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Practical directionsfor fuelling economicgrowth in GreeceA PwC Greece point of view31 October 2013
From publicconsumptionto privateinvestmentinvestment
A PwC Greece point of view
Agenda
1. The context
2. Rebuilding trust
3. A simple strategy for long term growth
4. Changing the architecture of the State
5. The impact
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1. The context
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A PwC Greece point of view
Grexit - the Perfect Storm
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A PwC Greece point of view
223 233 231 222209
194 183
8,3% 7,7% 9,4%12,5%
17,5%
24,2%27,0%
10
15
20
25
30
100
150
200
250
300
GDP & Unemployment Rate
Grexit avoided - but conditions remain tough
Unemployment %
GDP,Current
PwC
8,3% 7,7% 9,4%
7,0% 4,5%
-0,9% -3,9% -6,1% -7,1%-5,5%
-30
-25
-20
-15
-10
-5
0
5
10
-250
-200
-150
-100
-50
0
50
100
2007 2008 2009 2010 2011 2012A 2013F
%
€B
illio
n
5Source: EΛΣΤΑΤ, International Monetary Fund (WEO April 2013)
GDP Δ %
CurrentPricesy-o-y change
Longest recession in modern history
60
80
100
120
140 1930’s Great Depression vs Greek Recession in 2008
US GDP
Greek GDP
A PwC Greece point of view
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Source: ELSTAT
0
20
40
1 2 3 4 5 6 7 8 9 10 11 12 13
Years since start of contraction
For Greece 2008=100
For US is 1929=100
359%250%
300%
350%
400%
450%
20
12T
ota
lD
eb
t%
GD
PGreece is not over indebted!
1.016%
240%227%
899%
443%
A PwC Greece point of view
PwC
117%84%
124%90%
157%
82%
127%103%
116%
137%
51%
111%
61%
60%
0%
50%
100%
150%
200%
250%
Ireland Cyprus Portugal France Greece Germany Italy USA
20
12T
ota
lD
eb
t%
GD
P
7
Source: IMF (JEDH, Fiscal Monitor)
227%208%
188%
Private Debt
Public Debt
193%
163%
A PwC Greece point of view
-5,1-6,2
-4,2-5
0
5
10
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012A2013E2014E2015E
Is there light at end of tunnel?
PrimaryGovernmentdeficit/surplus
Generalgovernmentspending
?
PwC
-5,1-6,5 -7,6
-9,9
-13,8
-10,9-12,6
-15,2
-23,1
-36,0
-23,9
-19,7
-12,5
-8,4-6,2
-4,2
-40
-35
-30
-25
-20
-15
-10
€b
n
8Source: International Monetary Fund (WEO April 2013)
spendingincluding netinterest
16%
7%
4%
18%
60%
70%
80%
90%
100%
Co
mp
os
itio
no
fS
tate
De
bt
%State debt burden is not as heavy as it looks
OtherT-bills
PSI
Total Government DebtPost PSI €340bn
~ €167,4bn value of Debt at 5%discount factor
A PwC Greece point of view
PwC
13%
34%
8%
0%
10%
20%
30%
40%
50%
60%
2012
Co
mp
os
itio
no
fS
tate
De
bt
%
9
ECB
EFSF
IMF
Bilateral Loans
Source: GS Global ECS Research
>71% held by officialsector
20%
25%
30%
35%
But, even after PSI and “Whatever it takes”, the marketsdo not trust Greece
PSI
WHATEVER IT TAKES”
MARIO DRAGHI
“WHATEVER IT TAKES”
10y
rG
ov
er
nm
en
tB
on
ds
Yie
ld
A PwC Greece point of view
PwC
0%
5%
10%
15%
20%
Jan12
Feb21
Mar12
Apr12
May12
Jun12
Jul12
Aug12
Sep12
Oct12
Nov12
Dec12
Jan13
Feb13
Mar13
Apr13
May13
Jun13
Jul13
Aug13
Sep13
Greece 10,2%
Portugal 7,1%
Ireland, Spain, Italy 4,0% to 4,5%
10
10y
rG
ov
er
nm
en
tB
on
ds
Yie
ld
Trust gap
The trust premium paid by the private sector
A PwC Greece point of view
5
6
7
8
9
10
%BOND YIELDS
ELPE
TITAN
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-
1
2
3
4
5
01/3
1/1
3
02/0
7/1
3
02/1
4/1
3
02/2
1/1
3
02/2
8/1
3
03/0
7/1
3
03/1
4/1
3
03/2
1/1
3
03/2
8/1
3
04/0
4/1
3
04/1
1/1
3
04/1
8/1
3
04/2
5/1
3
05/0
2/1
3
05/0
9/1
3
05/1
6/1
3
05/2
3/1
3
05/3
0/1
3
06/0
6/1
3
06/1
3/1
3
06/2
0/1
3
06/2
7/1
3
07/0
4/1
3
07/1
1/1
3
07/1
8/1
3
07/2
5/1
3
08/0
1/1
3
08/0
8/1
3
08/1
5/1
3
08/2
2/1
3
08/2
9/1
