Unsolicited Rating of the Community of Madrid
The unsolicited credit rating of A- with stable outlook for the Community of Madrid reflects the positive evolution of its economy. In the medium term, it will continue to grow leading its regional peers, which will have a positive impact on job creation, albeit with less dynamism than in the last years. The rating also evidences fiscal consolidation, which will enable the Community to continue to meet deficit and debt targets. On the other hand, government instability, population aging, and social and economic inequality, negatively affect the growth potential.
Madrid, July 30th, 2019
Axesor Rating informs that it assigns the Community of Madrid an unsolicited credit rating of A- with stable outlook.
This rating is based on the positive recovery of Madrid's regional economy, mainly tertiary, which in 2018 led the rest of the autonomous communities with a growth rate of 3.7% due to the boost in domestic demand. Axesor Rating's growth forecast is 3.3% for 2019 and 2.5% for 2020, figures that are well above our expectations for Spain (2.5% in 2019 and 2.0% in 2020). We estimate that this trend will continue in the medium term, albeit with the moderation inherent in the maturing economic cycle.
The impulse of Madrid's regional GDP has been sustained by internal demand driven by the private consumption derived from the dynamism of the labour market and the positive evolution of the tourism sector and the export activity to European countries, mainly of energy and semi-finished products.
The credit rating highlights the dynamism of the labour market, where more than 370,000 jobs have been created since the beginning of the economic recovery. However, although the unemployment rate fell to 11.5% in 2018 and is below the national average (14.4%), it has not recovered to pre-crisis levels. Axesor Rating estimates that it will close 2019 at 10.7% of the active population. The region is also impacted by the problem of high youth unemployment. Low labour productivity also continues to be a challenge due to its negative effect over economic growth potential
On the side of the challenges, we have population ageing - life expectancy in the Community of Madrid is one of the highest in Spain (85.5 years) - due to its negative effect on health and social spending - which consumes 40% of the 2019 budget - and because it reduces the potential growth of the economy. The population at risk of social exclusion (20.6%) is below the national average (26.6%), although the levels remain above those before the crisis.
The credit rating also values the path of fiscal consolidation, which has made it possible to meet the deficit targets set in the last two years and to improve the level of debt. Axesor Rating forecasts that this year the deficit target will be met again despite the expansive nature of the budget, presented in an election year. However, indebtedness, despite being the smallest of the communities in general regime, triples the levels before the crisis, forcing it to allocate a fifth of its budget to face the financial burden.
The credit rating of the Community of Madrid also takes into account the governmental instability that has existed since the elections of 26th May, in which no political party reached a sufficient majority to constitute a government. This instability derived from parliamentary fragmentation is one of the factors that reduce the potential for economic growth.
Axesor Rating values the advances that the Madrid region has made in recent years in the ESG environmental principles, being the first Community to issue green bonds to finance environmental projects, a trend that we expect will continue in the coming years. In addition to that, we highlight the existence of environmental taxes, the extensive repertoire of environmental and social legislation and the fact that a greater part of the budget is being allocated to social benefits.