Current Account Getting Closer To Surplus

BMI View: Trade rebalancing in Greece has happened so quickly in recent quarters that a 12-month current account surplus could be on the cards for end-2013 or early 2014. However, we continue to argue that this rebalancing is suboptimal as it reflects demand-driven import contraction, rather than a significant improvement in export competitiveness. This suggests that external debt can be stabilised, but that longer-term growth will suffer.

The sharp adjustment in the Greek balance of payments shows few signs of letting up as the current account edges ever closer to surplus. A return to surplus following years of double-digit (in percentage of GDP terms) deficits will enable Greece to beginning paying down its stock of external debt. However, we continue to argue that the nature of Greek trade rebalancing (through demand destruction rather than significant gains to export competitiveness) means that even with a return to surplus the economy faces a much weaker longer-term growth trajectory compared to before the financial crisis. As such, we believe Greece will shift from a high growth rising debt economic model, to a low growth and stable/falling scenario. Ultimately this form of rebalancing will mean that unemployment will remain perniciously high for many years to come.

According to the latest data, the current account recorded a EUR663mn surplus in June, following a more modest EUR36mn outturn the previous month. Moreover, this follows several months of deficits which punctuated the return to surplus over June to September 2012. On a 12-month rolling basis, the longer term trend is clear to see. As the chart below shows, the rolling deficit hit EUR2.6bn in June, down from a peak of EUR36.6bn in November 2008. Such has been the pace of adjustment in recent years that the current account may return to a full 12-month surplus by the end of 2013 or early 2014.

Surplus On The Horizon
Greece - Current Account, Rolling 12-Month EURbn

BMI View: Trade rebalancing in Greece has happened so quickly in recent quarters that a 12-month current account surplus could be on the cards for end-2013 or early 2014. However, we continue to argue that this rebalancing is suboptimal as it reflects demand-driven import contraction, rather than a significant improvement in export competitiveness. This suggests that external debt can be stabilised, but that longer-term growth will suffer.

The sharp adjustment in the Greek balance of payments shows few signs of letting up as the current account edges ever closer to surplus. A return to surplus following years of double-digit (in percentage of GDP terms) deficits will enable Greece to beginning paying down its stock of external debt. However, we continue to argue that the nature of Greek trade rebalancing (through demand destruction rather than significant gains to export competitiveness) means that even with a return to surplus the economy faces a much weaker longer-term growth trajectory compared to before the financial crisis. As such, we believe Greece will shift from a high growth rising debt economic model, to a low growth and stable/falling scenario. Ultimately this form of rebalancing will mean that unemployment will remain perniciously high for many years to come.

According to the latest data, the current account recorded a EUR663mn surplus in June, following a more modest EUR36mn outturn the previous month. Moreover, this follows several months of deficits which punctuated the return to surplus over June to September 2012. On a 12-month rolling basis, the longer term trend is clear to see. As the chart below shows, the rolling deficit hit EUR2.6bn in June, down from a peak of EUR36.6bn in November 2008. Such has been the pace of adjustment in recent years that the current account may return to a full 12-month surplus by the end of 2013 or early 2014.

Underpinning this dramatic shift has been a sharp retrenchment in the goods trade and income deficits. Indeed, the shortfall in merchandise trade hit EUR16.8bn in June on a 12-month rolling basis, from a peak of EUR45.8bn in October 2008. Similarly, the income deficit has shrunk to EUR2.7bn on a rolling basis in June from EUR10.8bn in February 2009. The services account, meanwhile, has made an increasingly positive contribution to the headline current account data with the surplus edging up to EUR15.2bn from EUR12.5bn in April 2010.

Surplus On The Horizon
Greece - Current Account, Rolling 12-Month EURbn

Sticking With The Suboptimal Rebalancing Path

As we alluded to above, the rebalancing process has been suboptimal and shows few signs of changing course. By suboptimal, we mean that the external accounts are improving mainly though a collapse in imports rather than a marked recovery in exports. As the chart below shows, the rolling 12-month goods export series has steadily recovered following the sharp drop in 2009, brought about by the downturn in the global economy. Imports, meanwhile, have undergone two stages of adjustment. The first occurred at the same time as the drop in exports, with the second occurring in 2012 - the year in which Greece's sovereign debt was restructured.

Suboptimal Rebalancing
Greece - Goods Exports & Imports, Rolling 12-Month EURbn

Although import retrenchment is still positive, as it reflects a transition away from the credit-driven consumer model that propelled the economy in the pre-crisis years, a relatively faster recovery in exports would be required to suggest evidence of a more optimal rebalancing. As it stands, exports have been steadily expanding, but have consistently underperformed the expansion in global trade. As such, the improvement in exports owes more to the recovery in global demand and international trade than it does to a significant improvement in competitiveness, which would otherwise show up in an expansion of foreign market share.

The implication of suboptimal rebalancing is likely to be a lower longer-term growth trajectory. The most immediate threat facing Greece is the external and government debt burden, which needs to be stabilised. By moving towards a current account surplus, even without a recovery in growth, Greece can stabilise the external debt trajectory. This relieves near-term pressures, by can provide a false sense of security since the challenge of raising the longer-term growth potential remains.

Financial Account Stabilising

Aside from the longer-term implications of the rebalancing path that Greece is traversing, the instability of the financial account has been a persistent risk to economic stability throughout the adjustment process. As the chart below shows, in the run up to the economic crisis, and during the subsequent adjustment period, the financial account had been in surplus as the shortfall in trade required foreign financing. During the current period of rebalancing, the financial account surplus has narrowed as expected, but the surplus and deficits for individual constituents have expanded wildly. This has been the result of a mass outflow of portfolio capital, particularly from the sovereign debt market, which needed to be countered by 'other investment'. The 'other investment' component comprises largely financial transfers from European parent banks and various liquidity support measures from the European Central Bank (ECB).

Financing Risks Fall
Greece - Financial Account, Rolling 12-Month EURbn

Without the support of external liquidity, the correction in the balance of payments would have been far more disorderly and the fallout from the debt restructuring in 2012 would have been difficult to contain. The latest data, again on a 12-month rolling basis, show that the large imbalance in external financing has subsided significantly as credit risk has improved. The stabilisation in net portfolio outflows has eased demand for other forms of external financing to fill the void.

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This article is tagged to:
Sector: Country Risk
Geography: Greece
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