It is unclear whether the government that will emerge from the polls in general elections scheduled for the end of the year “will have a strong enough mandate to address some of Spain’s long-term economic and fiscal challenges.” The warning has been issued by the agency S&P Global, in its latest review of Spain’s rating, in which it has decided to maintain the country’s rating at ‘A’ with a stable outlook. The North American firm is concerned that the absence of a sufficient majority in Congress will prevent the next Executive from putting on the table the necessary measures to tackle the still high level of unemployment (the unemployment rate stood at 12.87% of the active population , according to the EPA for the fourth quarter), the persistent duality in the labor market, as well as the structural deficit that Social Security drags on.
In its report, to which ‘La Información’ has had access, the credit rating agency has raised its growth estimate for Spain in January by two tenths to 1.1%, placing it below the 1.7% calculated by the OECD or 1.6% contemplated by the Bank of Spain. This, in a scenario where he considers that the “greatest imminent risk” for indebted households and companies, as well as for the State itself, demonstrated a consolidation of national inflationary expectations at levels above the medium-term objective of the European Central Bank ( 2 %), which -if generalized among the main euro economies- would force the issuer to raise interest rates above expectations to combat inflation.
In the Spanish case, the rise in prices has tightened in the first two months of the year (the general rate stagnated at 6% in February) after five consecutive months of moderation, with the underlying -which excludes its computation energy and unprocessed food- at 7.6%, its highest level since December 1986. According to their forecasts, the persistence of inflation and the tightening of financing conditions due to the rate hike will weaken domestic demand, which give rise to this slowdown in the economy from the 5.5% at which activity grew both last year and the previous year to 1.1%.
Looking ahead to next year, S&P forecasts a greater increase in GDP, of 1.6%, which will accelerate to 2.3% in 2025 and stabilize at 2.2% in 2026. By then, and according to their calculations, the unemployment rate will still remain at 12.6%, so it will have barely dropped four tenths from the 13% it would close this year. In fact, throughout its report, the agency stresses that if the economy recovers in the next three years “or if additional labor policies are applied that lead to a further reduction in structural unemployment and a significant improvement in public finances,” could raise the Spanish rating.
Additional spending measures would also contribute to this to support the sustainability of the pension system, which registers considerable deficits “due, among other things, to indexation” to the CPI; as well as an eventual strengthening of the country’s institutions or of the foreign position, including the reduced need for short-term external financing. Conversely, if the global economy were to worsen beyond S&P’s expectations with higher inflation and lower growth, the effects on Spain’s finances “could no longer be reconcilable” with an ‘A’ rating, given other credit vulnerabilities, including the large but declining net external liability position and the significant but declining levels of private debt.
Public projects with EU funds will be delayed until 2024
Under its central scenario, the US firm maintains the perspective of its rating for the country “established” for the next two years, anticipating that the Government will apply policies to support growth and a certain degree of fiscal consolidation until 2026. At the same time At the same time, the economy will benefit from Next Generation EU (NGEU) program grants and loans equivalent to more than 2% of GDP until 2027.
However, S&P Global warns that the execution of large public projects in charge of European funds will be delayed until 2024 and following years due to “administrative, planning and capacity limitations, even at the regional level”. The slow rate of absorption of the NGEU by Spain and other partners could lead the European Commission to extend the period foreseen for their use, given that a large part of the delay in spending is due to the processes put in place to guarantee that investments benefit long-term growth and sustainability. Starting next year, public sector capital spending will surpass private investment as the engine of growth.
Long-term unemployment and the structural deficit
The analysis prepared by the agency points out that, despite the fact that the labor reform approved by the Government has contributed to reducing the gap between temporary and indefinite ones, the official employment rate continues to be considerably lower than the average for the Eurozone (67.7% compared to 72.5% on average among our neighbors). Furthermore, although the long-term unemployment rate has almost halved since 2013, it remains the second highest in Europe after Greece (6.2%). This, together with a GDP per capita that is lower in absolute terms than that of other large euro economies, such as Germany or France, contributes to a large extent to keeping Spain’s sovereign rating at “A”.
In relation to the imbalance in public accounts, S&P Global places the deficit of the Public Administrations as a whole at 4.4% last year, six tenths below the target that the Government set for itself despite the suspension of fiscal rules in the EU since the pandemic. For this year, it foresees a slight deviation from the 3.9% objective set in the General State Budget, as “extraordinary income derived from unexpectedly high inflation” decreases and interest payments rise. Thus, they do not expect Spain to register a primary surplus until 2027.
Lastly, the US firm highlights the fact that since 2012, the country has registered uninterrupted foreign surpluses, despite the drag on tourism revenues caused by the Covid-19 pandemic, and the shock to the energy terms of trade that the war in ukrainian Looking to the end of the year, they estimate that Spain’s net external debt (the liabilities that the economy has once the assets it has abroad have been subtracted) will have decreased to 76% of GDP from the 96% of GDP it reached in 2014.
