Monday, January 24, 2011

Is Greece’s Trade Deficit Shrinking?

Besides balancing its budget, Greece needs to also balance its external accounts. Not once in the last thirty years has Greece exported more than it imported and while “balance” is no virtue by itself, the steady increase in the country’s foreign indebtedness signals a loss of competitiveness and an inability to produce as much as the country consumes. So was Greece able to correct its large current account deficit in 2010? The short answer is no. The longer answer is maybe.

In 2009, Greece ran a current account deficit of €25.8 billion, or 11.1% of GDP. In the first 11 months of 2010, the current account was down just 2.6%, far below the more ambitious target of a 27% reduction set when Greece got its bailout money from the IMF and the Europeans. On that level, Greece seems to have made very little progress in reining its current account deficit. But look deeper and the picture is more nuanced.

Goods: The goods balance was meant to shrink by 16%; instead it fell by 4%. The main reason, however, was the rise in the country’s oil bill (up 24%) and ship purchases (up 12% as Greeks “imported” more ships than last year). Exclude these two items, and the goods balance fell by 17.6%, which is above the initial IMF forecast.

Services: The services balance was meant to increase by 40%; instead it rose by only 4.6%. Tourism disappointed as net receipts fell by 7%. Transport revenues (mostly shipping) increased by 14%, more than compensating for the drop in tourism. The rest of the sectors showed a modest improvement (fewer imported services than last year). At the heart of the failure, however, is a dismal tourism season.

Income and current transfers: In both of these sectors, the initial projections proved way wrong. Against a 23% expected increase in income, the reality was just a 1.7% rise; for current transfers, the balance went from plus €1.2 billion in 2009 to just €200 million for the period to November 2010. Investment income and transfers between either governments (official support) or individuals (remittances) are mostly to blame for these trends.

Stepping back and looking at the big picture, several trends become clear:

(a) With continued high oil prices, Greece will need to redouble its efforts to bring its current account in balance. In 2010, oil averaged just below $80 a barrel; now, prices fluctuate between $90 and $100. So the oil bill could increase in 2011 making life harder for Greece.

(b) Shipping is offering some reprieve. The Baltic Dry Index, which is an index for charter rates on dry cargoes – is just above its lowest point after Lehman Brothers. An increase in charter rates would do wonders for the Greek current account. However, as Greek ship-owners continue to purchase ships, the impact on the current account will be muted somewhat (purchases being treated as an import - see here).

(c) Tourism needs to recover. Receipts have fallen by 7.3% in 2011 (to November). Amazingly, arrivals increased by 1.5% in the first three quarters of the month, even while receipts declined. This means that besides just attracting more people, Greece needs to attract tourists who will spend more money. Therefore, the chronic challenges of Greek tourism of which I have written before seem to still be with us.

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