3
09/0
5/1
3
09/1
2/1
3
09/1
9/1
3
09/2
6/1
3
10/0
3/1
3
10/1
0/1
3
10/1
7/1
3
10/2
4/1
3
10/3
1/1
3
%
COCA-COLA HBC
OTE
Investment is the driving force, inhibited by lack of trust
A PwC Greece point of view
10%
15%
20%
25%
30%
Investment of%GDP - Greece
Investmentof %GDP –EU average
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Source: ΕΛΣΤΑΤ, IMF
-10%
-5%
0%
5%
10%
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
%GDP - Greece
GDP %change
2. The Challenge
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Rebuild Trust, Mobilise Capital
Investment is dependent on trust bythe markets
Rebuilding trust requires significantinstitutional reforms now
GDP
growth
Production
increase
Capital
A PwC Greece point of view
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Capitalapplication
Capital mobilisation
Trust
Trust and confidence in Greece will be growing consistently, only if we reforminstitutions to provide long term incentives to:
- investors for putting their money into the country
- business people to keep expanding their business
- civil servants to have their work driven by outcomes
Reforms are key to gaining the trust of the marketsagain
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- civil servants to have their work driven by outcomes
- citizens to stay within the spirit of the law
- politicians to think and act to the benefit of the nation
Having a complete agenda and moving along in a clear, systematic andinternally consistent manner should give a huge initial push and will beinstrumental in building again our growth momentum
15
3. A simple strategy for long termgrowth
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Capital is attracted only by the country’s comparativeadvantages
A PwC Greece point of view
Trade passage between the East and Europe (goods, energy) Global tourist destination
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Energy Pipelines
Shipping Trade Routesfrom/to East
tourism
60%
70%
80%
90%
100%
Ex
po
rto
rie
nta
tio
n(%
of
ex
po
rts
)Mobilise capital into sectors with export potential andscale
0,3%0,4%
Tourism attracts investment of0,4% of GDP
Manufacturingattracts
Shipping attractsinvestment of 0,3% of
GDP
A PwC Greece point of view
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0%
10%
20%
30%
40%
50%
0% 5% 10% 15% 20% 25%
Ex
po
rto
rie
nta
tio
n(%
of
ex
po
rts
)
Size of sector as % of GDP
18
Sources: ΕΛΣΤΑΤ, BCG research, World Travel and Tourism Council
0,2%0,5%
Constructionattracts investment
of 0,2% of GDP
Energy attractsinvestment of2,3% of GDP
attractsinvestment of3,0% of GDP
Services attractinvestments of 0,5%
of GDP
For capital to have a swift impact on the economy, itneeds to be focused on large projects in sectors ofeconomic importance
StrategicAreas tourism
internationaltrade
energyenergy
interconnections
large
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large tourismprojects
InvestmentFocus
largeinfrastructure
projects
transportation& logistics
manufacturingconstructionSectors
Stimulatedserviceshospitality
Infrastructure through PPP can mobilise about €17bn
Tourist ProductUpgrading
• Key marinas• Mega yacht marina in
Lavrio• Regional airports
Upgrading of island
EnergyInterconnections
• Electricityinterconnection ofAegean islands, Rhodesand Crete
• Investment in
Transit Transport
• Transshipmentfacilities in the Piraeusand Thessaloniki ports
• Through roads(Egnatia)
A PwC Greece point of view
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• Upgrading of islandports
• Kastelli airport
• Investment intechnology insensitiveRES (geothermal/off-shore wind parks) tosupport inter-connections
