step in that direction by reducing its transaction fees by 33 percent. This is the largest fee reduction in the history of the Athens Exchange. Of course, one of the basic outstanding issues in need of immediate resolution is the elimination of the sales tax (0.15 percent), which at present reduces the competitiveness of the Greek market. Unless this tax is eliminated, our market runs the serious risk of seeing transactions migrate to other platforms abroad, where the tax will not be paid, and our market will become marginalized. While all of the above might sound like threats for European exchanges, for those exchanges that are successful in achieving their targets, national borders will no longer be a constraint, as their potential market will be the whole of Europe. The opening of the exchange markets of Europe is expected to strengthen the trend toward mergers and acquisitions. The merger of the New York Stock Exchange with Euronext, the merger of the London Stock Exchange with Borsa Italiana, and the acquisition of OMX by the NASDAQ and the Dubai Stock Exchange, all of which took place in
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2007, are indicative of things to come. The Hellenic Exchanges Group is ready to face the challenge posed by the MiFID. During the last few years a series of changes took place some of them visible to the average investors and others more technical in nature. These changes have strengthened our capital market, effectively protecting private investors and increasing the liquidity of the market. In particular, the new Athens Exchange Rulebook, with its corporate governance standards, has increased the quantity and quality of information that is made available to investors. Furthermore, the extension of market trading hours has facilitated the increased presence of investors from Western Europe and North America. In the past few years, international investors have given the Greek market and the improvement of the investing climate their vote of confidence with their money. Nevertheless, we must not forget that the relative absence of local private investors is cause for concern. Mutual funds and pension funds, with all the problems that they have recently been facing, as well as Greek institutional investors still seem to be unable to play the role that they should, a role that they play in other developed markets. Therefore, the only way for us to develop our market is to become more extroverted. With roadshows in Europe and the United States in order to promote our listed companies to international institutional investors, we are trying to increase interest in the local market. Today, 53 percent of the total market capitalization of the Athens Exchange, which exceeds 190 billion euros, is in the hands of international investors, and they are responsible on average for approximately 60 percent of total daily trading activity. It should be noted that, since the beginning of 2005, the net capital inflow from other countries to the Greek market is now approaching 17 billion euros. In 2004, the average daily turnover at the Athens Exchange was 140 million euros, while in 2007 this figure has been in excess of 480 million euros. And that is not all: 2007 has been one of the most important years in the history of the Greek capital market as regards rights issues. Capital raised from ATHEX in 2007 exceeded 10 billion euros, a record amount for us, and noteworthy even by international standards. We believe that the HELEX Group's strategy for growth should adhere to the following three axes: Organic growth Reduction in operational costs
Expansion in Southeastern Europe At the beginning of 2008 a new product and a new market segment will be introduced as part of our strategy. In January 2008 the first Exchange Traded Fund (ETF) will be introduced in our market. ETFs are like mutual funds which are listed and traded on the exchange during market opening hours, just like shares. ETFs are baskets of shares and thus reduce investment risk through diversification. Additionally, at the beginning of 2008 our Alternative Market, ENA, will become operational. This new market segment, a semi-regulated market, will have reduced listing and corporate governance requirements and low fees, in order to attract smaller, dynamic companies that want to raise capital at a low cost, but cannot shoulder the costs and compliance requirements of a listing in our main markets. Furthermore, we are now ready to open our market to remote members. The MiFID has led to the elimination of the last remaining barriers to entry for remote members, and their introduction is expected to increase competition, reduce access costs to our market, and significantly increase transaction activity. Concerning the second leg of our strategy, the reduction in operating costs, the efforts of the past few years have been quite successful, given that we have been able to reduce our operating cost by approximately 40 percent since 2003. The relocation of the HELEX Group to our new building, which was completed in 2007, is expected to lead to fur-
ther synergies and economies of scale. Finally, as regards geographical expansion in SE Europe, our vision is to create a single hub for entry into the capital markets of the region while maintaining the characteristics of an emerging market. The size of this market will make it feasible to attract part of the liquidity directed toward emerging markets. The benefits from the unification of the SE European capital markets are increased transaction activity, reduced operating expenses for exchanges, which in turn are expected to lead to reduced costs for the final investor, the introduction of new products to final investors, and an increased capacity by listed companies to raise capital. Our guide in that vision is the cooperation between the Greek and the Cypriot exchanges. The Athens Exchange began the operation of the Common Platform with the Cyprus Stock Exchange in October 2006 and the first year of operation was a complete success, as this cooperation led to a significant increase in transaction activity in Cyprus. To conclude, we believe that we live in interesting times. State monopolies and protectionism are a thing of the past. With free and unfettered access to European markets, and with the appropriate vision in place, as well as the resources to implement it, the Hellenic Exchanges Group will continue to serve the Greek capital market responsibly and effectively, to the benefit of the Greek economy and its shareholders.
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If global equity markets enter a bearish phase or volatility increases, then sectorscompanies that trade at a premium vis-a-vis comparable peers may underperform.
A stock-picking year
conomic growth, regional expansion, corporate actions, restructuring and earnings growth have been key drivers of Greek share performance during 2007. The same themes will support 2008 market performance, namely: Economic growth: High GDP growth of 3.7 percent in Greece is expected in 2008 as a result of a still healthy credit expansion, and consumer spending. Besides banks and consumer goods we forecast a strong year for domestic broadband and electricity thus supporting respective sectors. Regional expansion: Foreign institutional investors have been investing in the Greek equity market as a safer proxy to SE European markets and primarily the Bal-kans. We expect that bottom-line contribution from the region will be significant during 2008 for Greek banks. Exposure will remain high for the Greek telecoms, industrials, gaming and consumer goods sectors. Corporate actions: M&A activity involving listed companies remained strong in 2007 mainly due to the Marfin Investment Group (MIG). For 2008 we expect continued corporate action across sectors also supported by the Greek state denationalization plan. Restructuring: Although a big part of corporate restructuring of Greek banks and telecoms is behind us there is more to come, primarily in electricity, water and ports. Earnings growth: Double-digit earnings growth has supported the bull run of the last five years. According to our projections, 2008 will be another year with double-digit earnings growth and it will help the market exhibit absolute gains. Although the key investment themes remain in place, the positive impact of two of them, namely of economic growth and corporate actions, has weakened lately as a result of credit turmoil and the situation between the Hellenic Telecommunications Organization (OTE) and MIG. On the other hand recent developments in the Public Power Corporation (PPC) point toward an acceleration of restructuring efforts, thus
Vassilis Theodorou
Research Director National and P&K Securities
enhancing the positive impact of the respective investment theme. I think that the risk profile of the Greek market has increased, which may lead to multiple compression. During the last earnings season negative surprises were almost double the positive ones. The absolute number of negative surprises increased significantly quarter-on-quarter while the respective positive surprises decreased q-o-q. Given that the third quarter follows another quarter with increased negative surprises, if Q4 net earnings surprises are negative it will set a trend that we last saw during 2001-02. The Greek market trades at a premium to Europe in terms of P/E (2007e: 17.0x vs 13.6x and 2008e: 13.7x vs 12.4x), which is justified by its stronger earnings growth profile. Earnings-per-share (EPS) growth in 2008 is forecast at 23 percent, expecting that banks and utilities will be the key contributors to this growth with an estimated EPS growth of 20 percent and 166 percent respectively. During the last 12 months oneyear forward-looking P/E multiple decreased by 1.0x, yet the respective gap with Europe remained unchanged at 1.3x. If global equity markets enter a bearish mood or volatility increases then sectors-companies that trade at a premium vis-a-vis comparable peers may underperform. Banks, passenger ferries, Titan, Corinth Pipeworks, Fourlis and Piraeus Port (OLP) trade at a premium, while Intralot, Folli-Follie, Autohellas, Sidenor and Halcor trade at a discount to close peers. During the course of the year, we maintained our risk-free and premium rates at 4.0 percent and 4.5 percent respectively. But as a result of still high long rates and increased EPS growth, required returns are higher now and valuations have to be adjusted downward. Overall, I think that 2008 will not be another bull year for Greek equities because of high expectations, increasing long-term rates and risks of credit crunch. Neither will it be a bear year due to the defensive characteristics of the Greek market and the region. I believe that 2008 will be a stock-picking year for the attractively valued companies,
with resilient business models, earnings quality and defensive characteristics. Sector-wise, I favor gaming and utilities but will briefly discuss all key sectors: Banks: The financial sector worldwide has been experiencing significant difficulties that have led to poor share price performance lately. Although the Greek financial sector has no direct exposure to the credit issues faced by others, should this turmoil continue far into 2008, then possibly we could see the problem spill over to Greek and Cypriot financial institutions. Telecoms: Aggressive market share gains by mobile operators may jeopardize the broadband growth outlook for fixed-line providers, while the regulatory pressure to bring wholesale rates further down may spur competitive pricing pressure for facility-based operators. Gaming: The Greek gaming sector appears highly attractive due to positive momentum and resilience to economic slowdown. The outlook is positive for 2008 mainly due to the European Football Championship, Europe's biggest betting firm OPAP's restructuring and further global market penetration by Greek lottery systems provider Intralot. Consumer Goods - Retail: Although competition is intensifying, the outlook of the sector will still be dictated by the macroeconomic environment in Greece and SE Europe and consumption trends along with regional expansion and M&A activity. Industrials: Sector performance will depend on commodity prices, regional expansion and the resilience of regional growth. Utilities: Restructuring opportunities and cost cutting will be the main performance drivers along with the recently announced tariff increases. Energy: The volatile global environment and weather conditions will once again be critical parameters for Greek refiners. Transport: Following ownership changes in the passenger ferry sector there will be increased speculation for corporate action during 2008. Regarding ports, further denationalization is likely.
