In its March review, the European rating agency warns of the structural problems of the labor market, marked by temporary employment and high rates of youth unemployment that will increase the unemployment rate to 17%. It also forecasts deficit and debt levels of 8% and 120% respectively at year-end.
The unsolicited credit rating of the Kingdom of Spain of A- with a Stable outlook assesses the expected recovery from the second half of 2021, as the vaccination schedule evolves, and limitations on activity are eased. It also highlights the increase in competitiveness of the Spanish economy, supported once again by the foreign sector which closed 2020 with a positive current account balance of 0.7%. In this regard, GDP is expected to grow by 5.6 percent at year-end. However, Axesor Rating warns that the unemployment rate could reach 17% due to the worsening of the structural problems of the Spanish labor market, as well as the high levels of fiscal deficit and public debt, which are expected to be around 8% and 120% respectively (after including the SAREB's liabilities).
Madrid, March 26, 2021
In its March review, Axesor Rating confirms the credit rating of the Kingdom of Spain at A- with Stable outlook.
The European rating agency expects a gradual recovery of the Spanish economy from the second half of 2021, both because of the evolution of the immunization schedule that will allow the recovery of activity, especially in the sectors most affected by the restrictions (hospitality, leisure, and tourism) as well as for the reception of 140 billion euros from the European recovery fund (European Next Generation) that will boost the national economy and whose conditionality and orientation towards projects that foster a sustainable economy will help improve the competitiveness and productivity of the productive fabric, boosting the national economy. Thus, Axesor Rating projects GDP growth of 5.6% at year-end 2021 and 5.4% in 2022.
However, the report warns of the risk involved in the "worsening of the structural problems of the labor market." The high level of temporary employment and the historical duality of the Spanish labor market will increase the unemployment rate to 17% this year (nine-tenths above that registered at the end of 2020) and to 15,7% in 2022, more intensely affecting young people and activities related to tourism, leisure, and hospitality, in which an "asymmetric behavior in terms of employment rates is already observed compared to the average of the rest of the productive sectors." This is subject to the evolution of the pandemic, possible extensions of the temporary layoffs, and direct aid to affected companies.
In addition, Axesor Rating warns about the high percentage of people at risk of exclusion — above 26% — and the population aging, with a rate of dependency of 54.3%, two situations that could worsen in the coming years as a result of the economic situation and the slow population growth. In this section, the report stresses that this situation poses “quite a challenge” for the future growth potential, both because of the lower propensity to consume among older generations and the need for care services and social benefits that this group has and which "will certainly put considerable pressure on the budgetary stability of the coming years, so structural reforms will be necessary to ensure the self-sufficiency of the public pension system”.
Pent-up demand and foreign sector
The foreign sector is one of the pillars of recovery. In fact, despite the fall in exports during the first half of the year due to mobility restrictions, 2020 closed with a positive current account balance of 0.7%. In this respect, Axesor Rating puts the emphasis on “gain in competitiveness” driven by structural reforms that were launched during the harshest years of the previous economic crisis and anticipates an improved situation for both 2021 and 2022, when the current account balance is expected to reach 0.9% and 1.1% of GDP, respectively.
Still, the rating is limited by the "high level of external debt" (957 billion euros - among the highest in the EU), which" emphasizes the vulnerability of the Spanish economy to external financial shocks."
Fiscal policy, debt, and liquidity
The rating of A- with a stable outlook for the Kingdom of Spain takes into account the impact that government-approved stimulus measures will have on public finances, the deterioration of which will sharpen the need for new debt.
Axesor expects the public deficit to have reached 12% by the end of last 2020, a figure that will be reduced to 8% by 2021 and 6% by 2022.
In this regard, Axesor Rating points out that, although the 2021 General State Budget increases the expenditure ceiling to counteract this situation, “the deterioration of the economy could put pressure on tax collection, which is already conditioned by the accrual and settlement effect of a financial year severely affected by the pandemic.”
Concerning public debt, the European rating agency highlights the change in trend in the reduction path in recent years, raising the debt level to 120% of GDP (after including the debt associated with the SAREB, guaranteed by the State. A level at which “it will practically stagnate in the next few years” and which, together with the labor market, will represent one of the "main structural problems of the Spanish economy."
While a monetary policy of low-interest rates and high liquidity favors debt sustainability, Axesor Rating points out that "faced with a hypothetical future normalization and in addition to promoting inclusive growth, fiscal policy must keep the eye on the path of fiscal consolidation.”
Financial sector and non-performing loan ratio
Regarding the financial sector, the “remarkable improvement” in terms of capitalization and solvency is emphasized compared to the situation in the 2008 crisis, which places Spanish banks in a good position to deal with the current economic shock. However, a "marked profitability problem" persists, which is forcing a rethinking of business models towards activities that enhance revenue generation. It must also meet the challenges to adapt to the new regulations, technological change, and sustainable financing.
Although Axesor Rating positively assesses the record of compliance with the Sustainable Development Goals (SDG) and the 2030 Agenda the rating committee insists on the negative effects of political instability on meeting the milestones set for the period. In fact, it notes the delay observed in the evolution of compliance of the SDGs until 2018, in goals such as poverty reduction, education, or gender equality, among others.
The rating also takes into account indicators that measure ESG factors, such as energy dependence, per capita income, happiness index, dependency rate, unemployment rate, or indicators of good governance, to name a few.
Moreover, the rating report confirms the "solidity of the institutional framework", reinforced by Spain's membership in the European Union and the presence of guarantee, supervision, and control mechanisms that preserve the proper development of economic relations, with Spain holding the top positions in the different governance indicators of the World Bank.