The unsolicited credit rating of A with stable outlook reflects the performance of the fourth economy of the eurozone, which is expected to continue to exceed that of the EU average, albeit with less dynamism. However, important vulnerabilities remain, undermining its growth potential. Additionally, continued political instability, has had a delay on investment decisions and impacted the ability to meet the 2030 Agenda.
Madrid, October 16, 2019
Axesor Rating informs that it has affirmed its unsolicited rating on the Kingdom of Spain at A with a stable outlook.
The rating reflects the performance of Spanish economy and our forecast for 2019 and 2020, with expectations of a year-on-year growth rate that will close to 2% in 2019 and 1.8% in 2020, once again exceeding that of its European peers. We note that, although the Spanish economy has accumulated twenty-five quarters of economic growth, since 2018, the economic activity is slowing down. We expect this situation to continue during the remainder of this year, with an expected quarter-on-quarter growth of 0.4%.
The external sector, which has been one of the drivers of the recovery of the Spanish economy is subject to external uncertainties such as the trade war and Brexit which has undermined the export growth potential since the second half of 2018. However, the recovery in the second quarter of 2019 coupled with the weakening of imports, has been enough to improve the external financing capacity and sustained current account surpluses. However, despite the recurrent surplus of the foreign sector, the Spanish economy continues to face a high level of external debt, which is, in fact, one of the highest in the OECD (2.1 billion euros at the end of the second half of 2019, representing 169% of GDP). The accommodative monetary policy of the European Central Bank (ECB) as well as reduced oil prices have favoured the reactivation of investments.
The credit rating also takes into account the dynamism maintained by the Spanish labour market, with the generation of more than 2.2 million jobs since the beginning of the economic recovery, mainly between 2016 and 2018. However, our credit rating is constrained by the continuing high unemployment rate (14.5% at the end of 2018). We expect these unemployment levels to continue to improve in 2019 and 2020, to 13.7% and 12.5%, respectively. High unemployment is one of the main challenges of the Spanish economy, both because of its proximity to the structural level (which we estimate at around 15%), and due to the negative effects of its high temporality, percentage of long-term unemployment and its concentration on young people which contributes to an increasing rate of people-at-risk of poverty.
Imbalances in the labour market, together with those existing in the education system (Spain has a school drop-out rate of 17.9%), negatively affect productivity, which continues to decline, reducing the potential for future growth.
Our credit rating of A with stable outlook, is supported by the fiscal consolidation effort carried out since the beginning of the economic recovery, although the improvements have been minimal since the 2013-2014 period. We view as positive, Spain´s ability to exit of the corrective arm of the European Commission, with a public deficit that closed 2018 at 2.5%. However, we are concerned of how the economic slowdown and the higher current spending has been moving away from meeting the target of 1.8% for 2019, agreed with Brussels. This year we expect that the deficit will close at around 2.3% of GDP.
The expansive fiscal policy deteriorated the structural deficit, which has registered a notable increase since 2015 up to 3% of GDP, the highest level in the last five years, once again exceeding the European average (1.1%). Moreover, it has a negative influence over the public debt currently at 96% of GDP, which we see as one of the main vulnerabilities of the Spanish economy, which has narrowed its fiscal margin to face future economic shocks and makes it increasingly difficult to implement the new fiscal policy measures promoted by the ECB to boost the economy of the eurozone.
Finally, our credit rating takes into account the political instability, with four general elections in four years. Among the impacts on the General Budget and the objectives of budgetary stability, this situation delays the adoption of new structural measures that would allow Spain to better address the important pending challenges (labour market, productivity, foreign sector, demography and Agenda 2030), and the reduction of its public debt. It’s foreseeable that parliamentary fragmentation will continue, after the general elections on November 10th, which will exacerbate the climate of uncertainty, negatively affecting the confidence of economic agents and, with it, diminishing the potential of the Spanish economy.