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UBS- Greece: scaling the (macro) upside

ubs-14.-

We discuss growth and fiscal outlook; and our strategy views on Greece We take a fresh look at the key issues on Greek macro and strategy.

There were several noteworthy developments recently:

a) business confidence reached 108.4 in August, the highest since November 2007 and consumer confidence rose to -6.8, the best reading since early 2000;

 b) Greece submitted a request to repay part of its IMF debt early (EUR 2.9bn);

c) Greece last week issued a 3m T-bill at negative yield and its 10Y bond yield has been hovering around a record low of 1.3-1.4%. On the macro side, we think that GDP growth could visibly accelerate in 2020 and the country should safely deliver the planned 3.5% of GDP primary surplus target in both 2019-20.

High NPLs remain one of the most important growth barriers but the soon-to-be launched NPE disposal ‘Hercules’ scheme could help, with positive implications for the country’s credit rating. Overall, Greece’s positive macro/fiscal prospects even in the face of the Eurozone slowdown suggests there is some more upside for GGBs, as the normalisation process with their periphery peers matures further.

We maintain our long GGB 29 recommendation and target a yield of 1.25%. GDP: sluggish 2019, but a 2020 acceleration should be possible The economy started 2019 on the back foot: GDP grew by 1.1% y/y seasonally adjusted in Q1-19 and by 1.9% y/y in Q2-19.

The sluggishness largely stems from weak q/q readings in Q4-18 and Q1-19 (-0.1% q/q and 0.2% q/q), although in Q2-19 there was a clear acceleration in growth to +0.8% q/q. Household consumption contracted in H1-19 and the contribution from investments was rather volatile.

This makes our 2019 GDP forecast of 2.4% unlikely, and thus we lower our projection to 1.8% We think that economic growth could pick-up in 2020 due to: a) rising confidence, b) improving labour market, c) strong tourism, d) planned tax cuts in 2020 and e) significant upside in terms of EU fund absorption. However, given a sluggish Eurozone growth environment, we also lower our 2020 GDP projection to 2.5% from 2.9% previously.

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