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Greece is a country of unique advantages and opportunities, which offers financial and legal stability, a developed infrastructure and new motives for investment.
parency. Among other measures, the Greek government: Reduced the number of operational programs from 24 to 13, to ensure better implementation and monitoring; Divided the national territory into three regions of motives according to the intensity of financial support; Introduced a more effective monitoring system; Accelerated administrative procedures for projects with a budget of under 5 million euros; Signed an agreement with the Hellenic Organization for Standardization (ELOT) for the creation of a national project management model, to ensure administrative sufficiency of final beneficiaries; Introduced the measure of open proclamations during all 2007-2013 period. Of equal importance, however, is that they are the financing possibilities resulting from the exploitation of national resources. The Greek government has introduced a modern, effective and well-drawn investment law. It is a powerful development tool that addresses the investment opportunities and challenges of the new programming period and combines the promotion of entrepreneurship with the exploitation of comparative advantages of our country in the European and Balkan territories. The new investment law has already introduced a number of innovations compared to the previous one, such as: the financing of enterprises without discrimination between the old and new, strategic emphasis on quality and new technologies, tourism, renewable sources of energy, transport and communications, more simple and objective processes, and more emphasis on transparency. Along with the abovementioned actions and programs, a range of developments in the broader economic, institutional and development environment have strengthened the country's prospects and created new investment opportunities including the new legal framework for collaboration between the private and public sectors, the adoption of modern methods for the use of public and Olympic properties, the liberalization of the electricity and natural gas supply market, and the creation of a series of strategic contracts in the energy sector. It is not by chance that during the past three years, foreign investment has multiplied almost tenfold, reaching 4.3 billion euros in 2006. Greece of 2008 is a country of unique advantages and opportunities, which offers financial and legal stability, a developed infrastructure, a competent work force, an improved tax establishment and new motives for investment. With the proper implementation of the NSRF, there will be even more room for business to explore, exploit and develop.
Panagiotis Drossos
Secretary General for Investments & Development
www.ggea.gr
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It seems that some Greek companies have already realized the new rules of the global marketplace, and they have found a promising regional niche for themselves.
nomic data brings a glimmer of hope for the Greek economy. Specifically, at the beginning of 2000, Greek exports of services (tourism, banking/financial, telecoms etc) started growing rapidly, thus increasing their share in the world total (from 1.44 percent in 1997 to 2.74 percent in 2005). At the same time, certain sectors, such as chemicals, pharmaceuticals, telecommunications and IT equipment, have gained a significant share among Greek exports. Finally, in 2006 FDI inflows in Greece amounted to 1 percent of the EU total, while that share was as little as 0.1 percent in 2003.
A deeper analysis of the macroeconomic data brings a glimmer of hope for the Greek economy.
In other words, during the last few years certain sectors of the Greek economy have displayed noticeable success in the world market. In particular, it appears that: 1. Some Greek companies have already realized the immense business opportunities that are available in the Balkans and Southeast Europe (both as market places and also as production locations) and thus they have quickly moved into the region. 2. Also, Greek companies have seen an opportunity to become important regional players (e.g. banks) and thus they have quickly expanded their operations in the area. 3. Finally, in focusing more outside of Greece, local companies have realized the need to develop long-term strategies and also to support those strategies by developing the human capital necessary to run their international operations. All in all, it seems that at least some Greek companies have already realized the new rules of the global marketplace, and they have found a promising regional niche for themselves. In achieving these new roles they have developed a new business model that depends on long-term strategy and planning, investment and, finally, development of human capital. Perhaps these companies will finally become the catalysts of the restructuring of the Greek economy that is way overdue by now.
Kostas Axarloglou
Associated Professor ALBA Graduate Business School
www.alba.edu.gr
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It is rather encouraging that many large international companies have demonstrated interest in the Greek public-private partnerships market by participating in PPP tenders.
Leonidas Korres
Special Secretary for PublicPrivate Partnerships
www.sdit.mnec.gr
reimbursement of a private partner of a PPP project cannot be used for any other purpose. In any case, our main effort was the creation of a new market of works and services. This target depended entirely on planning and tendering a sufficient number of pilot PPP projects across various sectors. By replicating successful examples and best practices in other European countries that have experience in implementing PPPs, and by closely cooperating with the competent public sector authorities, we have designed and approved the first PPP projects, which fall into diverse sectors of the economy. Today, as a result of all abovementioned actions, the Inter-Ministerial PPP Committee has approved 24 projects, with a total budget of 3.1 billion euros, which correspond to 140 new infrastructures sites spreading throughout the peripheral regions of the country. The sum of the annual future payments to be made to the private sector contractors comes to 3-4 percent of the total annual Public Investment Program. This practically demonstrates the government's will and commitment to use PPPs as a tool, complementary to public works, which in any case will not be eliminated or constrained. As had been announced and planned, the first PPP tenders were launched in 2007 in the most transparent way, precisely following EU legislation. The four projects that have been tendered, with financial closure expected within 2008, are the construction and facility management of seven new fire stations, the reconstruction of the existing infrastructure of the Faliron Pavilion into the Athens international Conference Center, the construction and facility management of the Police Headquarters in Piraeus, and the construction and facility management of six new buildings for the University of the Peloponnese. The gradual tendering of the first
PPP projects has given the market the opportunity to familiarize itself with the prerequisites and the underlying rationale of the public sector regarding these new projects. We now reckon that the market has been prepared to correspond to the requirements of PPPs. Therefore, given that public authorities now have the required expertise and know-how, in order to efficiently tackle these new projects the Ministry of Economy and Finance aims at tendering one PPP project per month. It is rather encouraging that many large international companies have demonstrated their interest in the Greek PPP market by participating in the current PPP tenders. Actually, for some of them it is the first time that they are bidding in Greece. This comes to certify the rapid, yet cautious and consistent development of PPPs in Greece. Today, with the rapid expansion of PPPs and building on the know-how acquired through the concession agreements implemented in the past, our country has all it takes to become a focal point on the map of PPPs across Southeastern Europe and the Mediterranean region. It is a fact that many countries are trying to replicate the Greek model, in terms of our legal framework, the procedures we have established and the strategy we have designed. This in essence means that companies that will be involved in PPP projects in Greece will shortly find new investment opportunities in new markets that will be developed in the forthcoming years in neighboring countries. The Greek government's launch of PPPs is a major reform which is now being implemented. It is a reform that, as has been proven, can yield great benefits for both the public and the private sectors. In any case, however, it is a reform that will yield great benefits to the Greek citizens and that will enjoy more and better-quality infrastructure and services in the years to come.
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Real Estate
Shopping malls are new to Greece and are doing extremely well on the back of expanding consumer credit levels. The retail trades positive evolution has been exceeding EU averages.
he real estate sector has traditionally been a solid pillar in Greek culture and this has been proving particularly true over the past two to three years. Indeed, following the 2004 Olympic Games the market has witnessed a number of positive developments, such as: The emergence of new areas and the enhancement of accessibility and visibility in others, as a result of massive improvements in the transport and communications networks; naturally, the Games were a real catalyst on this front. Favorable changes in tax rates: (a) of immediate effect corporate tax was slashed from 35 percent in 2003 to 25 percent today, while the recent property taxation laws have only marginally touched on commercial real estate; (b) of medium-term effect the imposition of VAT on new construction as well as (optionally) on shopping centers no smaller than 4,000 square meters. Improvements in business practices, underpinned by better-qualified personnel entering the sector and greater exchange of information and statistics (both formally, via specialized press, and informally, via greater trust being gradually built among consultants and agents alike) all leading to higher transparency levels and marking a stark difference from the opaque state of the market as recently as a decade ago. Improvements in construction standards, often triggered by the increasing presence of foreign institutions and their quest for suitable investment products and resulting in higher specification buildings with faultless zoning and land use parameters. In our view, the above trends are not expected to come to a halt, despite the international credit crunch which is undermining real estate performance almost worldwide. Admittedly, the residential sector is already feeling the squeeze; however, this is to a large extent due to the sector's overexpansion in the recent past.
Conversely, the commercial sector is recording very healthy transaction levels and as far as the latter can be traced, they exceeded 1 billion euros in 2006 and may well reach 1.3 billion in 2007. More specifically by subsector: The office sector features a serious missmatch between supply and demand, with companies often unable to find quality premises >3,000 sq.m. while an abundance of grade C&D offices plagues the market, especially downtown. This situation is anticipated to continue well into 2008, although it is hard to imagine that supply shortages will lead to monthly rents beyond 40 euros/sq.m. the last two take-ups from the banking sector in the central business district! Highstreet shops are solidly sought in prime locations and the operation of a two-tier market is increasingly apparent: Top locations command high monthly rents (up to 220 euros/sq.m.) as well as key money (up to 5,000 euros/sq.m.) while secondary ones count vacant units in despair. Again, supply constraints are a key parameter, fragmented ownership in particular. Shopping centers are a newcomer to Greece and are doing extremely well for it, on the back of expanding consumer credit levels and behavior; indeed, the retail trade's positive evolution consistently exceeding the European average since 2001 largely underpins The Mall's and other complexes' outstanding performance. More importantly, neighboring and theoretically competing traditional retail markets have witnessed only small adverse effects to date, not least because Greece is considered terribly undersupplied by international standards. The future holds a big increase in shopping center floor space (the 300,000 sq.m. of existing shopping center space in greater Athens alone is expected to more than double by 2010 should all schemes in the pipeline materialize), so this is an area to follow closely, as not everyone will emerge a winner at the end of the day. In my view, certain centers will be very successful while others may not even make it to opening day. Lastly, warehousing and logistics is probably the sector undergoing the greatest changes at present, with several schemes in the pipeline and strong demand from all quarters. Notwithstanding this is probably the sub-sector offering less potential in the short term to institutions, as occupier demand is triggered mainly by multinationals while local players prefer to owner-occupy. Still, with demand seriously exceeding supply, initial yields currently range between 6 and 7 percent and monthly rents for quality new space are expected to continue to fetch 6 euros/sq.m. In reflection of such trends and expectations, net profitability in publicly listed property companies has been outperforming most other sectors, ranging between 130 and 180 percent in 2005 and 2006 and anticipated to reach at least 120 percent in 2007.
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Real Estate
There is an important window of opportunity regarding second-home developments as Greece has not yet taken advantage of its significant assets.
found on the outskirts of big cities, offering shoppers the possibility to purchase brand labels at affordable prices. As far as logistic centers are concerned, we should definitely mention that there is a serious lack of modern facilities here in Greece. This is a fast-growing market, especially now that major international chains (ie in electronics, food, hypermarkets etc) are entering the country and are in need of modern spaces to store their merchandise. Last but not least, we should mention that there is an important window of opportunity in regards to second-home developments. Greece has not yet taken advantage of its significant assets, including its climate and beautiful landscape, which in combination with the Greek cultural heritage give it an important lead when compared with other countries. We should also not forget that Greece now receives more tourists annually than its entire population, however its absorbency of European visitors compared to other countries is less impressive since we have not developed the necessary infrastructure, such as complexes that include hotels, villas, bungalows, golf courses, marinas etc, to satisfy the everyday needs of such tourists. An important prerequisite for such development is also the creation of necessary infrastructure such as hospitals, airports and modern highways, which are now missing from the areas that are considered prime destinations for tourism.
The whole picture has definitely changed in comparison to the previous decade, but it is very important to note that we are still at the very beginning of the changes.
