Spain: political deadlock clouds investment outlook, with risks for growth, fiscal consolidation
By Jakob Suwalski and Alessandra Poli, Sovereign & Public Sector Ratings
Unlocking investment for sustainable growth and jobs is crucial for Spain (A-/Stable). Fixed capital formation has stagnated, falling behind the rest of southern Europe, notably Italy (BBB+/Stable) and Portugal (A-/Stable) (Figure 1).
The risk is that this constrains Spain’s longer-term growth prospects. The country’s poor investment record partly explains the lacklustre jobs market. Unemployment of 12.8% in Q1 2023 stood at more than twice the euro area average and compared with 11.8%, 7.8%, and 6.9% in Greece, Italy and Portugal, respectively.
Figure 1. Investment (gross fixed capital formation) in Spain, Portugal, Greece Italy, 2019-2022
% of GDP, 2011=100
Source: Eurostat, Scope Ratings
Spain experiences consequences of long-running corporate deleveraging
The prolonged period of private-sector deleveraging after the global financial crisis in 2008-09 has held back investment even though the repairing of corporate and household finances is visible in the improvement in the current account balance and net international investment position (NIIP).
Over the past decade, the current account balance shifted from persistent deficits to a 0.5% GDP surplus in 2022, a significant change from the 9.4 % deficit in 2007 (Figure 2).
Spain's negative net international investment position (NIIP), has also improved to 61% in 2022 from around 85% of GDP in 2007, driven by partly external deleveraging, increased savings and more efficient investment, notably in the energy sector. Spain has become less dependent on foreign capital.
Figure 2: Current account balance (lhs), NIIP (rhs) for Spain, Portugal, Greece, Italy, 2007-2022
% of GDP
Source: Eurostat, Scope Ratings
Other cyclical, structural trends hold back investment
We expect Spain's positive current account trend to persist, bolstered by thriving domestic tourism and expanding renewable energy projects, underpinned by ample renewable energy capacity.
However, tighter monetary policy and rising interests represent a new brake on private-sector investment as borrowing costs increase. Reluctance by business to invest is mirrored by households’, with memories fresh of the economic impact of the pandemic, the cost of living on the rise, and possibly growing anxiety over retirement income as Spain’s population ages.
The role of public investment and the deployment of EU funds takes on extra importance in the context of these cyclical and structural impediments to private-sector investment even if they cannot entirely replace it in terms of creating jobs and boosting longer-term growth.
Spain has received to date EUR 37bn out of allocated EU recovery funds totalling EUR 164bn (12.4% of 2022 GDP, including EUR 77.2bn grants and EUR 84bn loans), indicating that much work remains ahead to implement the investment strategy, for which a broad political consensus is likely to be a crucial component.
Building such a consensus will be challenging without a new government backed by a functional parliamentary majority.
Given that neither acting Socialist prime minister Pedro Sánchez nor opposition leader Alberto Núñez Feijóo have a clear shot of forming a parliamentary majority, there is the risk of a prolonged political deadlock that holds back the deployment of EU funds and structural fiscal and economic reform. If that led to more sluggish-than-expected growth, it would complicate the government’s efforts to improve public finances.
Complying with revised EU rules may test Spain’s fiscal consolidation plans
We expect the European Commission to adopt revised fiscal rules by year-end with some leniency as regards the timing and path towards achieving fiscal targets. This reflects the common challenge among several EU member states, including Spain, France and Belgium, to reduce deficits below 3% of GDP.
Still, to comply with reactivated EU fiscal rules next year, prudent fiscal policy is crucial. In 2022, Spain's fiscal deficit decreased to 4.8% of GDP from 6.8% in 2021. Rising social welfare and healthcare spending will test fiscal consolidation. We project a deficit of 4.4% of GDP in 2023 and 3.2% in 2024, narrowing more slowly than the government estimates (3.8% and 3.0%), assuming no additional consolidation efforts.
Spain's debt-to-GDP ratio is set to gradually decrease, reaching 108% by end-2024 from 113% in 2022, broadly in line with projections for France (112%) and Belgium (108%), Portugal (103%) but below Italy (141%) – as long as GDP growth does not disappoint.
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