Spain: Risk Assessment
Country Risk Rating
|A4||A somewhat shaky political and economic outlook and a relatively volatile business environment can affect corporate payment behavior. Corporate default probability is still acceptable on average.|
Business Climate Rating
|A1||The business environment is very good. Corporate financial information is available and reliable. Debt collection is efficient. Institutional quality is very good. Intercompany transactions run smoothly in environments rated A1.|
Domestic demand remains strong, in a context of restored confidence
In 2015, consumption proved very vigorous, driven by job creation, deflation and strengthening household confidence. Improved credit terms, lower oil prices, the recovery in Europe, the depreciation of the euro and the implementation of reforms also helped restore business confidence, which boosted investment. The contribution to growth from domestic demand easily took over from that of external demand, with the help of import growth. However, exports also performed well, picking up slightly thanks to stronger external demand and competitiveness gains.
Whilst remaining vigorous, activity is expected to slow slightly in 2016, with the positive effects of lower oil prices and the depreciation of the euro wearing off. Lower interest rates should however help boost investment and consumption, with the latter again feeling the benefits of a stronger job market and a recent reduction in income tax. The negative effect on internal demand of the private sector deleveraging should also wear off somewhat. However, whilst it was almost 20% lower than its pre-crisis level, private debt still amounted to 235% of GDP at the end of 2014.
The fall in the unemployment rate (currently at 21%) is expected to continue thanks to new job creation. Property prices, after falling by 37% between the third quarter 2007 and the first quarter 2014, have risen by 7% since. Inflation, which remained in negative territory in 2015, thanks to falling oil prices, is expected to rise slightly in 2016, with energy prices not falling much more.
External account deficits turned into a surplus in 2013 as a result of improved competitiveness, made possible by the fall in the cost of labor, and decreasing imports. These latter have since picked up but the vitality of exports, driven in particular by the automotive sector, has not waned. In addition, tourism is breaking records. Demand from the EU is likely to remain relatively strong in 2016. However, the positive impact of the weak euro and low oil prices will wear off.
Stronger businesses and banks, high public debt
Exporting companies have been able to hold their own during the crisis. Those focused on the domestic market are now also beginning to get their heads above the water, such as for example the car dealers (the Spanish automotive market grew by more than 20% in 2015). Even the civil engineering and construction sector is looking healthier. Companies’ gross margins, whilst they have tended to stabilize since 2014, recovered. Finally, insolvencies have continued to diminish (-24% in 2015, after -27% in 2014).
The bank rescue program of mid-2012, required in return for financial assistance from the European Stability Mechanism, has been successful and enabled the return to a solid footing of a financial sector devastated by the bursting of the property bubble in 2007 and then the recession. The stress tests carried out by the ECB in autumn 2014 confirmed this improvement. The sector has improved its solvency and increased the quality of its asset portfolio, even if levels of non-performing loans remain high (11.2% of the total in August 2015). The contraction of domestic private sector credit has slowed significantly.
The sovereign risk has greatly improved, as demonstrated by the fall in borrowing costs on the bond market, dropping from a peak of 7.6% in July 2012 to 1.5% at the beginning of December 2015 (10 year yield). The public deficit continued to shrink in 2015 thanks to solid growth and low interest rates, a trend that is expected to continue in 2016. However, whilst its increase has slowed, the public debt ratio is running at a high level.
A fragmented political landscape, with threats to the unity of the kingdom
Weakened by the austerity policies and corruption cases, the traditional political class has to face the increase in the anti-establishment vote. It was already the case in the May 2015 regional and municipal elections. It was confirmed by the 20 December 2015 general elections which marked the end of the two-party system and plunged the country into a period of political uncertainty. The incumbent Popular Party came top of the polls but lost its absolute majority. Podemos (alternative left), close behind the PSOE (Socialists), and Ciudadanos (center-right) entered the Parliament. Due to this fragmentation and incompatibilities between political parties, it will be difficult to set up a governing coalition. This bout of uncertainty, if protracted, could affect to some extent economic recovery.
The pressure from Catalan separatists is also building. They won the early regional Catalan elections in September 2015 and remain mobilized, even if the Constitutional Court rescinded, early December 2015, the resolution of the Catalan Parliament to formally start the independence process.