Regarding the great evolution that is now taking place in the Balkans, and especially in Romania, Bulgaria and Serbia, we should mention that the right set of circumstances exist for developers due to the increase in the standard of living, the change in society structures and the improvement in financial indices accompanied by a decrease in tax rates. Hence, in these countries there is a lack of modern residential development, offices and shopping malls to satisfy the increasing demand of the local population.
George Papageorgiou
General Manager LAMDA Development
www.lamda-development.net
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Real Estate
Demand for quality premises in prime locations is expected to remain strong while transactions will depend on interest from international investors.
Dr Aristotelis Karytinos
Deputy General Manager, Head of Eurobank Real Estate EFG Eurobank Ergasias SA
www.eurobank.gr
pletion and implementation of new developments, taking into consideration the increased competition and how the existing traditional retail markets will be affected. Primarily shopping malls that are either under construction or in the planning phase are expected to increase the market size by more than 250,000 m2 of gross leasable area (GLA). Demand will be maintained at high levels for highstreet and prime locations. Prime rents will stabilize and yields will follow a smooth downward trend. The logistics market displays significant investment opportunities as was characterized by the lack of modern facilities. Almost 90 percent of logistics warehouses are located in the Athens region (Thriasio Plain, Oinofyta, Mesogeia, Spata). Prime rents for warehouses in Athens range from 3.50 to 6.50 euros/m2, while rents for refrigerating units are approximately 20 percent higher due to higher specifications. Yields for warehouse and industrial space are estimated between 8 and 8.5 percent and for prime new third-party logistics centers between 7 and 7.75 percent. In 2008 demand for warehouses is expected to remain strong following mainly the rapid growth of the third-party logistics (3PL) market. The main characteristic is that demand for large-scale spaces above 15,000 to 20,000 square meters is also increasing, driven largely by supermarket chains and big boxes. The increased demand for new high-quality spaces is expected to be partially met by government initiatives, as the administration has designated six strategic locations across Greece for the development of logistics parks and the development of new distribution centers for the expansion and modernization of the major Greek ports. Supply will meet demand as long as the majority of new developments are pre-leased. Additionally rents in prime locations are expected to increase slightly, followed by a marginal fall in yields. Demand in the residential market in 2007 decreased due to the increased interest rates and the vagueness of the existing framework regarding the taxes imposed on properties. The reduction in demand has resulted in the increment of market stock reducing construction activity. The areas of Athens that have maintained high levels of demand are those where the metro now extends to. However residential prices remain almost stable. The prospects of the residential market are still uncertain and depend on the settlement of the new taxation framework. It is expected that while stock lasts, prices will remain stable with a potential singledigit percentage increase. In the medium term, zoning measures need to be taken, otherwise available construction space will be become scarce and new projects will be fewer and fewer. As far as the second-home market is concerned, many international and Greek investors have shown significant interest, but issues related to the completion of the national land registry and city planning have prevented the implementation of such investment schemes.
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Real Estate
The increase in competitiveness in the real estate sector is both legitimate and welcome. Soon run-down areas will become the focus of urban regeneration projects.
Aris Vovos
CEO Babis Vovos International Construction SA
www.babisvovos.gr
reece will claim a larger share of the international investment map in 2008. The extroversion of Greek corporations paid off in 2007 and there are even more positive messages for the new year. The progress that was noted also applies to the real estate sector, where it culminates. A competitive economy, however, requires bold reforms. Greece can become highly competitive if it becomes friendlier toward foreign direct investment, which will lead to an increase in productivity as well as employment. In parallel, our neighboring position with the growing economies of Southeastern Europe and the development of business activity in the region with the participation of numerous Greek companies renders the broader Balkan region highly attractive for investment. The real estate sector acts as the traditional engine for the global economy. It would not be out of place to characterize it as being in fashion, since over the last few years we have observed efforts from corporations to become active in the sector. The increase in competitiveness is both legitimate and welcome. In fact, further sectoral growth is expected, given the government's desire to regulate certain urbanplanning issues and to legislate the conditions and prerequisites for the development and usage of land. Once this happens it will be possible to immediately appreciate the relationship between the cost of an investment and its benefits, and judicial complications will be minimized. A particularly important factor for the future of the real estate market will be the favorable tax regime. Providing a stable and predictable environment, in combination with the reduction of tax coefficients, will give a boost to the sector. The law that was passed by the Greek Parliament in September 2005 for public-private partnerships is now mature and what remains to happen is the cooperation between the channels for the optimal utilization of the public real estate assets, as well as the development of modern infrastructure with the provision of financing, development, management and maintenance. We will soon observe the following trend in Greece: Run-down areas will become the focus of urban regeneration projects. The objective may be to cover residential needs or in order to allow the development of commercial complexes. Athens has a unique opportunity with the regeneration of the area of Votanikos. Besides, we may very well be the only European city where only a few kilometers from the historical city center there is an area consisting of so
many thousand square meters that lacks basic infrastructure and is in essence abandoned. The combined regeneration project will provide a modern football stadium a pole of attraction for thousands of people a mall of 70,000 sq.m., green areas and walking areas, and, most importantly, infrastructural work that will service at least five densely populated municipalities. This project may serve as a guide for the even better development of areas that lack the basic infrastructure necessary for a higher quality of life. The organized development of coastal residences will create surplus value for Greece. The country's coastline equals that of half the circumference of the African continent. Therefore it is easy to comprehend the huge potential. Studies have shown that in the coming years more than 5 million Northern Europeans will relocate to warmer climates, in order to live there for over six months a year. Under certain conditions, tourism can contribute almost 30 percent to GDP. Moreover, investment activity in the tourism sector is supported by favorable tax incentives and subsidies. In conclusion, whether concerning private or corporate investment in real estate assets, any type of effort at exploitation is governed by rules and occurs under certain conditions. Making a careful choice, gathering information regarding the creation of future value, conditions for building, and usages that are allowed, as well as the archaeological designation of a given area, are all areas that need to be examined. In any case, the investment of private and institutional funds in real estate assets is considered to be of lower risk compared to other investment assets, as long as it is realized after carrying out analytical indepth research and given the right timing.
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Finance
Greek financial institutions operate in an intensely competitive international environment as spreads decline and the MiFID is about to unleash further competitive pressures. Yet banks are well organized and healthy, enjoying high profitability.
he Greek financial sector is one of most dynamic and profitable areas of the Greek economy. Since the late 1980s its performance has been boosted by a gradual process of liberalization and a subsequent wave of mergers and acquisitions, which totaled 37 over the period 1995 to 2006. Greek banks became fewer and larger and, in the last decade, expanded aggressively into the neighboring region. Today, Greek financial institutions face a number of challenges regarding their growth and profitability strategy. Some of the open questions are: Will there be a new cycle of mergers and acquisitions in the Greek financial sector, which would lead to larger financial groups that are able to compete more effectively in the region of New Europe? What are the consequences of the crisis in the subprime market abroad on the domestic financial market and the cost of money? Are there substantial risks involved in the expansion in New Europe? Will the Greek insurance companies continue their restructuring and consolidation in order to take advantage of the enormous growth opportunities in the life insurance sector? Will the domestic stock market strengthen its position in the international financial system and respond adequately to the pressures of the Markets in Financial Instruments Directive (MiFID)? How can the Greek mutual funds regain the trust of individual investors? Banking sector Greek bank groups are the key players in the domestic financial system, providing a complete spectrum of financial services. Commercial banks' assets at end-2006 amounted to 352 billion euros or 164 percent of GDP. The degree of concentration in the Greek banking system remains among the highest in the eurozone. The five largest banks in Greece held 66.3 percent of total bank assets at the end of 2006, compared to a corresponding 42.8 percent in the EU-12. No major events occurred in the domestic financial market during 2007, while 2008 is expected to bring new developments concerning the future of Attica Bank and the Greek Postal Savings Bank. The challenges and risks that Greek banks face come mainly from the international market. The spread of the credit crisis which began in the USA subprime mortgage market and the growth prospects of New Europe constitute the main sources of risk as well as opportunity in the short run. Aftermath of the subprime crisis The credit crisis, which spread from the subprime mortgage markets in the US to all international credit
markets, is expected to lead to direct financial institution losses of approximately $200-$400 billion internationally. With the exception of the Greek Postal Savings Bank, the country's banks have no direct exposure to securitized products that are based on subprime mortgages or other subprime bank loans and, hence, are not expected to face any direct losses. The costs for Greek banks stem indirectly from the higher cost of capital in the interbank market (Chart 1). Since the outbreak of the crisis in August, liquidity has dried up in the interbank market. There is a reluctance to lend funds for longer periods than overnight, as the lack of information on the exposure of each international financial institution to derivative securities of low quality makes banks suspicious of each other. This higher marginal cost of bank liquidity, coupled with the reluctance of the European Central Bank (ECB) to cut its intervention rate, will translate into higher lending rates for both households and businesses in 2008, adding roughly one percentage point to lending rates throughout the eurozone. Banks will no longer offer floating rate loans based on the ECB's intervention rate or on other government short-term bills, but on the higher interbank rates, which better reflect the credit risk and the real short-term cost of money. The higher interest rates will naturally lead to a lower overall expansion of credit. In addition, some of the higher cost of liquidity is bound to be absorbed by the banks themselves. Both factors would ceteris paribus lead to slightly lower profitability.
Gikas A. Hardouvelis
Professor, Department of Banking and Financial Management University of Piraeus Chief Economist, EFG Eurobank
www.eurobank.gr
Chart 1. The subprime effect on the interbank market Eurozone: 3-month EURIBOR minus the EONIA overnight rate USA: 3-month LIBOR minus the Effective Fed Funds rate
Greek banks do not face any short-term liquidity problems, as is the case with many banks in other
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countries. The average loans-to-deposits ratio in Greece is not very high, close to 100 percent, suggesting that the Greek financial system is liquidity-neutral. Furthermore, those banks with a loans-to-deposits ratio above 100 percent have already secured the required liquidity at least until the end of the first quarter of 2008. Presently, Greek banks also have the ability to secure liquidity through the ECB in the repo market using covered bonds at a lower cost than in the interbank market. This is because the Bank of Greece (BoG) recently allowed the issuing of covered bonds by banks under a strict legal framework and a set of rules offering extra protection to investors. Covered bonds use bank assets, such as mortgages, government bonds etc, as collateral and if a loan in the collateral pool defaults, the bank is obligated to replace it with another healthy loan. Expansion into New Europe The presence of Greek banks in the countries of New Europe has intensified in recent years. They have strengthened their networks in the region either through direct acquisitions of banks in countries including Turkey, Bulgaria, Serbia, Ukraine, Albania and the Former Yugoslav Republic of Macedonia (FYROM) or through organic growth in countries such as Poland (EFG Eurobank) (charts 2 & 3). There is also active interest in the markets of the Middle East and North Africa, with Piraeus Bank already having acquired a small bank in Egypt. The profit targets in those countries are ambitious but attainable. In the case of EFG Eurobank, profitability from the international network appears low compared to the other Greek banks (see Chart 3), but this is a healthy sign. It is due to the
financing of an aggressive organic growth schedule, which absorbs most of the gross profitability of the international network itself.
