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Rating action

Scope Ratings GmbH (Scope) has today affirmed the Kingdom of Spain’s (Spain) long-term issuer and senior unsecured debt ratings at A in both local- and in foreign-currency, with Stable Outlooks. The short-term issuer ratings have been affirmed at S-1 in both local- and in foreign-currency, with Stable Outlooks.

Spain’s long-term A/Stable ratings are underpinned by the following credit strengths: i) a resilient and diversified economy, supported by a shift towards higher value-added sectors, which enhances external competitiveness and underpins above-average growth relative to the euro area; ii) a favourable public debt profile with long maturities, contributing to debt affordability; and iii) a robust institutional framework, supported by euro area membership, which has enabled fiscal consolidation despite political fragmentation and repeated use of rollover budgets, with Spain consistently meeting fiscal targets since 2020.

Credit challenges relate to: i) a still-elevated public debt burden, which limits fiscal flexibility; ii) persistent structural labour market weaknesses, including high long-term and youth unemployment; and iii) increasing long-term budgetary pressures and rising age-related spending caused by accelerated ageing dynamics.

Key rating drivers

A resilient and diversified economy, which enhances external competitiveness and underpins above-average growth relative to the euro area. Scope expects Spain’s resilient, service-oriented economy to continue outperforming key euro area peers over the next two years. Real GDP grew by 3.2% in 2024, well above the euro area average of 0.8%.

Scope maintains its 2025 growth forecast at 2.5%, reflecting solid domestic demand and EU-funded investment, despite fiscal tightening. Spanish GDP grew by 0.6% in the first quarter of 2025, underscoring the resilience of domestic activity and supporting the full-year outlook. Tourism remains robust, benefitting from price competitiveness and geopolitical disruptions in alternative destinations. Private consumption and investment are underpinned by real wage gains, resilient employment, and favourable financing conditions amid monetary easing. Headline inflation is expected to average 2.4% in 2025, reflecting a continued moderation in price pressures. Growth will be driven by a robust labour market supporting private consumption and the continued roll-out of Recovery and Resilience Plan investments. EU recovery funds, equivalent to 11% of GDP, continue to support investment in Spain and support growth. Spain has executed around EUR 54 bn, or about one-third of its EUR 163 bn allocation, by end-May, with further disbursements expected through 2026. The resolution rate stood at 68%, indicating that around EUR 110 bn in project funding had been formally approved and is pending disbursement.

However, Scope expects Spain’s real GDP growth to slow to 1.8% in 2026, thus converging toward its estimated medium-term potential, as temporary growth drivers fade. Strong recent growth has been driven by a rapidly expanding labour force, supported by labour market formalisation, digitalisation and past reforms. While these factors have temporarily lifted growth above potential, their gradual normalisation combined with the growing fiscal burden of an ageing population points to a more moderate growth path ahead.

Medium-term growth benefits from structural improvements, including labour market reforms, gains in high-value-added sectors, and increasing external competitiveness, particularly in non-tourism services. Continued diversification away from tourism and construction should enhance productivity and resilience. Spain’s external position has strengthened significantly, with the net international investment position improving to -45% of GDP in Q1 2025 from -96% in 2015, reflecting the sustained deleveraging of the private and corporate sectors. While this trend has reduced external vulnerabilities and supports macroeconomic stability and more balanced growth over the medium term, some re-leveraging is expected as financing conditions ease and investment activity picks up.

A favourable public debt profile, which supports debt sustainability. Spain’s public debt profile is characterised by long average maturities and a high share of fixed-rate instruments. As of June 2025, the average maturity of government debt stood at 7.8 years, unchanged from 2022, reflecting stable maturity management. The Treasury has indicated that it considers this level appropriate and intends to maintain maturities around this horizon. A strong domestic investor base continues to support funding resilience, and the rising share of foreign holders further contributes to relatively stable borrowing conditions. The total average interest rate on public debt rose gradually to 2.3% in June 2025, from 2.2% at end-2024, 2.1% in 2023, and 1.7% in 2022. This increase reflects the broader euro area monetary policy cycle, while Spain’s favourable debt structure continues to smooth the pass-through of higher rates.

A robust institutional framework, bolstered by euro area membership, which enhances the country’s resilience to external shocks. Spain benefits from strong institutional capacity, reinforced by the policy anchors provided by EU and euro area membership. These frameworks bolster macroeconomic stability and enforce fiscal discipline under European rules. Spain’s institutional framework has enabled a measured approach to fiscal consolidation, even amid persistent political fragmentation and repeated reliance on rollover budgets due to the absence of a parliamentary majority. Despite these challenges the country demonstrates a strong track record in meeting its fiscal targets since 2020.

The general government deficit narrowed from 9.9% of GDP in 2020 to 3.5% in 2023 and 3.2% in 2024. Adjusted for the one-off costs related to storm DANA, the 2024 deficit stood at 2.8%, compared to the government’s 3.0% target. Consolidation progress has continued under rollover budgets since 2022, reflecting the operational role of the general expenditure limit introduced that year, which restricts spending growth and permits only internal reallocations, including for defence. The Ministry of Finance has retained the EU escape clause as a contingency tool, reflecting a prudent approach to fiscal management without resorting to exceptional measures.

