Bank of Greece : Economic Bulletin, Issue 48

Today the Bank of Greece published the latest issue of its Economic Bulletin (No. 48/December 2018).

The articles published in the Economic Bulletin reflect the views of the authors and not necessarily those of the Bank of Greece.

Issue 48 features the following three articles:

Evangelia Georgiou: 'Financing constraints and firm characteristics: evidence from Greek SMEs'

The paper analyses the financing constraints faced by SMEs in Greece over the 2014-2017 period, exploiting the micro dataset of Greek SMEs provided by the Survey on the Access to Finance of Enterprises in the euro area (SAFE), which is conducted bi-annually by the European Central Bank (ECB) in conjunction with the European Commission. More specifically, the author uses a wide range of variables that capture both demand-side and supply-side financing constraints, as well as firms' perceived and actual access to bank credit and trade credit.

By employing probit regression analysis, the author examines whether certain characteristics of SMEs such as firm size, age, exporting activity or performance were related to their access to bank credit and trade credit, while also complementarily examining the impact of the overall economic and financial conditions. The results of the regressions provide evidence that smaller firms as well as firms performing weakly encountered stronger bank credit constraints. Exporting firms are estimated to have been more active in requesting financing, while relatively younger firms as well as highly exporting firms were less likely to report constraints.

Both firm size and performance may reflect broader weaknesses of Greek SMEs, such as the fact that they operate in low value-added sectors; their limited ability to exploit economies of scale or scope; a low degree of export-orientation or innovation; high dependency on the banking system or prospective lenders' difficulties in collecting reliable information on these firms. The analysis points to the need for channelling available funds from banks, international organisations and structural funds towards productive small and medium-sized firms with high growth potential, i.e. towards exporting and innovative SMEs operating in dynamic sectors. Furthermore, Greek SMEs' access to finance would improve, were they to provide prospective lenders with more timely and reliable information on their performance and outlook, as it would also improve through the effective restructuring of financially distressed but viable firms and through coordinated action to close important gaps in SMEs' awareness and technical knowhow of available programmes and innovative financing tools.

Konstantinos Dellis: 'Structural determinants of FDI inflows and the case of Greece'

The paper explores the drivers of foreign direct investment (FDI) inflows, relying on the relevant theoretical and empirical literature, with a focus on the case of Greece. FDI has grown rapidly over the past decades and is the object of strong competition between countries, as it is considered less volatile than portfolio investment and, as suggested by a battery of studies, has a positive effect on the productivity and long-term growth of the domestic economy. The capacity to attract FDI flows depends on a number of host country attributes, including macroeconomic, geographical and institutional variables. The extent to which FDI inflows contribute to domestic productivity and long-term growth is also conditional on characteristics that shape a country's absorptive capacity.

The study describes the trends observed in a wide range of variables which determine the direction of FDI flows as well as the potential of host economies to enjoy the resulting positive knowledge and technology spillover effects. Special emphasis is placed on the case of the Greek economy whose overall performance in the field of FDI inflows can be described as lacklustre. Greece's mediocre performance relative to the performance of countries with similar economic characteristics or geographical proximity is explained by the trajectory of key variables over time. Despite the recent deep economic recession, FDI inflows to Greece showed clear signs of recovery in 2016 and 2017, surpassing USD 3 billion. The analysis underlines the need for perseverance as regards reforms in product, labour and financial markets, with a view to keeping up the positive momentum of the last two years. Moreover, given the country's growth potential in R&D-, knowledge- and technology-intensive sectors and its sizeable stock of human capital, FDI inflows of high technology content are expected to generate substantial positive externalities on the domestic economy.

Dimitrios Louzis: 'Greek GDP revisions and short-term forecasting'

The paper investigates whether short-term forecasts of the Greek gross domestic product (GDP) are affected by GDP revisions.

Indicators of economic activity such as GDP are usually published with a significant delay, possibly even exceeding a period of two months after the reference quarter. This means that policy makers conduct fiscal and monetary policy without knowing with certainty the current state of the economy, relying on short-term estimates or predictions of the key economic indicators before their official release from the statistical authority.

Given the relevance of short-term forecasting in conducting economic policy, the literature has developed a set of methodologies and econometric models for the production of short-term predictions, which is referred to as nowcasting. Nowcasting techniques are widely based on the use of economic indicators that are published earlier and at a higher frequency than the target variable, thus providing timely economic forecasts.

Besides, it is known that macroeconomic data are typically revised by statistical authorities because of incoming new information or methodological changes. In order to account for GDP data revisions, the author constructs a real-time database to produce short-term forecasts using a set of econometric models. Next, the forecasting process is repeated utilising last vintage data and the predictive ability of alternative nowcasting models is compared using both last vintage and real-time databases.

The empirical results show that GDP revisions, as captured by real-time data, do not affect the comparative predictive ability of the various econometric models. This result is policy-relevant, given that economic policy is made in real time and what is warranted is models that generate accurate predictions in real time, the quality of which remains unaffected by any revisions of the economic variables.

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Issue 48 also includes the abstracts of Working Papers published by the Special Studies Section of the Bank's Economic Analysis and Research Department between July and December 2018.

The full text of Issue 48 is available on the Bank of Greece website.