Measures are likely to include a gradual cut in

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corporates to be introduced gradually from January 2020. Measures are likely to include a gradual cut incorporate income tax to 20% from 28 over two years, a cut to the lowest income tax rate to 9% from 22%,a suspension of capital gains tax on property sales and suspension of VAT on construction activity. It istoo early to assess the overall impact of these measures on GDP growth and public finance outturns butwe expect to have more information by September when the 2020 draft budget will be presented.The government appears to have prioritized acceleration of privatizations and addressing the bankingsector asset quality issues. The oversight of banking sector policies is now the sole responsibility of theMinistry of Finance (as opposed to the previous joint responsibility with the Ministry of the Economy andMinistry of Justice) and the privatization program is overseen by the Ministry of the Economy. In our view,this is a positive development that could lead to swifter policy implementation in these areas.Public finances continue to improve. Greece posted a headline budget surplus of 1.1% of GDP in 2018,up from 0.7% a year earlier, driven by higher than budgeted revenues, expenditure restraint and under-execution of capital spending. This implied a primary surplus of 4.4% of GDP, well above the ESMprogram target of 3.5% of GDP. We expect fiscal policy to remain sound and project primary surpluses of3.5% and 3.4% of GDP in 2019-20. General government gross debt has peaked at 181.1% of GDP in2018 and we expect it to decline firmly to 161% of GDP by 2021, on the back of sustained primarysurpluses, average real GDP growth of 2% and low nominal effective interest rates.Although the stock of general government debt will remain high, there are mitigating factors that supportdebt sustainability. Greece's cash reserves are high at €26.8 billion (14% of GDP) in December 2018 andhave remained undrawn since the end of the ESM program (August 2018). Gross financing needs arelow and our estimates (which assume full rollover of T-bills) indicate that Greece could be fully funded62The Fortnightly may also be found at our Web site of:
until 2022-23, providing a significant backstop against any financing risks for a prolonged period.The concessional nature of Greece's public debt implies that debt servicing costs are low; 90.8% ofgeneral government debt stock is at fixed interest rates (which implies low sensitivity to interest rateshocks), and the average maturity of Greek debt (21.1 years) is among the longest across all Fitch-ratedsovereigns. Interest payments to revenue at 7.2% are slightly below the current 'BB' and 'BBB' mediansof 7.3%. The nominal effective interest rate on Greece's general government debt stock is well below thatof most Eurozone peers.In Fitch's view, the current fiscal policy mix may not be sustainable over the medium term. The fiscaladjustment since 2016 has relied heavily on tax revenues and under-execution of capital spending. Thenew government inherits the challenge of rebalancing the fiscal policy mix without hampering thecommitment to the fiscal targets agreed with the official creditors.

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