The improvement in Spain’s public finances has been underpinned by strong nominal GDP growth, solid revenue performance, particularly from expanding social security contributions. Broader structural reforms, including the formalisation of the informal economy, efforts to reduce tax evasion, and the digitalisation of tax administration, are contributing to a more sustainable and diversified revenue base. Notably, rising net immigration and successful labour market integration have supported both economic growth and the tax base. In addition, according to the first Annual Progress Report on the implementation of the Spanish Medium-Term Fiscal Path for 2025 to 2028, net primary expenditure grew by 4.1% in 2024, below the 5.3% ceiling originally established. This outcome, but also the generous expenditure ceiling itself, provides some fiscal flexibility for the coming years, strengthening Spain’s fiscal adjustment capacity.

Spain is on course to achieve a near-balanced primary budget in 2025, a critical condition for stabilising debt dynamics amid projected interest expenditures of approximately 2.2% of GDP. Scope projects the general government budget deficit to narrow from 3.2% of GDP in 2024 (including one-off DANA-related costs of 0.4% of GDP) to 2.5% in 2025, which also incorporates an estimated 0.3% of GDP in further DANA expenditures. Scope expects a more gradual consolidation path thereafter, with the deficit declining to 2.3% in 2026 and approaching 2.0% by the end of the forecast horizon in 2029. This trajectory reflects a moderate fiscal adjustment with reliance on favourable nominal growth dynamics rather than structural expenditure reform.

Rating challenges: modest productivity and persistent labour market rigidities and a still-elevated public debt burden that limits fiscal flexibility.

Modest productivity and elevated unemployment. Despite notable gains in employment and output in recent years, Spain continues to underperform in labour productivity and per capita income relative to euro area peers. Labour market fragmentation and a high share of temporary or low-productivity jobs continue to weigh on overall efficiency. Although structural reforms have helped reduce unemployment from multi-decade highs, the unemployment rate remained the highest in the EU at 11.3% as of end-2024, highlighting ongoing challenges in absorbing labour market slack, such as among youth and long-term unemployed.

Structural budgetary pressures from ageing dynamics. Spain faces rising long-term spending pressures, particularly from population ageing. Age-related expenditures are forecast to increase at a faster pace than the EU average. Pension and healthcare spending are expected to be the primary drivers of this increase, placing strain on fiscal sustainability. Additionally, Spain’s relatively low defence spending, estimated at 1.3% of GDP in 2024, may need to rise in the context of evolving geopolitical risks, further constraining fiscal space. The fiscal dynamics between central and regional governments, whose budgets depend on negotiated frameworks, also introduce complexity. While consolidation at the central level is expected to continue, regional governments are not projected to contribute to fiscal tightening through 2027, potentially delaying more comprehensive fiscal adjustment beyond the medium term.

High public debt levels and constrained fiscal space. Spain’s public debt remains elevated, at around 101.8% of GDP in 2024, among the highest in the euro area. Although the debt ratio is on a gradual downward path and projected to return to pre-pandemic levels by 2028 (around 97.0%), it continues to limit fiscal flexibility. High debt, in conjunction with rising age-related spending and elevated interest costs, narrows the government’s ability to respond effectively to future economic or financial shocks. Sustained primary surpluses and prudent budget execution will be essential to ensure a durable reduction in debt over the medium term.

Outlook and rating sensitivities

The Stable Outlook reflects Scope’s opinion that risks to the ratings are balanced over the coming 12 to 18 months.

Upside scenarios for the long-term ratings and Outlooks are if (individually or collectively):

1. Firm downward trajectory of government debt-to-GDP trajectory;
    
2. Sustained economic growth, for instance driven by improved labour markets and diversification into emerging sectors; and/or
    
3. Marked improvement in external competitiveness resulting in a stronger external position.

Downside scenarios for the long-term ratings and Outlooks are if (individually or collectively):

1. Weaker economic growth or public finances, reversing the declining debt-to-GDP trajectory.
    
2. Higher domestic political risk, materially deteriorating Spain's economic conditions and public finances.

Sovereign Quantitative Model (SQM) and Qualitative Scorecard (QS)

Scope’s SQM, which assesses core sovereign credit fundamentals, signals a first indicative credit rating of ‘a’ for the Kingdom of Spain. Under Scope’s methodology, the indicative rating receives i) a one-notch positive adjustment for the euro as reflecting a global reserve currency, and ii) no negative adjustment for political risks. On this basis, a final SQM quantitative rating of ‘a+’ is reviewed by the Qualitative Scorecard (QS) and can be changed by up to three notches depending on the size of Spain’s qualitative credit strengths or weaknesses compared against a peer group of sovereign states.

Scope identified the following credit weaknesses in the QS: i) fiscal policy framework; and ii) social factors. On aggregate, the QS generates a one-notch negative adjustment for Spain’s credit ratings. This results in final A long-term ratings on the Kingdom of Spain.