• Gas pipeline inter-connections to Turkey,Italy and the Balkans
• Gas storage facilities inthe North
(Egnatia)• Connecting roads to
Bulgaria, FYROM,Albania
• Motorways
€3bn
€12bn
€2bn
Action
• Market Greece as 5+ stardestination and experience
• Streamline permit process
• Facilitate scale in hotel
Tourism needs scale, new products and new markets, andit can mobilise around €20bn of investment up to 2025
Benefit
• Capture more value
• Large integrated resorts
• New destinations
• Higher price
A PwC Greece point of view
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• Facilitate scale in hotelmanagement and marketing
• Release hotels from bankbalance sheets and separate realestate from hospitality servicesthrough hotel REITS
• Develop second home market
21
• Higher price
• Longer stays
• Business clarity
• Scale enhancement
• Permanent stays
• Construction driver
Concessionary funding properly managed willfacilitate capital mobilization
Concentrate concessionary funding (new ΕΣΠΑ approx. €15bn) to areas which yield non Greek income with large economic multipliers
Make concessionary capital available in the form of co- funding withfinancial institutions and investors
A PwC Greece point of view
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financial institutions and investors
Rather than grants, concessionary funds as loans will help to re-circulate capital in the economy upon repayment
Outsource concessionary funding administration
Currently, approximately €35bn corporate NPLswith another €10bn+ expected in the near future,keep the underlying assets out of market
Active management of NPLs would mobilizeincremental cash capital to the tune of 20% of thewrite off value for the business
Active management of corporate NPLs could attract€7bn of new cash capital
Liberate Corporatezombie assets• Housing• Hotels/resorts
A PwC Greece point of view
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Losses incurred by banks from NPLs should begiven full or partial tax credit, consistent withBasel III, which will soften the effect onregulatory capital
23
• Hotels/resorts• Physical
production assets
Infrastructure and tourism investments with theirmultipliers feed growth into other sectors of theeconomy
Infrastructure investments have a significant economic multiplier of ~2xand spread economic demand to adjacent sectors like cement and steel andthe whole country. Investments add permanent output and employment
Tourism has an economic multiplier of ~2x, linked mainly to food supplychain subsectors, but also transport and construction. Investments addpermanent output and employment
A PwC Greece point of view
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permanent output and employment
Concessionary funds facilitate large scale investments and fill in thelending gap left by the Greek banking system
Bank assets released provide a capital attraction and much needed liquidity,mainly to the real estate sector
Economic benefits flowing to other sectors and across Greece, will lead tohigher consumption, stimulating the retail sector
Subsectors with export orientation, will be boosted with this opening ofthe economy
4. Changing the architecture of theState
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Rebuilding trust is key to attracting investment
State clearly the new objective
Get the institutional debris out of the way
Clarity of vision anda purpose
Remove constraintsto business andoffer incentives
A PwC Greece point of view
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Kill institutional volatility (120-150 new laws p.a.)