Chart 2. The distribution of the branch network of the 4 largest Greek banks (3rd quarter 2007)
Chart 3. The contribution to profits according to domestic and international activities for the 4 largest Greek banks (3rd quarter 2007)
Developments in the domestic market Despite its small size, the domestic market is the one that presently supports the profitability of Greek banks (Chart 3). Credit expansion to households and businesses continues to be strong and outperforms the corresponding expansion in the eurozone. In September 2007, housing loans in Greece increased by twice the corresponding rate in the eurozone (22.3 percent against 7.8 percent on an annual basis). Consumer loans increased by 20.8 percent (4.1 percent in the
The increasing dependence on bank profits coming from abroad suggests that the macroeconomic and financial risks in New Europe are gaining importance. Yet 2008 is expected to be a year of high growth in the region with all countries growing above 5 percent and with their financial sectors expanding at even faster rates.
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Finance
eurozone) while business loans increased by 12.1 percent (13.4 percent in the eurozone). In the last two years, there has been an increase in the growth of business loans with a simultaneous decrease in the growth of loans to households (Chart 4). Total loans are expected to continue increasing in 2008, since the Greek banking system is mature, although not as much as in the EU-13. The private sector credit-to-GDP ratio stood at 87 percent in Greece and 176 percent in EU-13 in the third quarter of 2007 (not including securitized loans).
management of insurance company assets in the past (Chart 6). Over the last few years, there were significant efforts aiming at higher transparency and reliability in the Greek insurance sector. The establishment of a new public authority at the Ministry of National Economy for monitoring the insurance market constitutes an important first step. There is significant consolidation in the sector as well with the weaker companies being forced to cease operations or be taken over. The number of insurance companies operating in the Greek market at the end of 2006 decreased to 90 from 110 in the year 2000. From the official number of 90, only 77 were in actual operation (63 Greek and 14 foreign companies) at end-2006, with most of them operating in casualty insurance. The Athens Stock Exchange Following the price and trading volume boom of the late 1990s and the crash of 2000, the Greek stock market has subsequently recovered, follow-
Chart 6. Insurance sector asset investments and revenues from insurance premiums (percent GDP)
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ing the rise of the international markets from 2003 onward. The entry of foreign institutional investors and the increasing profitability of enterprises were the main driving forces behind the renewed interest in the market. Since the beginning of 2003, the general index of the Athens Stock Exchange (ATHEX) has gone up by 193 percent, and as of December 12, the year-to-date increase in 2007 is 16.8 percent, outperforming most international stock markets. The ATHEX's aggregate price index reached an all-time high on October 31, 2007, corresponding to a capitalization of approximately 202 billion euros (Greek GDP in 2006 was 214 billion), while at the beginning of December 2007 it was 196 billion. A main feature of this period is the continuously rising share in the participation of foreign investors. In October 2007, the share of foreign investors amounted to 57.2 percent of total capitalization and was concentrated mainly in large and medium-size companies, against a share of only 36.4 percent in December 2004. The rise in prices and the influx of foreign investors revived interest in raising new company capital through the ATHEX as well. In the first nine months of 2007, 9.1 billion euros were raised through IPOs and SPOs, a six-year high (2006: 4.1 billion, 2005: 4 billion). Today, the Greek stock exchange and all Greek brokerage firms and other related intermediaries are called upon to adapt successfully to the new environment to be shaped by the creation of a single European market for financial services (MiFID). The transposition of European directives concerning financial service markets into Greek law opens the way for investors to gain access to all member states' markets under a common institutional framework, thus increasing competition and reducing transactions costs.
Mutual funds Greek mutual funds are bleeding. In 2007, just as in 2006 and earlier, both open-end and closedend funds failed to keep pace with the rising stock market. Open-end fund assets in the first six months of 2007 decreased to 23.6 billion euros, from 23.9 billion at the end of 2006 and 35 billion at the end of 1999. Greek mutual funds represent an aberration to a positive international environment for funds (Chart 7). Something is definitely not right. Perhaps the funds market would reverse course with the application of long-awaited essential reforms (tax regime, legal framework for operation of hedge funds etc). The same dismal picture holds true for the assets of closed-end funds, which peaked in 1999 at 4.2 billion euros, but at the beginning of December 2007 were approximately 0.25 billion. Part of the drop in size is also due to the fact that a number of active closed-end funds were absorbed by their parent banks. Conclusions Greek financial institutions operate in an intensely competitive international environment as spreads between bank lending and deposit rates are declining and MiFID is about to unleash further competitive pressures. Yet banks are well organized and healthy, enjoying high profitability. This is also evidenced by the fact that the current international banking crisis, which originated in the US subprime mortgage market, has not affected them. The cost of the crisis is only indirect and minor, as it works through the higher cost of attracting funds in the interbank market. The future of Greek banks depends critically not only on their success in competing effectively in the domestic market, but also on the success of their international expansion, mainly in the coun-
tries of New Europe. These countries are growing fast and their financial sectors even faster. Thus Greek banks are posed to do well. Of course, international expansion requires a careful strategy and an active monitoring of associated risks. Other sectors of the Greek financial system, such as insurance companies or the mutual funds industry, must resolve a series of deep-rooted problems and weaknesses, before achieving sustainable and dynamic growth.
Chart 7. The increase in mutual fund assets during the 1st quarter of 2007 (percent)
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Finance
The Greek economy has benefited greatly by becoming extrovert over the last decade or so. SE Europe has become one of the faster-growing regions globally. Greek companies have invested successfully in the area, mainly in banking, energy and telecoms.
as there is limited exposure to it have resulted in the credit crunch that has dramatically increased interest rates. The domestic deposit pool is not sufficient to fund the credit expansion and as domestic banks cannot turn to the non-existent debt capital market or other forms of wholesale funding, they will eventually have to charge higher interest rates to the borrowers. Turning to global markets, the outlook for 2008 is quite bleak. The market expects US growth to slow before rebounding in the second half of 2008. Some see the risk of a hard landing in the US and the majority of investors have turned risk-averse. There is little appetite for risk and there is huge uncertainty surrounding the financial sector. But what people tend to forget is that the US dollar has lost 35 percent of its value during the last five years and this is the most competitive dollar price that most of us have seen in our working lifetimes. At the same time, markets have pushed down asset prices (equity and real estate) in the US. We believe that the relative value of US assets will increase investment in the US, which in turn will lead to the strengthening of the currency to 1.30-1.35 euros by the end of 2008. Greek stocks will follow the same pattern. We expect a slow start and then the markets trading higher in the second half of the year. Bonds in the US and the eurozone have little relative value as the recent flight to quality has led to higher prices / lower yields to the point of no zero real returns, as yields on 10-year bonds are close to the inflation rate. The Asian story is here to stay, irrespective of a possible near-term correction, therefore we expect commodities to continue providing good investment value.
Dinos Kamaris
Head of Treasury and Capital Market, HSBC Greece
www.hsbc.gr
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Insurance
Curbing the generosity of state pension systems is the task of the day they will otherwise collapse under the burdens piled upon them by demographic change.
emographic changes rarely come without warning. The aging of the baby boomers has been on the cards for the last 40 years and the lifespan of the populations of the most industrialized countries has been increasing for more than two decades. But it took time for policymakers to realize that pay-as-you-go (PAYG) pension systems would not be able to cope with the demographic challenges looming on the horizon. In the mid-1990s, however, the message finally began to sink in and the reform process was launched. Nevertheless, different countries across Europe are proceeding at different speeds. While the new European Union member countries of Central and Eastern Europe created new pension systems from scratch after the collapse of the Council for Mutual Economic Assistance (COMECON), many Western European governments are still struggling to find a suitable design for their pension systems. In the coming years we will continue to see different degrees of pension reform among the Western European states. In this study we look at the Western European pension markets, comprising the EU-15 countries as well as Norway and Switzerland. Curbing the generosity of state pension systems is the task of the day they will otherwise collapse under the burdens piled upon them by demographic change. Rising numbers of pensioners and the baby boomers who have yet to retire fewer workers as a consequence of falling birthrates and increasing life expectancy are all putting pressure on the pay-as-you-go pension systems. Since taxes or social security contributions cannot rise much further without undermining the competitiveness of the European economies, declining benefits are the logical consequence of demographic developments. This can be achieved by raising the official pension age and removing incentives for early retirement on the one hand and a straightforward reduction in benefit levels on the other. Demographic changes are forcing many countries to abandon their complete reliance on PAYG financed pensions. Governments are beginning to realize that state pensions are a risky asset - at least for those who are still working and trying to calculate how much they will receive after retirement. Returns in PAYG systems are as volatile as the rules, determining how entitlements are translated into actual benefits vary over time. However, the alternative funded pensions is usually regarded as the riskier way to provide for old age.
Given demographic forecasts, this need not be the case. Returns from funded schemes may well exceed those from unfunded ones, and at comparable or lower risk. Unfortunately, a complete system change is not possible in most countries as the time remaining to accumulate the necessary funds for the baby-boom generation is now too short. Given that the forces driving returns of funded and unfunded pension schemes are not perfectly correlated, a mixture of both schemes is the best way to prepare for the future. A higher degree of funding in pension provision means of course that fluctuations on capital markets affect pensions directly. However, some fears in this respect are ill-founded. A very common argument against funding is the so-called assetmeltdown hypothesis. In short: Asset demand among baby boomers drives up prices; once they retire and try to sell their assets, there are not enough buyers around and asset prices are bound to collapse. As simple and clear-cut as this hypothesis sounds, it is likely to be proven wrong. The argument concentrates on the demand side while completely ignoring the supply side. Asset prices will only inflate if demand outgrows supply. There are many reasons to believe that demand for capital will keep on growing. Investments in fast-growing emerging markets and the need to upgrade production lines as labor becomes scarcer in many developed countries are only two arguments as to why capital demand will remain high. Furthermore, the world population is set to keep on growing, even in developed markets as the predicted population increase in the USA from 290 million today to 400 million in 2050 shows. Investments will need to be well diversified in future, but today there is no reason to believe that after 2030 asset markets will collapse for demographic reasons. It is evident that the increasing importance of individual and occupational pensions offers huge opportunities for asset managers and life insurance companies in Western Europe. More and more funds will be channeled to these companies, tied to the hope that their successful management secures a long and happy retirement. The task for financial service providers is to meet these expectations and offer sound asset liability management and a good investment strategy. These are becoming ever more important, given rising life expectancy and lackluster returns on capital markets. A prudent long-term investment policy and superior investment concepts can significantly contribute to alleviating the pension challenge.
