One trend I was observing before the coronavirus outbreak was the level of foreign direct investment in Greece compared with the size of the current account deficit.
This is important because right now the economy appears structurally unable to grow without importing more than it exports. Greece relies on imports not just for consumption but depends on imports of capital goods and materials to invest in its productive capacity and to make its own export goods.
Whereas other eurozone crisis-hit countries, like Ireland and Spain, turned their current account deficits into surpluses, in Greece it took a collapse in domestic demand to just bring the external sector into balance. Low growth since was accompanied by the current account deficit reaching 2.8 percent of gross domestic product in 2018.
The deficit is small enough to not be overly concerned yet, but it needs monitoring. It’s also important to keep an eye on how it’s financed. Short-term money flows can leave countries vulnerable to crises in times of financial panic — as Greece learned the hard way a decade ago following the build-up of external debt through foreign holdings of government bonds. Foreign direct investment — by entities exercising controlling ownership of businesses in Greece — is harder to walk away from.
FDI also offers some comfort about the “quality” of Greek growth. If the country can cover its external deficit through FDI, that offers hope that enough of the imported goods are supporting investment and enhancing Greece’s own export sector.
Last year offered some encouragement, as net FDI exceeded the current account deficit by more than 1 billion euros.
There’s a large amount of variability on the amount of FDI that comes into Greece in a given month, so we should be cautious about reading too much into two months of data. Nevertheless, 82 million euros in March was the lowest since July 2017, and in April it barely rose to just 91 million euros.
For now there are reasons to be hopeful that this is just a blip. It’s probable that plans just got put on ice as things shut down in March and April, and that delayed projects will show up in future months as the economy reopens.
A parallel can be seen in 2016, when there was a jump in FDI as pent-up investments that were on hold in the previous years came to fruition once the country’s political dramas subsided.
Whatever happens, this is an indicator to keep an eye on.
Meanwhile, the main headline when the Bank of Greece released the country’s April balance of payments data last week was the complete collapse of travel receipts.
Sure enough, a 99 percent drop in revenue from travellers into Greece to just 7.3 million euros is dramatic. Still, given that April is in the tourist off-season the collapse barely registered in the overall current account. With the lockdown also reducing imports, the current account deficit for April was actually about 200 million euros smaller than it was in the same month of 2019.
The chart above shows the asymmetry in Greece’s current account. In the goods component, the country runs a persistent deficit that’s fairly evenly spread throughout the year. The services balance, where tourism revenue shows up, is highly seasonal as you’d expect.
Once again, what happens in the coming months will be crucial.
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