Reform/upgrade the state apparatus
Improveinstitutionalstability
26
Increase speed ofresponse and theefficiency of thestate
Changing architecture of the public sector is anecessary condition for capital to be systematicallyattracted to Greece The State must withdraw as market participant and develop its role as market regulator
and facilitator
Allow markets to decide on resource allocation, by removing obstacles and installing
proper regulation
The State apparatus must become smaller and swifter
Public
A PwC Greece point of view
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Publicsector
Trading publicsector
Non tradingpublic sector
Less laws
Robust taxregime
Lawenforcement
Bettermanagement
Privatisations
PPPs
Trusts/Foundations
Speedyjudiciary
Law codification, relevance, enforcement and speed
Stable tax system and selective tax incentives
Better management of the non trading public sector with private sectorinvolvement
Privatisation or ring fencing of public trading assets
Four pillars are critical in supporting the newarchitecture
A PwC Greece point of view
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Privatisation or ring fencing of public trading assets
28
Less constraintsand more incentives
for business
Institutionalstability
Speed andefficiency of State
apparatus
Law codification, relevance, enforcement and speed to get the frame of referenceright for business:
Establishment of limits in the number of new laws or amendments toexisting laws (for example, ministers can introduce 1 law/amendment per yearper Ministry)
Laws not to be amended/altered within the first 3 years from effectingthem. This could be a constitutional provision
Change in bankruptcy law to facilitate resolution of zombie companies and
Most of the reforms have been on the table for years,but some will change totally the way “business” is done
A PwC Greece point of view
PwC 29
Change in bankruptcy law to facilitate resolution of zombie companies andthe release of the assets back in the economy
Stable tax system with selective tax relieves to facilitate capital attraction and landdevelopment:
Abolition of all taxes that apply on capital raising, e.g. the 1% capitalduty, (we are one of the very few EU countries still having this tax) or the 2,4%stamp duty on loans (a big headache for MNCs trying to fund their localsubsidiaries)
Conclusion of bilateral tax agreements with key rising counterparties(e.g. China, India, Gulf Countries), which will make Greece a favourabletrading partner and a country of choice for inward investment
Significant reduction of real estate transfer taxes and abolition of annualproperty taxes on real-estate development investments
Better non trading public sector management to improve responsiveness:
Secondment of mid to high level managers from the private sectorand second senior civil servants into the private sector
Add an output linked element to the remuneration of civil servants
Introduce accruals accounting to all services
Integrate all IT systems which cover the totality of the non trading
Most of the reforms have been on the table for years,but some will improve the way “business is done(continued)
A PwC Greece point of view
PwC 30
Integrate all IT systems which cover the totality of the non tradingpublic sector
Privatise or ring fence public trading assets to add value to the servicesoffered and contain meaningless spending
Public hospitals, universities, school clusters, cultural organisations,museums can all be turned into trusts/foundations, and managedwithin a given, for each case, policy framework
The trust/foundations may be directly funded by the State or whennecessary the State will subsidise the demand for their services so thatthe choice remains with the people
Output and prices to be regulated by the relevant Ministry or aRegulator
5. The impact
PwC 31
A PwC Greece point of view
20%
25%
30%
The full application of this strategy could mobiliseca €45bn of investment in the period to 2025 witha positive impact on GDP and unemployment
Official Unemployment % estimate
Target Unemployment %
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-10%
-5%
0%
5%
10%
15%
2013F 2014F 2015F 2016F 2017F 2018F
Source: EΛΣΤΑΤ, Bank of Greece, International Monetary Fund, Ministry of Finance
Target Unemployment %
Official GDP Δ% estimate
Target GDP Δ%
Trust building
Concentration of capital resources on infrastructure and tourism
Scale in tourism
Concessionary funds as loans
The game changers
A PwC Greece point of view
PwC
Concessionary funds as loans
De-trapping assets from the banks
Better public sector management
33
Thus a new virtuous circle will start
Debt Containment to
Development
Publicly funded consumption to
A PwC Greece point of view
We have to shift the political agenda from…
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Publicly funded consumption to
privately funded investment
A slow, investment inhibiting and medling publicsector to
a relevant and business facilitating State
“Οι καιροί ού μενετοί της ημετέρας
βραδύτητος”
Θουκυδίδης
Final thoughts
A PwC Greece point of view
PwC 35
“The Long March starts with a first step”
Mao Jedong
Thank you
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