Petros Papanikolaou
CEO Allianz Greece
www.allianz.com.gr
45
Insurance
Greece has bright prospects as local consumers are under-insured compared to their EU counterparts, with financial services representing a mere 2 percent of the Greek GDP.
Eric Kleijnen
Managing Director AXA Asfalistiki SA
www.alpha-insurance.gr
reece has a bright economic future. Compared to more mature European countries, the Hellenic Republic capitalizes on continuous superior growth, skilled human resources, European support and a lot of unfulfilled social needs. Financial services definitely have a big role to play. Experience shows that insurance contribution to GDP increases more than proportionally with the revenue per capita. Greece has even brighter prospects as local consumers are currently under-insured compared to their EU counterparts: Financial services represent a mere 2 percent of the Greek GDP against 8 percent in Portugal for average revenue per capita in the same range. To foreign professionals, the local insurance market looks old-fashioned, in volume, in product and service range, in pricing techniques, in business-oriented communication, and in distribution and market-driven field-marketing approaches. Overall practice looks very traditional, competing mainly on price and commissions, refraining from entering differentiation and customer-oriented evolution. Big foreign players are hungrily eyeing the Greek market for its potential and the way they could capitalize on the experience they have accumulated in more advanced markets. They are expected to bring additional value to both individual and industrial Greek customers, in segmented and differentiated products and services, in benefits, in segmented pricing, in servicing, and in improved end customer share in the value chain: With the current distribution and management costs, the return from his premium is definitely lower than in most European markets. International (and certainly some national) players would love to leverage local insurance practice, especially newcomers. In reality, they adopt a somewhat wait-and-see attitude, despite the huge amount of goodwill they paid to enter the Greek market. One main reason for this paradox are some questionable aspects of the local playing field. The motor business is quite a good example. Some (not always very small) consistently unprofitable companies poison the market with pricing far below real costs. In other European countries, their license would be revoked or they would be put under special administration. It is true that the Greek insurance watchdog took measures in the summer of 2007, but only a limited range. Common practice did not really change. According to the last statistical report from the Greek Insurance Federation, the 2005 combined (including claims, commissions and management costs but excluding financial profits)
motor insurance ratio ranges around 105 percent of premiums, in first observation. The same report shows that first observation claims increase by no less than 75 percent in the next five years, bringing losses to unprecedented heights. No sustainable market can survive with such figures. No supervisor should accept them, as such levels of misevaluation of provisions. Whether such provisions are short or long, their volatility is way beyond every acceptable professional practice. The unique way for said steadily unprofitable companies to survive is to look for growth at any price on one end and to differ and minimize claims payments on the other, further destroying market and customer value. The same is true in pensions. Aging is definitely the major social challenge our societies and economies are facing. Insurance companies are at the forefront: The core of their activity relates precisely to managing risks in the long term. In this respect, some local insurers have found, it seems, the philosopher's stone. They apparently solved an issue which is still at the research stage in the world's most advanced pension markets, including the US and the UK. One needn't be an experienced actuary or supervisor to wonder how defined annuities can be offered to a 30-year-old customer, payable in 35 years for probably some 30 years, based on current mortality tables, underestimating even current survival expectations. What will it be in 35 years, when the annuity will become payable? And as if that were not enough, guaranteed returns exceeding all risk-free historical averages are the cherry on the cake. In private, Greek stakeholders acknowledge the situation. They then refer to economic nationalism or political influences. Maybe, maybe not. No possible protection of steadily unprofitable local actors, for whatever reason, short-term political or electoral consideration, can put the long-term revenue and wealth of Greek society at risk! Strict insurance supervision is a prerequisite for the Greek insurance market to flourish. Leveraged by an adequate legal, fiscal and governance environment, a dynamic and sound insurance sector will, on a sustainable basis, offer crucial cooperation in financing our long-term key social challenges. Public social security systems will not be enough. Strong professional supervision, preventing further companies' explicit or implicit collapse, will revive the reputation of the industry and Greek consumers' trust: No one is prepared place his long-term future in the hands of providers whose financial and professional reliability is not solid as a rock: As of today, it still is not the case.
46
Insurance
A growing number of insurance companies are operating successfully in bancassurance, which is seen as being the major driver for market growth.
in Greece, compared to 114 in 1999. Seventeen are life companies, 60 non-life and 13 composite. The market is mostly concentrated among the 10 biggest companies with an 86.3 percent market share in life and the 10 biggest in non-life with 56.6 percent. Total insurance premiums for 2006 amounted to 4.3 billion euros, of which 52.5 percent was in life and 47.5 percent in non-life. Despite the considerable growth that the insurance sector has shown over the last seven years (total insurance premiums for 1999 reached 2.4 billion euros), insurance premiums as a percentage of GDP come to only 2.2 percent, compared to an 8.3 percent average for the 33 CEA countries (Communaute Europeenne d'Assurance).
The outlook for the Greek markets remains positive despite the expected turbulence in global markets.
Estimates for macroeconomic developments are positive, a fact that surely reinforces the prospects of the insurance market. he sector has the potential to grow faster than the Greek economy, due to low penetration compared to other sectors such as banking. Bancassurance and other retail businesses are positioned to be the driving forces. The market of industrial risks will not grow. The absence of strong tax incentives for private insurance in Greece remains a major issue. The market is lobbying strongly for the abolition of stamp duty as well as the increase in incentives which will contribute to market growth. Social insurance reform in Europe in general and specifically in Greece is just a matter of time. It is evident that the new framework should treat the services of private insurance companies as a key factor. The new supervisory authority, which will be fully operational as of January 1 2008, is expected to be a catalyst for the development of the sector and the market. The outlook for the Greek markets remains positive despite the expected turbulence in global markets. The Greek insurance sector will most probably continue its growth and reform, eventually converging with European averages from both the quantitative and qualitative perspectives.
Doukas Palaiologos
President and CEO Ethniki Insurance
www.ethniki-asfalistiki.gr
47
Market
The soft-drinks market is expected to keep on moving at a stable pace, with consumers showing a preference for established brands.
Dimitris I. Vidakis
Country General Manager Coca-Cola Hellenic Bottling Company
www.coca-cola.gr
he evolution of the alcohol-free beverages market in Greece is defined by a number of factors that concern Greek consumers' habits and market trends. The most important of these are: Technological progress, along with significantly developed industrial research and development that increase the scale and variety of qualitative products, leading to more specialized nutritional solutions that cover even more nutritional needs; New working conditions, the rapid pace of living and long periods away from home on a daily basis, which lead to the consumption of more water, juices and refreshments in general; Today's consumer needs for beverages that offer something more than simple fruit flavors; Consumers' shift to well-known brands with valid certifications regarding their quality. In addition to the above, we have to take into consideration the fact that Greece has been one of the fastest-developing countries in the EU over the past 10 years. The performance of Greek industry during 2007 in macroeconomic figures is considered to be satisfactory. Since the beginning of this year, the country's financial climate has been positive, a fact that has resulted in financial growth in general. In addition, industry investments have followed an upward trajectory. In retrospect, the market's course during 2007, regarding soft drinks, water and juices sectors, has also been northbound. The Greek juices market is characterized by its significant growth perspectives. Regarding consumers' preferences, there is an obvious need for specialized products, in functional packaging as well as for enriched juices that contribute to physical health with nutritional vitamins and minerals. The soft-drinks market is expected to continue at a stable pace. Consumers are showing a preference for established brands that cover their needs for freshness and enjoyment. As far as bottled water is concerned, the Greek market, compared to its international peers, has in recent years shown significant growth without having exhausted its growth prospects. In 2008 we will continue to monitor both the socioeconomic environment as well as consumer trends in order to be able to respond fast to any emerging changes. The strategic objective of the Coca-Cola Hellenic Bottling Company (a member of the Coca-Cola Hellenic Group) is to further enhance its key position in these markets via the launch of innovative products, responding to continuously evolving consumer needs,
and robust involvement at points of purchase. In 2007, according to plan, we successfully launched new products, while continuing to invest in health and wellness products which, along with light products, have shown an increase in consumer penetration. Taking into consideration future market trends, Coca-Cola HBC has developed innovative products in soft drinks, juices and water. In the water category we launched Avra Active, featuring an ergonomic bottle with a new easy-toopen sports cap in response to consumers' needs. Additionally, during 2007 our company launched: Coca-Cola Zero, which preserves the authentic taste without sugar, constituting a case study in the Greek soft-drinks market; Amita Motion Energy Bars biscuit bars with nine fruits and seven vitamins that meet the daily diet's continuously increasing requirements for natural energy in the healthiest way. Having developed the basic juice product, we created one innovative snack to launch the company into the energy bar category. An Amita Juice range with antioxidants as well as the Amita Apple and Cinnamon Juice, the first juice designed to be consumed hot or cold. According to consumer research, market trends for the next years will be characterized by intense competition and growth. Consumers will continue to seek out qualitative products with functional benefits as well as attractive packaging at reasonable prices that reflect their everyday habits, available at the right sale points and produced by socially responsible companies.
48
Telecoms
Greece is faced with four major difficulties that are hindering market competiveness; these are: high inflation, indirect tax increases, bureaucracy and the public sectors unwillingness to utilize telecom services.
