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Most people believe that the significant deterioration in the Greek balance of payments after the introduction of the Euro is a clear sign of the fall in Greek competitiveness and of unsustainable private debt expansion dynamics. It is assumed that the Greek economy was not able to provide the global market with goods and services of a sufficient quality and competitive price while the large expansion of domestic demand (due to significant private credit flows) expanded imports with a rate that led to a large increase in the goods deficit.

Although there is some truth in the above statement, a closer look at the detailed balance of payments data (from BoG) reveals some very interesting facts. The actual balance of payments figure deteriorated significantly from a deficit of €11bn in 2002 to €36.5bn in 2008 all while nominal GDP expanded by 50% in the corresponding time period.

Yet imports and exports of goods excluding oil & ships expanded with the same rate (although at a rate higher than nominal GDP which suggests that private credit flows did play a role). What made the corresponding deficit increase by around €10bn was the fact that exports are only 34-36% of imports although that ratio remained relatively steady throughout that period:

Greek Balance of Payments Imports Exports of other goods 2002 - 2008The actual increase in the balance of payments deficit can be attributed to 3 factors:

  1. An increase in the oil balance deficit which more than doubled by 2008.
  2. The ship balance moving from a surplus of €400mn to a deficit of more than €4.6bn in 2008 and
  3. A significant increase in the balance of investment income (mostly interest payments) from €2.3bn in 2002 to €10.6bn during 2008

Greek Balance of Payments - Oil Ship and Investment Income Balance 2002 - 2008

The first factor can mostly by attributed to a large increase in global oil prices during that period, especially denominated in Euros.  By 2008, global Euro oil price had increased 150% compared to 2002 while the Greek oil balance deficit had expanded by a comparable 170%.

The swing of the ship balance to a large deficit is most probably accounted by a corresponding increase in ship building/purchases investment by Greek ship companies. This was a period of large global trade growth with the Baltic Dry Index reaching new highs. The reasonable assumption was that these large investments would quickly translate into increased shipping payments that would be used to finance the initial outflows and (also) lower the current account deficit through a higher services surplus.

As for the investment income deficit this is mostly the outcome of stock-flow adjustment and monetary policy. Each year’s current account deficit added to an increase of Greek foreign net liabilities and to larger net interest payments in a semi-automatic way. Moreover, the increase in short-term interest rates by the ECB after 2005 made servicing the same amount of net liabilities even more expensive which is one of the reasons why the investment income deficit expanded more rapidly during 2006 – 2008.

If we assume that the sum of the Balance of Goods excluding oil & ships and the balance of services can be regarded as the most representative metric for the Greek external sector and competitiveness we observe that this deficit expanded by only €4.5bn during 2002 – 2008. The bulk of the balance of payments deficit expansion can be accounted by oil, ships and investment income. In other words, global factors (oil prices, expansion of trade and the shipping industry, ECB monetary policy) as well as the automatic effect of flows on stocks were the main drivers of the Greek external deficit.

Greek Balance of Payments changes since 2002 up to 2008

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BoG recently released the Greek balance of payments for July 2015 (which is actually the first release where the data are based on ELSTAT rather than bank transactions). The release is the first after the imposition of capital controls (following the announcement of the Greek referendum) and includes some quite interesting developments.

Compared to July of 2014 the balance of payments increased to €4.25bn (from €1.27bn), an increase of close to €3bn. The major movements in specific categories are as follows:

  • The fuel balance dropped from -€726mn to -€227mn mostly due to a large fall in fuel imports of €731mn (although exports also fell €241mn). A large part of the drop is probably due to much lower oil prices compared to a year ago.
  • Purchases of ships were nil compared to €114mn last year.
  • Other goods imports fell strongly by €730mn to a little more than €2bn (while the average figure during the first 7 months of 2015 was around €2.6bn).
  • Apart from travel receipts all categories of the services balance dropped significantly, especially payments abroad (-€690mn) and transport receipts (-€700mn).
  • Secondary income receipts (basically government receipts from the EU) increased substantially by €1.75bn.

The effects of capital controls were very strong on most elements of the goods and services balances. It is helpful that exports of other goods did not seem to be affected and actually increased by €50mn. It will be interesting to observe August figures (when they do get released) to determine to what extent the drop in goods and services imports was permanent or just postdated.

The improvement of the goods and services balance was €1.24bn in a single month. As long as this improvement is permanent I think it is reason enough to not expect a large fall in Greek GDP during 2015Q3. Even a nominal drop of 6% during the third quarter (which is consistent with a fall of 5% in real GDP if the VAT increases are taken into consideration) is equal to roughly €2.9bn. In other words, the improvement of the July balance of goods and services is close to 40% of that drop. As long as the August external balance figures are also positive news it is very hard for Greek internal demand to negate the positive impact of the external sector. Third quarter GDP might actually prove to be quite resilient.