Axesor Rating confirms Spain's unsolicited credit rating at A- with a stable outlook and upgrades GDP growth forecasts to 6.1%

17th September of 2021

In its September review, the European rating agency highlights the positive impact of the first disbursement of the Next Generation European funds as well as the "unexpected" recovery of the domestic demand -which will grow by 8.3%- and foreign sector. However, it warns of imbalances in public finances, with a deficit and public debt that will rise to 8.5% and 119.6% of GDP respectively at the end of this year of 2021, making it necessary to adopt fiscal consolidation that will allow a primary surplus to be achieved.

The unsolicited credit rating of the Kingdom of Spain of A- with a stable outlook values the progress of the Spanish economy during the second and third quarters of 2021 -in parallel to the evolution of the vaccination campaign-, which has allowed a relaxation of the limitations to mobility and the gradual return to normality in the sectors most affected by the pandemic. It also takes into account the first transfer of 9,000 million euros from the Next Generation European Funds, which are decisive for the recovery. In addition, the pull of domestic demand, exceeding 8.3% by the end of the year, and the foreign sector, closing the year with a positive balance of 0,9% , will raise the growth of the Spanish economy to 6.1% in 2021, placing Spain as a driver of growth in the Eurozone. However, it warns of the persistence of structural challenges, such as the duality and temporality of the Spanish labour market -with an unemployment rate of 15.7% at the end of the year-, the aging population, and the high levels of fiscal deficit and public debt, which are expected to be 8.3% and 119.6% respectively.

In its September review, Axesor Rating confirms the credit rating of the Kingdom of Spain at A- with a Stable outlook.

As the European rating agency announced in its report of March, the Spanish economy has experienced a remarkable recovery during the second and third quarters of the year, in parallel with the progress of the vaccination campaign. This has allowed the progressive lifting of restrictions on mobility and the gradual return to normality in the sectors most affected by the health crisis -tourism, hospitality and commerce-, pillars of the outsourced Spanish economy. In this regard, the report emphasizes the "unexpected" increase in national demand (one year ahead of schedule), that will raise private consumption above 8.3% year-on-year, adding to the good performance of the foreign sector that will close the year with a positive balance of 0.9%.

The report also evaluates the arrival of the first transfer of 9,000 million euros of European funds, which will be decisive for the recovery.

Based on the foregoing, Axesor Rating forecasts a GDP growth of 6.1% at the end of 2021 and to 5.7% for 2022 (both figures one tenth above the previous review). With this, "the Kingdom of Spain would be positioned as the Eurozone’s growth driver in 2021", above France (+5.7%), Italy (+4.2%) and Germany (+3.4%). This is logical given that the Spanish economy was one of the most affected by the health crisis during 2020.

Despite the fact that the country's economy "presents a high level of competitiveness and diversification", the September report indicates –in line with what has been in previous reviews- the "structural challenges" presented by the Kingdom of Spain’s labour market, which are specified in the duality and the high temporality with an estimated unemployment rate of 15.7% at the end of 2021 (just four tenths less than in 2020) and 15.1% in 2022. Figures above those of the main Eurozone economies and that greatly affect young people and activities related to tourism, leisure and hospitality. In addition, the rating takes into account the possible extinction of the Temporary Employment Regulation Files (ERTE) during the third quarter of this year, which "could increase the unemployment rate".

The report points out two other risks: the high levels of the population at risk of exclusion (25.3%) and aging of the population (dependency rate of more close to 54%), situations that could worsen in the coming years and represent a challenge for the future economic growth. In fact, “they could put the stability of public finances at risk", both due to the lower propensity to consume among older generations and the increase in public spending –mainly on pension – and the gap between the supply and demand of future employment, "which would raise inflationary pressures".

In this regard, the rating given to the Kingdom of Spain takes into account the exceptional increase in inflation (which stood at 3.3% year-on-year in August) mainly due to the increase in the electricity prices. Added to this is the impact of bottlenecks in supply chains (semiconductors), the increase in price of some raw materials and the effect of the fiscal stimuli approved by COVID-19. Although, Axesor Rating expects the upturn in prices will be "transitory", the European rating agency pointed out that "if it persists and extrapolates to wages, it could pose a risk in the future".

Foreign sector

The report highlights the positive evolution<> of the foreign sector, which is consolidating as one of the pillars of the recovery. Both exports and imports present better figures than 2020, when the current account balance closed at 0.7%. In fact, for this year the aforementioned current account balance is expected to be 0.9% of GDP, a figure that will rise to 1.5% in 2022.

Regarding external debt, the rating assesses the decreasing percentage of it in the hands of international investors. Even so, it is constrained by its "high volume", which translates into " Spain’s persistent international debtor position" and whose consequence is the "continuous deterioration of the net international investment position, reaching in 2021 the worst result since 2018 –84.1% of GDP-".

Fiscal policy, debt and liquidity

Despite the improvement in public finances, the A- rating with a stable outlook of the Kingdom of Spain takes into account the high levels of deficit and public debt, above those registered in 2019.

Axesor Rating expects the public deficit to stand at 8.5% of GDP in 2021 and 6% in 2022, which is 5.5 and three points above the maximum established in fiscal rules in the European Commission which could force to speed up the fiscal consolidation process if Brussels decides to abolish the escape clause approved due to the outbreak of the pandemic. That said, the report highlights as positive the reduction in budgeted extraordinary spending compared to 2020.

Looking at the State accounts for 2022, this trend is expected to persist and that "the extraordinary expenditure will not become structural expenses". Something that, "will not be enough to ensure a stable consolidation. Deeper reforms, such as the pension system, are still needed”.

Regarding public debt, Axesor Rating analysts do not expect a notable reduction in it in the coming years, closing 2021 with a level of 119.6% of GDP and 116.9% of GDP in 2022. These levels that could rise in the future if risks such as new contingent liabilities (ICO guarantees), European debt and increased financing costs materialize. These risks, together with inflationary pressures, "expose debt to external shocks, making it more vulnerable to exogenous factors."

Although the monetary policy of low interest rates and high liquidity favors debt sustainability, Axesor Rating points out that "given a hypothetical normalization in the future, it is necessary that fiscal policy, in addition to promoting inclusive growth, does not lose sight of the path of fiscal consolidation".

Financial sector and delinquency

The rating assesses the extraordinary actions implemented by the European Central Bank (ECB) to maintain the expansionary monetary policy focused on the purchase of public debt. In this regard, according to what was agreed in the September meeting of the supervisory body, and in the interests of growth expectations and the rise in inflation, the volume of purchases will be reduced, which "will not be a drag on Spain's growth expectations".

With regard to the Spanish financial sector, it insists on the best position compared to the situation it presented in 2008, which is reflected in the increase in levels of credit granted. Contrary to expectations for this year, the NPL ratio has fallen to 4.4%, which "could be due to the high proportion of loans with state guarantee", says the report.

Despite this, the rating report insists on the "high" level of lending and the "low" return on assets (0.5% in 2020).

2030 Agenda

Axesor Rating positively values the trajectory of compliance with the Sustainable Development Goals and 2030 Agenda as well as the progress made in the application and development of environmental, social, and governance (ESG) policies, which are reflected in the approval of the first Law against climate change in May 2021 and the first issue of sovereign green bonds worth 5,000 million euros this September. This line is expected to be consolidated taking into account the conditionality of European funds, of which 37% must be allocated to ecological transition, "which would guarantee an evolution in the environmental aspect of the Kingdom of Spain".

On the other hand, despite the good situation of the Spanish welfare state, the European rating agency warns of the "increase in inequality between the Kingdom of Spain and the rest of the countries of the European Union".