Babis Mazarakis
Chief Operating Officer of Vodafone
www.vodafone.gr
Vodafone is placing emphasis on Mobile Plus, which will provide integrated mobile/PC Internet, leading IP services and VAP complete home solutions. Under this framework, consumers will be able to increase the services available on their mobile phone, which will become an integral part of their daily lifestyle activities and interactions. We, in Vodafone, believe that the stronger our competitors, the better we become, exceeding our own targets. The telecoms industry is a very intense and competitive environment and will continue to be so in terms of pricing and services offered. We respect our competitors, whoever they may be, and we are in favor of a 'fair yet intense' rivalry with the customer being the end-winner. Vodafone Greece will maintain its focus on listening to customer needs and addressing those needs in the best possible way by exploiting both the Group's innovative approach as well as local know-how and expertise. This business model is aimed at a long-lasting relationship with Vodafone's customer base, enhancing existing clientele and offering firstclass products and services. We are very optimistic about the future and we reckon that there are many unexplored fields that are just waiting for a new Columbus. However, in order to maintain this pleasant position, the framework under which you need to operate must be able to support this approach. Our contribution is clear since sector competitiveness has been questionable for the last five years and is expected to continue to shrink. Prices have fallen by almost 15 percent per annum. There is a standard price reduction every year against a services quality and investments increase. Greece, among others, is also faced with four major difficulties which hinder market competiveness: a) Inflation is on the rise along with the cost of living and, therefore, there is consumer expenditure is reduced; b) indirect taxing is increasing; c) the public sector and its overall bureaucratic approach, as well as reluctance in applying the law; and d) the public sector's unwillingness to utilize the services offered by the telecoms market (i.e. broadband, mobile services etc) in order to facilitate the relationship between the citizen and the state. These four points should be viewed as an opportunity since the existing relationship between companies and local communities is not the desired one and is holding back the upgrading of citizens' living standards and lifestyles.
50
Telecoms
The mobile telephone sector is at a turning point, with the driving force in the sector probably being the launch of advanced value-added services based on the possibilities of 3G technology.
vertical disposal of services, including constant, mobile telephony and broadband Internet, as another, new perspective for the coming years. By providing high-speed, mobile Internet access, these technologies open up a landscape where users can communicate, read, listen, watch and work as they wish, wherever they wish, using mobile services personalized to their interests and even their physical location. Today the sector is at a turning point, as third-generation (3G) applications gradually increase in usage, and this is definitely something that will grow significantly in the next years. Although voice services continue to represent the bigger percentage of total sales for the companies, the driving force in the sector will very probably be the launch of advanced value-added services based on the possibilities of 3G technology. Therefore, considerable investments in new infrastructure for the expansion of 3G networks and generally wireless technologies such as WiMax must be made so as to cover a wider area of the country and that is a must for all Greek providers if they want to remain competitive. Moreover, consumers' growing appetite for double, triple or even quad play services under the same provider indicates a trend for convergence that big enterprises seem to be adopting. Customers seem to prefer to have all their communication services (fixed line phone, mobile, broadband internet and gradually TV services) from the same provider and to deal with only one company for their communication needs. Some years ago the telecommunications industry in Greece was dominated by the Hellenic Telecommunications Organization (OTE). The major characteristic since market liberalization is the great number of companies that provide telecommunications services. Especially at the beginning, this number seemed and truly was disproportional to the potential number of
customers each company could have. However, companies need to make huge investments in order to meet the market's needs and expectations and to also keep up with technological evolution. This implies considerable costs for those who wish to gain a share of the market and remain competitive and I believe that progressively a lot of small providers will face difficulties in surviving. Mergers and acquisitions among small telecom enterprises will remain the main trend in the telecommunications market, not only in Greece but also in other countries, because this will be the only way to fulfill the advanced customers' needs as well as exploit the economies of scale that such synergies can offer. Also consider that in 2006 the value of mergers and acquisitions in the telecommunications sector reached almost 3 trillion euros and this year the figure is equally high. The case of Greece is certainly a distinctive one since we have witnessed major business agreements like the takeover of Germanos by Cosmote, the cooperation of HOL and Vodafone, and last but not least the buyout of our company by Weather Investments last February, which by the way is considered one of the biggest deals in the telecommunications sector worldwide. WIND Hellas also purchased the minority stake in Tellas which was previously owned by the Public Power Corporation. This acquisition has furthered WIND's commitment to deliver Greek consumers integrated telecommunications services, introducing them to a new era of converged technologies and becoming the leader in the Greek telecommunications market. It is clear that the industry is undergoing transformation, but what about the consumer? The figures reveal that consumers are eager to benefit from liberalized converged services. Today LLU connections (fixed lines fully liberalized) are continuing to increase rapidly, shaking
OTE's position in the market. More than 2,000 new broadband connections are being made and analysts forecast that by the end of the year the penetration of broadband services will reach 9 percent. If we take into consideration that broadband penetration on the EU level averaged more than 20 percent, it is clear that the Greek market still has great potential for growth. The new landscape also indicates a special need for the independent regulatory body of our country, NTC, to safeguard the new regulatory framework and accelerate the process of opening up the sector to competition. Intense competition will certainly work in favor of the consumer, thus increasing the demand of new telecommunications services. In this environment, WIND Hellas is favorably positioned to offer integrated telecommunications services, namely mobile telephony, fixed telephony, broadband Internet and also video on demand.
George Tsaprounis
Corporate Communication Executive Director of WIND
www.wind.com.gr
51
Telecoms
The Greek telecoms market is experiencing a long-awaited boom in broadband. This trend is expected to peak in the coming months thanks to a mix of favorable socioeconomic and sector indicators.
roll-out, capacity enhancement and the development of new applications such as IPTV (Internet Protocol Television). These investments will enlarge the market, making fast Internet connections available to a growing number of potential customers, households and businesses. Personal computer and Internet penetration, still among the lowest in Europe, are growing rapidly, benefiting, among others, from government programs bringing PCs and connectivity to primary and secondary schools. Internet applications such as file downloading, social networking and video sharing sites, WebTV and online gaming are booming, especially among youngsters, and require a very fast connection to work effectively. Greek businesses are increasingly adopting dataintensive applications including electronic commerce, virtual private networks (VPNs), virtual hosting, virtual remote services, video conferencing, video surveillance etc. All these applications will continue to drive demand for bandwidth and, as a result, fast Internet connections. In summary, the Greek telecoms market is finally experiencing the long-awaited boom in broadband. This trend is expected to peak in the coming months thanks to a mix of favorable socioeconomic and sectoral indicators. This is very good news for the Greek economy. As repeatedly stated by Greek Prime Minister Costas Karamanlis, the future economic growth of the country is directly linked to the advent of the digital and information society.
Ruggero Gramatica
Managing Director On Telecoms SA
www.ontelecoms.com
52
Markets
2008 Sectoral Overview
National P&K Securities
conomic growth, regional expansion, corporate actions, restructuring and earnings growth have all been key drivers of shares performance during 2007. As far as 2008 is concerned, we think that it will not be another bull year for Greek equities because of increasing long-term rates and risks of a credit crunch. Neither will it be a bear year due to the defensive characteristics of the Greek market and the region. We believe that 2008 will be the year for attractively valued companies, with resilient business models, earnings quality and defensive characteristics. Sector-wise we present our view below:
Banks
During 2007 Greek banks enjoyed a growing market for credit products; however competition in the sector has been intensifying these, as new players appeared or some existing banks have become more competitive. We are positive on the banking sector due to the fact that Greece and the broader region are experiencing a solid macroeconomic environment; economies are growing fast and credit expansion in most of the countries is impressive. Following this, most Greek banks have expanded their business in the region, establishing significant footholds and, having acquired significant experience in banking domestically, are applying their respective business models in these foreign markets. In the coming year we expect enhanced business volumes, and increasing bottomline contributions from the foreign operations. In addition to this, many Greek and Cypriot banks are maintaining high levels of liquidity, a fact that would give them a significant competitive advantage should the credit turmoil persist throughout 2008. On the other hand, the financial sector worldwide has been experiencing significant difficulties that have led to poor share price performance. Although the Greek financial sector has no direct exposure to the credit issues faced by others, should this turmoil continue far into 2008, then possibly we could see the problem spill over to Greek and Cypriot financial institutions. Finally, risks in the global macroeconomic environment are increasing and should the significant global growth slowdown scenario materialize, difficulties faced by the largest economies could also affect macros in the region. All in all we think that the main catalysts will be M&A activity and any further divesting of state-owned banks.
taken its way. However, the aggressive market share gains by mobile operators may jeopardize the broadband growth outlook for sole fixed-line providers, while the regulatory pressure to bring wholesale rates further down may spur competitive pricing pressure for facility-based operators. Bearing all this in mind we conclude that the catalysts which will mainly affect the sector are the following: a) industry consolidation among alternative players (yet outright exits are unlikely at this stage as market growth is likely to nourish laggards over the next two to three years); and b) accelerated positive contribution by regional activities for the Hellenic Telecommunications Organization (OTE) Group coupled with possible government stake disposal/strategic investor interest. It is worth noting that during 2007 the shares price performance was positively sustained by Marfin Investment Group (MIG)'s build-up position in OTE and Cosmote's minority buyout by OTE. On corporate terms, the key catalyst in 2007 was the launch of fixed/mobile converged offers by Vodafone and Wind/Tellas. For 2008 the telecom share price catalysts are a) the evolution of domestic fixed market in customer churn and migration toward LLU mobile players, b) the potential appearance of a strategic investor for OTE, coupled with the active role of MIG in management decision-making, c) the further evolution of Romtelecom, d) the evolution of Forthnet's market share in ADSL/LLU customers, and e) circa 50 store openings of Forthnet.
Gaming
The Greek gaming sector appears highly attractive since growth in terms of revenues is continuous (CAGR 1998-2006: 16.2 percent) while domestic sales per capita are the highest within Europe. No matter if the Greek gaming sector is inelastic to economic slowdown, the sector relies heavily on the state's stance toward gambling, which could change following recent trends in the EU. During 2007, the sector was influenced by the signing of the contractual agreement between Europe's biggest betting firm OPAP and Greek lottery systems provider Intralot regarding the procurement of terminals by the first, the appointment of Christos Hadjiemmanuil as new president and CEO of OPAP, the uptake by Intralot of new projects (South Korea, Russia, South Africa, Australia) and the grant of operation licenses in Italy and Madrid. The coming year looks again positive mainly for the following reasons: a) Euro Cup play, b) the announcement of OPAP's business plan, c) the possible launching of the game KINO on ships, d) the approval of new games by the Greek state (e.g. VLT), e) in-house risk management of Stoichima by OPAP, and f) further market penetration by Intralot despite the fact that US lotteries privatizations look highly improbable for 2008.
