Spain: Risk Assessment
Country Risk Rating
Business Climate Rating
- Reform measures (labor market, banking sector, insolvency, etc.)
- Improved competitiveness and strengthened export sectors
- Improvement in the financial position of companies
- High-quality infrastructures
- Significant tourism potential
- High levels of private and public debt, very negative net external position
- Duality of labor market, high level of structural unemployment
- Large number of relatively unproductive small companies
- Fragmented political landscape, unity of the country threatened by separatist movement in Catalonia
Gradual Slowing in Activity
Spain was again one of the most dynamic of the Eurozone countries in 2017 despite the threat of secession by Catalonia. Growth was driven both by internal and external demand. Household consumption, which grew at a slower rate than in 2016, remained strong thanks to the continued vitality of the jobs market. There is however likely to be a gradual slowing in the level of activity in 2018. The post-crisis recovery is gradually running out of steam. Consumption will increase less quickly, despite the low level of inflation, as the impact of the catching up by households with previously delayed consumer durable purchases begins to wane. Investments, however, are expected to continue growing and most notably among exporting companies but these could suffer as a result of increasing uncertainties and, specifically, political. The construction sector will remain on its positive track in a context of robust demand and rising prices. Exports will benefit in part from the vigor within the Eurozone economies but given the expected strengthening of the euro against the dollar, this will have an impact on the competitiveness of exports outside the EU as will the negative consequences arising with the slowdown in the United Kingdom.
Despite the relaxed financing conditions, the growth in credit will remain sluggish in a context of ongoing debt reduction within households and companies. The weak state of the credit market in a context of low interest rates will nevertheless continue to undermine the profitability of the banking sector even though its creditworthiness and the quality of its portfolios have improved. Following the adsorption of Banco Popular Espaňol S.A. by Banco Santander for one symbolic euro when it failed the July 2016 stress tests, Spanish banks need to get ready in 2018 for a fresh round of banking stress tests based on a more stringent methodology (IRFS9).
Exiting from the Excessive Deficit Procedure Predicted in 2018
The public deficit will continue its slow contraction since 2016. The improvement in the public accounts can be attributed to an increase in revenues and a slight reduction in public spending (lowered social contribution, limited investments and lower interest costs). Unless there is a political consensus following the Catalan crisis making it possible to approve the 2018 budget, the 2017 budget agreed in May 2017 with the support of the Basque minority party, should be duplicated in 2018. There will be a slowdown in budget revenues but spending will continue to be held in check. The reduction in social transfers and the freeze on government employee wages in 2018 will allow for a small increase in public investments. The favorable debt ratio will help contribute to a reduction in the debt servicing burden. If the budget is applied as planned, the public deficit should fall below the 3% threshold in 2018 and allow Spain to terminate the excessive deficit procedure initiated in 2009.
Exporting companies have enhanced their competitiveness since the 2009 crisis thanks to reductions in their labor costs and the restoration of their profitability that has enabled them to win increased market shares. The solid rate of growth in the Eurozone is also expected to help sustain activity but the slowdown in the United Kingdom, Spain’s fourth largest trading partner, could present a threat to those sectors exposed to UK demand, such as the automotive sector (11% of the sector’s exports) and the production of capital goods. The low level of debt interest payments and the cost of energy should also help to maintain the current account surplus.
Risk of Catalan Secession Because of Fragmented Parliament
After two consecutive parliamentary elections, the Spanish political landscape was seriously fragmented. The Spanish government formed at the end of October 2016 and led by the conservative Mariano Rajoy has a fragile base. Mariano Rajoy was only able to win a confidence vote in parliament and to bring an end to Spain’s longest governmental crisis thanks to abstentions by a number of socialist Deputies. The commencing of the Catalan crisis with the calling of what was deemed by the Madrid government of an illegal referendum by the Catalan separatists on 1st October 2017, could lead to a realignment of the polarisation of the political chessboard, with the nationalist parties adopting a united front. Following the “yes” vote and faced with the determination of the Catalan authorities under the leadership of Carles Puigdemont to declare independence, the region was placed under central government rule. The enacting of this exceptional provision in the Spanish constitution was followed by the calling of early regional elections, in which the central protagonists for independence, and despite being the subject of legal action, stood and obtained the majority again. This victory is likely to prolong the Catalan crisis, which in view of the results of the PP could occur at the national level. The agreement between the PP, PSOE, and Ciudadanos on the Catalan question is not going to eradicate the dissensions within the Cortes (the Spanish parliament). With the government struggling to obtain a majority to approve the 2017 budget, it seems that the inflexibility of its position concerning the Catalan question will in future cost it the votes of Deputies in the small regional nationalist parties. Mariano Rajoy is no longer safe from a censure motion.