Spain: Risk Assessment
Country Rating1
Rating: A4
Business Climate Rating1
Rating: A1
Risk Assessment2
The country again slipped into recession
Economic activity gradually slowed in 2011 due to the contraction in public spending and the continuing decline of housing investment. GDP started to decrease in the 4th quarter, with household consumption and investment in capital goods in turn recording negative figures. This fall continued in the 1st quarter 2012 under the effect of a further contraction in investment and a deceleration in exports of goods and services. On the supply front, the construction and manufacturing industry sectors have experienced the sharpest drop in their added value. The recession should deepen in the coming months. Consumption will continue to be penalised by increasingly limited access to credit, the continuation of the deleveraging of households, the reduction in the value of their assets and the record level of unemployment (24% threshold exceeded in March 2012). Investment will continue to suffer from the effect of an excess of supply in the property sector, the high level of corporate debt, increasingly poor financing conditions and the drop in public spending. Furthermore, forecasts are gloomy on the foreign trade level due to the weakening of demand from the eurozone (57% of outlets). However, the contribution from the external sector to growth should remain positive due to the sharp contraction in imports.
Imbalances accumulated during the boom years, the banking sector is at the core of the crisis
The country is now bearing the brunt of the excessive expansion in domestic demand observed until 2007, linked to a high level of productive investment and investment in property, with the latter leading to a private sector debt overhang (household and corporate debts represented 82% and 134% respectively of GDP at the end of 2011). The current account deficit resulting from this excess demand reached 10% of GDP. However, it decreased sharply in 2009 due to the fall in imports, then in 2010 and 2011 due to strong exports, which increased in competitiveness.
On the fiscal front, Spain was, until the crisis, one of the only eurozone countries to comply with the Stability and Growth Pact. However, public accounts have deteriorated as a result of the stimulus policy and the recession. The burden of public debt, until now modest, has increased sharply, even though it still compares favourably to that of the other eurozone countries (68.5% of GDP compared to 87.2% for the eurozone at the end of 2011). The current recovery effort is thwarted by the sluggishness of economic conditions and by the difficulty of adjusting the accounts of autonomous communities. The government has had to revise its fiscal objectives for 2012 downward after last year's overspending, two thirds of which the regions are responsible for. It has been forced to release funds so that local authorities can pay the invoices of their suppliers and it exercises a tighter control on their expenses.
The State's financing conditions have once again been strained over the past few months despite exceptional cash injections by the ECB. The cause of it is the increase in the banks' capital needs following the upward review of losses related to their exposure to property developers. Considering the size of this recapitalisation, the government has decided to call on the financial assistance of the eurozone. This aid, which mainly concerns the regional savings banks (financial institutions the most affected by the bursting of the property bubble), will be directly provided to the banking sector by the European Stability Mechanism. However, the reform of the sector will have to be pursued including, in particular, the transfer of impaired assets to a bad bank.
Companies again affected by the economic situation
Facing a highly degraded domestic climate while their ability to resist shocks is depleted due to their debt burden, companies are in a particularly difficult situation. Payment incidents recorded by Coface and the number of bankruptcies rose sharply in 2011 and in the start of 2012. Whereas small companies were the hardest hit during the first phase of the crisis (2009), it is currently larger companies that are affected. As in the case of bankruptcies, a significant proportion of the unpaid sums is concentrated in the construction sector, but other branches are weakened, including food processing, electrical equipment, chemicals and non-specialised trade.
Strengths
- Large groups with an international presence
- Close links with Latin America
- Modernised transport infrastructure
- Development of wind and solar energy
- High tourism potential
- Initial low level of public debt
Weaknesses
- Bloated construction sector
- Loss of productivity and competitiveness
- Energy intensive exports, mainly with low to moderate technological content (food products, base chemicals, metal articles, clothes, machines, transport equipment)
- Heavy private debt burden
- Regional savings banks weakened by the property crisis
- Deteriorating public finances
- Very high unemployment, especially among the young