Emerging Markets: The Week Ahead (Mar 25- Apr 1), Greece Is The Word

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Includes: ALBKY, BPIRY, EGFEY, GRDOWD, GREK, NBGIF, NQGR
by: Interactive Brokers
Summary

Economic releases on Greece’s calendar are set to provide investors with further color about the country’s improving landscape, including consumer and business sentiment, retail sales and manufacturing.

While Greece’s economic sentiment index rose in February, sentiment among consumers generally darkened, along with the outlook for construction and retail trade.

Although Greece exited its bailout program in August, and has successfully tapped the debt markets to sell sovereign bonds, the country remains vulnerable to a myriad of potential shocks.

The country owes roughly €9.5bn to the International Monetary Fund (IMF), for example, positioning it as the third largest indebted nation after Argentina and Ukraine.

Still, the market’s perception of Greece’s ability to honor its debt obligations has been rather positive.

Economic releases on Greece’s calendar are set to provide investors with further color about the country’s improving landscape, including consumer and business sentiment, retail sales and manufacturing.

The week kicks off in earnest:

Thursday, March 28

  • Consumer Confidence (Mar)
  • Business Confidence

While Greece’s economic sentiment index rose to 101.3 in February from the prior month’s 99.6, staging its loftiest level since it hit 104.7 in August 2018, consumer confidence, as well as sentiment about construction and retail trade were markedly lower.

The Foundation for Economic and Industrial Research (IOBE) reportedly attributed the mixed results to the nearing of elections.

Sentiment among consumers generally darkened, along with the outlook for household finances and unemployment.

Fitch Ratings analysts Michele Napolitano and Alex Muscatelli recently noted that the short-term outlook for private consumption in Greece is “favorable.”

The ratings agency in August 2018 had lifted Greece’s sovereign credit rating by two notches to ‘BB-‘ from ‘B,’ citing improvements in its banking sector, as well as with its European creditors.

More recently, Fitch observed households' disposable income rose 4% in the third quarter of 2018, the fastest pace since 2008, while wage growth is “gradually picking up” and HICP inflation remains “moderate.”

Greece’s unemployment rate dropped to a seven-year low of 18.6% in October 2018, and employment growth averaged 1.8% in the period of January-October 2018.

Napolitano and Muscatelli added that consumer confidence was boosted by the successful completion of the country’s third adjustment program in August 2018.

Some weak spots

Indeed, while Greece exited its bailout program in August, and has successfully tapped the debt markets to sell sovereign bonds, the country remains vulnerable to a myriad of potential shocks.

The country owes more than SDR7.5bn, roughly €9.5bn, to the International Monetary Fund (IMF), for example, positioning it as the third largest indebted nation after Argentina and Ukraine.

The IMF recently said that Greece’s medium-term debt repayment capacity is “adequate, but subject to rising risks amid still significant vulnerabilities.”

The organization said while it anticipates the country’s debt-to-GDP will continue on a downward trajectory in the medium-term, thanks to ongoing “high primary surpluses agreed with European partners, nominal GDP growth, and debt relief,” risks – both domestic and external – “have intensified, and crises legacies—including high public debt and impaired private balance sheets— and a weak payment discipline continue to pose significant vulnerabilities.”

Greece’s debt-to-GDP ratio exceeded more than 180% of GDP at year end-2018. By contrast, the U.S.’s is around 103%, while Japan is more than 230%.

Credit confidence

Still, the market’s perception of Greece’s ability to honor its debt obligations has been rather positive.

To date, spreads on its sovereign five-year credit default swaps (CDS) have narrowed by almost 128.5bps over the past three months to roughly 366bps.

The country’s 10-year government bond was last yielding around 3.723% intraday Monday, in line with the Bank of Greece’s recent assessment of the effects of global central bank quantitative easing (QE) measures, including from the U.S. Federal Reserve Bank, the European Central Bank, the Bank of Japan and the Bank of England.

Greece’s central bank said that its findings suggest that global QE policies over the period 2009-2017 have contributed to “a permanent decline in sovereign bond yields, ranging from 250 basis points (bps) for AAA rated sovereigns to 330 bps for B rated sovereigns.

The Bank of Greece added that “while central banks have responded to the secular decline in the so-called ‘natural’ short-term real interest rate with unconventional monetary policies, these policies have eventually led to a permanent downward shift of the global sovereign yield curve.”

Standard and Poor’s, Moody’s and Fitch Ratings rate Greece ‘B+’, ‘B1’ and ‘BB-,’ respectively, while Spain’s (‘A-’/’Baa1’) and Germany’s (‘AAA’) 10-year government bonds were last yielding around 1.159% and 0.091%, respectively.

Meanwhile, the IMF also noted that the Hellenic Republic’s economic recovery is gaining speed and “broadening.” It expects growth to reach 2.4% in 2019, up from an estimated 2.1% in 2018, with support from exports, private consumption and investment “as sentiment improves.”

The organization added that a “gradual recovery in private deposits has facilitated a further relaxation of capital flow management measures, though bank lending remains negative.” Over the medium-term, economic expansion is expected to slow down to just above 1%.

Peter Dohlman, IMF mission chief for Greece, said earlier in March that the IMF is “urging the government to do more to fix banks, which remain crippled by past-due loans. This will help households and businesses to once again be able to borrow at reasonable interest rates.”

Investors Friday will receive updates on producer prices for February, as well as a snapshot of retail sales activity in January.

Friday, March 29

  • PPI (Feb)
  • Retail Sales (Jan)

Elsewhere, IHS Markit is due to release its Greece Manufacturing Purchasing Managers’ Index (PMI) for March after the weekend after rising to a nine-month high in February.

Monday, April 1

  • IHS Markit Manufacturing PMI (Mar)

IHS Markit said February’s manufacturing data suggested a “solid improvement in operating conditions across the Greek manufacturing sector.

The rate of output growth equaled January’s level, as an upturn in new business accelerated the fastest in a year. Also, employment grew at a pace that was generally in line with those since the start of 2018, with greater new export orders driving the rise in production requirements.

Manufacturers were reportedly buoyed by stronger client demand, while business confidence rose to a six-month high.

IHS Markit economist Siân Jones highlighted that “the sequence of employment growth that began at the start of 2018 is the strongest in the series history.”

She said that the “acquisition of new clients and expectations of further export growth reportedly drove business confidence, which rose to a six-month high.

“Encouragingly, firms expect output to rise over the coming months despite uncertainty over upcoming elections."

While vulnerabilities in the debt-laden country persist, investors will still be keeping an eye on Greece, albeit amid a somewhat more relaxed geopolitical tone.

Note: This material was originally published on IBKR Traders' Insight on March 18, 2019.

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