Telecoms
Broadband growth in the domestic market (that lags at least 20 percentage points in country penetration vs EU averages) makes the Greek telecom market looking promising. Furthermore, the consumer trend toward bundled usage tariffs and the uptake in unbundling of local exchanges enhance the view that sector development has
grants and currency movements influenced the sector's performance to a great extent during 2007. No matter the market's maturity, the enhancement of competition and the negative demographics from the Greeks, the retail - consumer goods sector has potential. Key performance drivers are still the macroeconomic environment in Greece and SE Europe, consumption trends along with regional expansion and M&A activity.
restructuring (Hellenic Petroleum) and CapEx rationalization, all aim at tangible benefits such as maximizing profits an investor-friendly policy evident from the high dividend payout (Motor Oil). However, sporadic government interference and the potential shutdown of a hydrocracker unit pose a risk to cash flows (Motor Oil). For 2008 the energy share price catalysts could be the volatility of the global environment (Med cracking refining margins, dollar/euro, oil prices in 2008), weather and speculation for further MOH placement.
Industrials
During 2007 industrial sector companies intensified their efforts in further expanding their business in the fast-growing Balkan regions and establishing distribution networks in Southeast Europe. However, high commodity prices hurt demand for some products (especially copper products) and affected fabrication margins, negatively impacting margins, and significantly increasing working capital and financing needs. In addition, the prevalence of substitute products, especially for copper products, still represents a threat to revenue. All in all, we are positive about the sector since the anticipated lower commodity prices will have a positive impact on margins, working capital and financing needs. At the same time, international demand for bauxite will continue (S&B Industrial Minerals), while further capacity additions are expected to increase volume and profitability (Viohalco Group).
Transport
Industry consolidation and last year's vessel disposals are likely to boost utilization rates and load factors in the Adriatic Sea, offsetting a sluggish top line at the operating profitability level. In addition, further rationalization in debt structures through refinancing are expected to lead to overall lower interest expenses in the coming quarters. All in all the domestic market is estimated to continue to drive growth in top line and margins due to superior utilizations. In contrast, rising fuel costs and competition set key barriers in margin expansion, while potential refleeting (possible in the case of Minoan Lines) may stress debt capacity on balance sheets. The realization of economies of scale and synergies with competitors in common markets remain the major catalysts in 2008 following the public offer of MIG for the Attica/Blue Star shares, which may lead to owner structure change. Regarding ports and particularly the Piraeus Port Authority the privatization prospects following the completion of the new container terminal are expected to act as positive share catalysts in the coming year along with a potential stake reduction/ placement by the Greek state.
Utilities
Utilities in Greece exhibited a solid performance during 2007 mainly due to monopoly power; water utilities maintain exclusive water and sewage rights in Greece and the Public Power Corporation (PPC) maintains the electricity monopoly despite the market deregulation on July 1, 2007 along with the strong and sustainable electricity demand that we expect in Greece in the future. Also the management is making important efforts to bring about significant changes, especially in the improvement of operation expenses containment (PPC); we mention the low generation cost due to exclusive access to lignite, despite the poor quality and carbon dioxide (CO2) emissions. At last water utilities have presented strong balance sheets, relatively lean and efficient operations and, following the annual tariff increases that are already approved, there is a satisfactory capital expenditures (CapEx) plan ahead. However, increasing commodity prices, government interference and the slow regulatory change in Europe and in Greece are negatively influencing the sector's performance. For 2008 we expect that restructuring opportunities and cost cutting will be the main performance drivers along with the tariff increases.
RES
The high wind load factors that Greece enjoys combined with strong incentives, such as feed-in tariffs and power purchase agreements, positively affected the renewable energy sources (RES) sector's performance during this year. However, wind levels may vary from year to year and good spots for wind park installation become fewer due to high investor interest. Moreover, there are high CapEx needs and the timely supply of wind generators is not guaranteed as demand is reaching higher levels. Bureaucracy and litigation issues as well as local community unrest in some cases significantly delay the licensing and installation of the RES parks, although new laws aim to reduce bureaucracy. The year 2008 will prove whether bigger expectations for the sector are justified and whether huge investment projects are feasible.
Energy
The volatile and negative environment, evident from the weak US dollar, relatively unchanged refining margins year-on-year and decreasing trading activity due to oil prices increased volatility and lower demand influenced the sector's performance to a great extent during 2007. On the investment positives we highlight the limited domestic competition due to high entry barriers to foreign competitors. In addition, solid financials with low leverage, tight CapEx discipline, ongoing cost containment, operational expenditure (OPEX)
55
Securities
Volatility is expected to continue in 2008. The majority of banks and companies do not seem affected by the defaults in the US subprime sector but there will be some side effects.
Alexandros Billis
President of Euroxx Securities
www.euroxx.gr
that as the crisis becomes deeper, we will inevitably see some side effects in the Athens Exchange. Foreign investors, who hold more than 50 percent of Greek stocks, might decide to cash in some juicy capital gains if the picture in the US becomes uglier and the declining stock prices continue to affect the total value of their investment portfolios. The question now is whether the Greek market can minimize the effect of the US subprime crisis, surpass the negative macro-backdrop and continue its upward trend for the sixth consecutive year. The answer can be found in the fundamental dynamics of the Greek market, the growth potential of local companies, their market positioning, and, most importantly, their expansion overseas. The majority of Greek banks and a multitude of other companies have already expanded their operations abroad, mainly in the Balkans and in Southeastern Europe. The aforementioned regions are characterized by high growth prospects (GDP growth exceeds 5 percent per annum) and favorable market conditions (i.e. underdeveloped financial activities). Greek companies have thus created a new source of revenue stream that is expected to accelerate in the future. At the same time, they have strengthened their position in the globalized business environment and hedged themselves against the gradual deceleration of the Greek economy.
56
Securities
On the domestic scene, the economic agenda in 2008 will be centered on market deregulation and social security reforms.
International Airport. Other developments with a smaller impact, such as the operation of the alternative market on the Athens bourse, licensing casinos, speeding up energy projects and the utilization of state real estate assets are also likely to have an impact on different economic fields. Company profitability in the next financial period will not enjoy the same tax benefit from a reduction in tax rates as in previous years. However, consolidated balance sheets have increased inflows from developing countries, offsetting any lack of growth domestically. Bank sector revenues from New Europe amount to 20 to 25 percent of income and many network investments will have been completely recovered by 2008. A similar situation exists with commercial companies while the consequences from the slowdown of the housing market in the US only relates to isolated cases. For 2008, we estimate that profitability growth rates will be in double digits between 12 to 14 percent.
The trend and need to find new technology that is friendly to the environment is expected to stir more intense investor interest in ecological investments.
Regarding merger activity, we expect talks to pick up in a series of different fields with a main emphasis on the domestic economic scene. Social security reforms can operate as a catalyst for takeovers in banking and low profit margins in telecommunications leave open the possibility of a consolidation among alternative carriers. A similar situation exists with ferry operators where a cycle of buyout activity is in process and increased oil costs are putting pressure on margins. There are still large amounts of liquidity on company balance sheets in the retail trade sector which can potentially be used for buyouts in or out of Greece. In conclusion, we expect a differentiation of company returns next year with a positive impact for the market due to the increased weight of the fields mentioned in the formation of indices and domestic economic activity. The combination of strong corporate growth rates and the Greek economy's stability we believe will continue to draw foreign investment capital, further improving participation of foreign institutional investors.
Manos Hatzidakis
Head of Investment Strategy Pegasus Securities
www.pegsec.gr
57
Securities
Compared to other markets, investment confidence is expected to become more concrete from the second quarter of the year, due to positive economic and political developments.
Konstantinos Vergos
PhD Head of Research Cyclos Securities SA
www.cyclos.gr
tainable profit growth. Bank merger trends in major capital markets, increasing the presence of foreign banks in Greece and the high growth prospects of the Greek bank sector may encourage new mergers. While profit growth from domestic activities tends to be lower for Greek banks, it is coupled with strong double-digit profit growth from international operations, mainly in the Balkan area. Nevertheless, the profit growth of these institutions is expected to be considerably lower in FY 2008 compared to that of FY 2007. Diminishing profit growth for banks in 2008 will somewhat limit the ability of these companies to appreciate by the second quarter of 2008 and will eventually force investment funds to switch their main interest to other sectors. If market conditions in major capital markets are relatively stable by the second half of the year, something possible while unknown for the moment the switching of investment funds to other, but not financial, sectors could eventually tend to an appreciation not only of largecaps, which is now the case, but also of mid-caps and small-caps, enabling the enlargement of the investment base at the end of the year. Under the conservative scenario, share price increases will be modest, resulting in just an incremental appreciation of the Athens Exchange Index.
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The export and import figures are more or less the same this year and the Chamber sees it as its duty to increase the amount of business between the two countries. For this reason in 2008 the BHCC is embarking on the most ambitious project in its history the organization of 2 Nations,' to celebrate the special relationship that exists between Greece and Britain. In 2008 we will be promoting Britain and British products in Greece and in 2009, Greece and Greek products in the UK. In this way we hope to raise not only the profile of both Greece and Britain but increase trade. We are also organizing, for the sixth consecutive year in February, our annual conference in London Greece Your Strategic Partner in Southeast Europe: Investment Prospects & Business Opportunities.' This event has become an annual forum of bilateral communication between the two countries. We aim not only to promote Greece as the regional economic center in the wider region of the East Mediterranean, but also showcase British expertise and steer Greek officials and companies toward the UK market. The conference looks to provide clarity and bring together business people and politicians to explain their views and visions. The Chamber views itself as a tool to be used by businesspeople. We have created a framework and it is now up to progressive business people to use this framework not only for the benefit of themselves but also to increase trade figures.