A rating committee has discussed and confirmed these results.

Factoring of Environment, Social and Governance (ESG)

Scope explicitly factors in ESG issues in its ratings process vis-à-vis the sovereign-rating methodology’s stand-alone ESG sovereign-risk pillar, which holds a significant 25% weighting under the quantitative model (SQM) and 20% weight under the methodology’s qualitative overlay (QS).

Spain’s environmental profile is broadly aligned with the euro area average under Scope’s Sovereign Quantitative Model (SQM). Elevated per capita emissions and ecological footprint contrast with relatively low carbon intensity per unit of GDP and moderate natural disaster risk, as indicated by the ND-GAIN Index. While transition risks remain, particularly from droughts and biodiversity loss, policy momentum, especially in renewable energy, demonstrates meaningful progress toward decarbonisation, albeit with further steps needed to meet 2050 climate targets.

Demographic and social challenges remain pronounced. Despite reform efforts, Spain continues to face persistent labour market duality, high old-age dependency, income inequality, and notable regional disparities in employment and economic outcomes. These factors weigh on long-term growth and fiscal sustainability, reflected by a negative qualitative adjustment in Scope’s assessment of social risks.

In terms of governance, Spain performs well relative to peers across most World Bank indicators, reflecting institutional strength. However, limited reform capacity under the current minority government, particularly in areas such as pension sustainability and intergovernmental coordination, continues to constrain long-term policy effectiveness.

Rating committee
The main points discussed by the rating committee were: i) domestic economic risk; ii) public finance risks, including fiscal policy framework and debt dynamics; iii) external risks; iv) financial stability risks, including private sector debt; v) ESG considerations; and vi) peer developments.

Methodology
The methodology used for these Credit Ratings and/or Outlooks, (Sovereign Rating Methodology; 27 January 2025), is available on https://scoperatings.com/governance-and-policies/rating-governance/methodologies.
The model used for these Credit Ratings and/or Outlooks is (Sovereign Quantitative Model Version 4.0), available in Scope Ratings’ list of models, published under https://scoperatings.com/governance-and-policies/rating-governance/methodologies.
Information on the meaning of each Credit Rating category, including definitions of default, recoveries, Outlooks and Under Review, can be viewed in ‘Rating Definitions – Credit Ratings, Ancillary and Other Services’, published on https://www.scoperatings.com/governance-and-policies/rating-governance/definitions-and-scales. Historical default rates of the entities rated by Scope Ratings can be viewed in the Credit Rating performance report at https://scoperatings.com/governance-and-policies/regulatory/eu-regulation. Also refer to the central platform (CEREP) of the European Securities and Markets Authority (ESMA): http://cerep.esma.europa.eu/cerep-web/statistics/defaults.xhtml. A comprehensive clarification of Scope Ratings’ definitions of default and Credit Rating notations can be found at https://www.scoperatings.com/governance-and-policies/rating-governance/definitions-and-scales. Guidance and information on how environmental, social or governance factors (ESG factors) are incorporated into the Credit Rating can be found in the respective sections of the methodologies or guidance documents provided on https://scoperatings.com/governance-and-policies/rating-governance/methodologies.
The Outlook indicates the most likely direction of the Credit Ratings if the Credit Ratings were to change within the next 12 to 18 months.

Solicitation, key sources and quality of information
The Credit Ratings were not requested by the Rated Entity or its Related Third Parties. The Credit Rating process was conducted:
With Rated Entity or Related Third Party participation   YES
With access to internal documents                                 YES
With access to management                                           YES
The following substantially material sources of information were used to prepare the Credit Ratings: public domain and the Rated Entity.
Scope Ratings considers the quality of information available to Scope Ratings on the Rated Entity or instrument to be satisfactory. The information and data supporting these Credit Ratings originate from sources Scope Ratings considers to be reliable and accurate. Scope Ratings does not, however, independently verify the reliability and accuracy of the information and data.
Prior to the issuance of the Credit Rating action, the Rated Entity was given the opportunity to review the Credit Ratings and/or Outlooks and the principal grounds on which the Credit Ratings and/or Outlooks are based. Following that review, the Credit Ratings and/or Outlooks were not amended before being issued.

Regulatory disclosures
These Credit Ratings and/or Outlooks are issued by Scope Ratings GmbH, Lennéstraße 5, D-10785 Berlin, Tel +49 30 27891-0. The Credit Ratings and/or Outlooks are UK-endorsed.
Lead analyst: Jakob Suwalski, Executive Director
Person responsible for approval of the Credit Ratings: Alvise Lennkh-Yunus, Managing Director
The Credit Ratings/Outlooks were first released by Scope Ratings in January 2003. The Credit Ratings/Outlooks were last updated on 6 September 2024.

Potential conflicts
See www.scoperatings.com under Governance & Policies/Regulatory for a list of potential conflicts of interest disclosures related to the issuance of Credit Ratings, as well as a list of Ancillary Services and certain non-Credit Rating Agency services provided to Rated Entities and/or Related Third Parties.

Conditions of use / exclusion of liability
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