Harilaos Goritsas
BHCC President
www.bhcc.gr
ince 1978, the Chinese economy has been in a constant process of liberation, displaying an annual average growth rate in the region of 10.1 percent over the last 15 years. Financial forecasts for 2008 indicate an increase of some 11.3 percent. The Chinese currency has strengthened against the dollar since mid-August 2007, but it has weakened against the euro, hitting Europe's competitiveness. Europe's pressure on China with its constant demand for faster revaluation of the yuan has begun to bring the first results restricting China's trade surplus against Europe's at 26.28 billion US dollars in November from $27.5 billion in October. However, Europe's trade deficit remains high compared with China's, whereas Greece's trade deficit with China remains high despite the decrease of the gap compared to 2006. According to Greek economists' financial forecasts, it seems that China's exports to Greece will continue to increase, but at relatively lower rate in comparison to 2007, a year in which there has been an increase of approximately 30 percent compared with 2006. Therefore, efforts must be mostly directed at increasing Greek exports (promotion of agricultural exports, tourist influx etc) to China with a simultaneous
improvement in the exported product range in order to restrain the yawning trade deficit at the expense of our country. A great part of the trade deficit is counterbalanced by the returns of the Hellenic merchant marine, which plays a great role in the transport of goods to and from China as well as internationally. At the same time, Greek shipowners are building new vessels of great value in Chinese shipyards. As the gate to the Middle East, Asia and China in the dynamically developed area of Southeastern Europe, as well as the rest of the European continent, Greece can contribute to and organize the development of financial cooperations and business transactions between China and Europe. It offers the territory and the passageways for Chinese products to Europe and vice versa. This possibility helps to maintain a mutual interest in promoting joint programs to interconnect Greek and Chinese ports, and the Chinese interest for investments in Greek ports is evident. The development margins for GreekChinese business and investment cooperations and the increase of Greek exports are immense. As regards further improvement of industrial cooperation, and in particular regarding small and middle-scale businesses, there are
significant margins as well. Moreover, for Chinese visitors, the main drawing points of Greece are its history, civilization, natural environment and high-quality infrastructure, which have the potential to be profitably exploited given the fact that Chinese tourists destined for the EU number more than 22 million people, although the Greek share continues to remain relatively low. If 5 percent of those 22 million Chinese tourists visited our country for the purpose of congresses or science tourism or history, there would be a steep increase of 25-30 percent on the total annual tourist exchange pouring into Greece with simultaneous benefits to all branches of the home market. With the contribution of direct flights between Athens and Beijing in 2008, we expect to see more cooperation between both countries as well as an increase in Chinese tourists. Furthermore, 2008 is the year of the Olympic Games in China as well as the Cultural Year of Greece in China. Because of this, bilateral political and cultural relations are enhanced and the efforts of the Greek government are directed toward attracting Chinese investments and achieving profitable cooperations. The results of all this work and the rapprochement of China as a trade partner
are expected to emerge early in 2008. The Hellenic-Chinese Chamber and all the relevant official bodies must aim at expanding Greek-Chinese business cooperation with the target of decreasing the huge trade deficit and exploiting all the relative advantages of our country's geostrategic position.
Constantine N. Yannidis
President of the Hellenic-Chinese Chamber www.chinese-chamber.gr
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Yanos Gramatidis
President of the AmericanHellenic Chamber of Commerce
www.amcham.gr
uring the 18th Annual Conference, The Hour of the Greek Economy,' organized recently by the American-Hellenic Chamber of Commerce (AMCHAM) it became apparent that Greece is taking radical steps toward the liberalization of its economy. More specifically it was established that: International observers are tremendously encouraged by the developments in the Greek economy over the past three years, particularly by Greece's dual achievements of reducing deficit and expanding growth. There is a rapid development in the country's infrastructure and more specifically in transportation, communications and energy. Greece has secured a place on the world energy map having being developed into an important energy center, a development which affects its geopolitical role positively. Greek banks play an important role as mechanisms of development of the economy. Also, the Athens Stock Exchange is introducing attractive new products and developing international synergies. The government seems to expedite procedures for the privatization of the Greek ports that play an important role in the development of the economy. Greece is making successful efforts to put its fiscal house in order by taking the necessary fiscal steps at the perfect time: when the global marketplace's interest in competitive markets and sound investment is at an unprecedented high level. It is vital for Greece to become more tax competitive, thus becoming an attractive corporate location. Further, it was established that the USA is looking toward Greece more than at any time in the past. The technology cooperation agreement between the Greek government and the Microsoft Corporation is testimony to this attitude. Microsoft's agreement with Greece provides significant discounts for the Greek government to purchase and utilize Microsoft products and will also create a joint technology innovation center in Greece that will support both academia and the efforts of private software companies that will receive help in the development of new and innovative software solutions. The USA recognized Greece's increasing regional and global economic role when it revived the Economic and Commercial Cooperation Council (ECCC) in March of this year. The ECCC brought high-level officials to Greece from the departments of State and Commerce, as well as from the US Agency for International Development. In the meeting, the full range of economic and commercial ties between the two countries was discussed and we are hopeful that we will hold the next meeting of the ECCC in 2008 in Washington.
There are, however, still several sector-specific challenges in increasing US private investment in Greece: Public hospital debt: Greece has a history of accumulating large pharmaceutical debts and then negotiating a lump sum discounted settlement with suppliers years later. Additionally, public hospitals are owed considerable sums of money by the stateowned social insurance funds, which inhibits their ability to pay bills on time. New legislation will be required to rectify the situation. Government procurement: US firms seeking to supply government procurement orders in Greece are hampered by unnecessarily lengthy administrative and legal challenges. Certain procedures, although designed to improve transparency, appear to have the opposite effect. US companies do not face the same pre-qualification obstacles in participating in procurement in other EU member states. A possible solution to the problem is to identify and adopt best practices in use by other member states, as there may be other, less onerous ways of implementing EU procurement requirements, which are designed to increase competition. IP rights: There is a need for immediate intervention in order to stop illegal trade that, among others, deprives the state of revenues, threatens the existence and reputation of branded products, and contributes to the international defamation of the country. The further reinforcement of the protection of intellectual property rights by means of preventive as well as repressive measures should be one of the priorities of the Greek government. Transparency: In relation to the increase of competitiveness of the Greek economy it is important for the government to secure transparency at all levels of the state mechanism in combination with the fight against corruption through the objectivity of procedures and the electronic government. AMCHAM will contribute positively to the general effort for the increase of competitiveness and extroversion of the Greek economy. More specifically it will support the reactivation of ECCC between Greece and USA and act as a catalyst between the two governments so that actions toward the implementation of this cooperation are planned and materialized. Finally, in cooperation with the ministries of Economy, Development, Tourist Development and Foreign Affairs, and also with the Athens Chamber of Commerce & Industry, the Investment Support Bureau (ELKE) and the Export Promotion Agency (OPE), AMCHAM will undertake targeted actions in the USA commencing in spring 2008.
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Themes
The new regulatory framework, scheduled for 2008, is designed to change the way banking institutions manage risk and calculate capital requirements.
asell II: The adoption of the new regulatory framework, which is scheduled for 2008, is designed to change the way banking institutions manage risk and calculate capital requirements. The distinction into credit, market and operational risk is fundamental. Traditionally, the credit portfolio has accounted for most of the assets of a bank's balance sheet and naturally attracted greater attention. Under Basel II, banking institutions are required to choose one of three approaches for managing credit risk: Standardized. The credit portfolio of the bank is assessed using external credit ratings derived by external credit assessment institutions (ECAIs, such as Fitch, Moody's and S&P). The credit assessments are then grouped into risk buckets through a mapping process and each group is assigned to a specific risk weight. This approach requires minimum effort for implementation of the new rules at the cost of higher capital requirements as shown from the example below. Foundation IRB. Regulatory capital is calculated using a set of equations that are mainly driven by three components: the probability of default (PD), the loss given default (LGD) and the exposure at default (EAD). Regulators provide the banks with fixed values for LGD and EAD and the banks are required to calculate the probability of default using an internal credit default evaluation model.
Credit default evaluation models are developed using techniques that vary according to data availability and the special characteristics of the credit portfolio (e.g. retail, corporate or asset finance). However, the steps for the development of those models are common: Data collection is the first step in credit risk model development. Since the quality of the input will determine to a great extent the quality of the output, data collection is essential. Typically data requirements include population characteristics such as financial ratios or commercial data for companies and demographic data for consumers as well as default data for all customers based on historical transactional behavior. The next step is the estimation of model parameters through an optimization process. Once the parameters are estimated, the model's performance must be assessed. A successful credit evaluation model must display high discriminatory power, i.e. be able to distinguish the good' customers from the bad' ones. On top of that, the predictions of the probability of default must be close to the actual default rates of the credit portfolio. These two crucial model attributes are tested using a set of statistical tests such as the binomial and the chi-square tests for the predicted probabilities of defaults and the accuracy ratio and the Kolmogorov-Smirnov tests for the discriminatory power1.
Advanced IRB. In addition to estimating the probability of default, advanced IRB requires the internal estimation of loss given default and exposure at default. Due to high demand for accurate historical data as well as model implementation, only top-tier banks worldwide have currently adopted the advanced IRB approach. However, this is expected to change in the coming years, as more and more banks get familiar with the new regulatory requirements. Regulatory capital requirements: Basel II aims at the convergence between regulatory and economic capital. In this attempt, the new framework differentiates borrowers according to their risk profile and reduces capital charges for low-risk borrowers while increasing capital charges for high-risk borrowers. The regulatory capital changes brought by the new accord are highlighted by the following case study Table 1. Under Basel I, regulatory capital for the credit portfolio was calculated as 8 percent of the full value (100 percent) of the risky asset with few exemptions for OECD-sovereigns and mortgage-backed loans. In monetary terms, for every 1,000 euros of credit, the bank's capital requirement was 80 euros independent of the borrowers creditworthiness. Under the new accord, capital calculations for the credit portfolio will distinguish borrowers based on their risk profile. Banks that choose the standardized
approach could use the 9-point rating scale of Fitch/S&P. For the top rating class AAA, the calculation of capital charges uses only 20 percent of the asset (loan) value. Therefore, for every 1,000 euros of credit, the bank's capital requirement is 8 percent of 20 percent of the value (200 euros), which is equal to 16 euros. If however the bank had chosen the IRB approach, the capital requirement for the top rating class would have been even lower and equal to 3 euros since it is calculated as 8 percent of 3.89 percent (the risk weight for the top rating found using the formulas with the three credit risk components: PD, LGD and EAD) of the asset value. Savings on capital requirements for low-risk borrowers can be substantial not only between the Basel I and II frameworks but also between the alternative approaches that banks can adopt, i.e. standardized versus IRB. In the end, the capital requirements for a bank will depend on the distribution of the credit portfolio in terms of risk. In the simplistic case of an evenly distributed credit portfolio (equal borrowers for each rating class), the IRB approach produces the lowest capital requirements, followed by the standardized approach and the Basel I framework.
Exposure Value (euros) 1,000 1,000 1,000 1,000 1,000 1,000 1,000 1,000 1,000 9,000
Risk Weights Basel I 100% 100% 100% 100% 100% 150% 100% 100% 100% Standardized 20% 20% 50% 100% 100% 150% 150% 150% 150% Foundation IRB 3.89% 10.02% 17.50% 29.19% 45.83% 67.91% 99.63% 152.27% 230.23% Basel I 80 80 80 80 80 80 80 80 80 720
Capital Requirements (euros) Standardized 16 16 40 80 80 120 120 120 120 712 Foundation IRB 3 8 14 23 37 54 80 122 184 525
Dr Panagiotis Avramidis
Professor of credit risk management & statistics American College of Greece Graduate School
www.acg.gr
Basel Committee on Banking Supervision (February 2005), Studies on the Validation of Internal Rating Systems, Working Paper No.14
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