Sovereign rating of the Kingdom of Spain
The unsolicited credit rating of A with a change of outlook from stable to under observation, subject to the evolution of the health crisis caused by COVID-19, reflects the better starting point for the Spanish economy. While we expect contraction of 5.5% due to dependence on the tourism sector, the slowdown in industrial activities and consumption contraction, we believe that this will be followed by a rebound in activity that could exceed 5.9% in 2021. Despite the dynamism of the labour market, the current account surplus and the lower level of indebtedness of households and businesses, we expect the increase in public deficit to foreseeably double with respect to 2019, and that the level of debt will exceed 100% of GDP, all this under a scenario of uncertainties that could cause a greater than expected deterioration on public finances.
Axesor Rating has revised its unsolicited rating on the Kingdom of Spain and confirms the credit rating of A with change of trend from stable to under observation conditioned to the evolution of the health crisis that could end up causing a greater deterioration than expected on public finances, and therefore on our credit rating.
The rating reflects the better starting point of the Spanish economy to tackle this crisis, compared to the situation observed in 2008. Despite the current slowdown, Spain grew by 2 per cent in 2019, above France (1.6 per cent), Germany (0.6 per cent) and Italy (0.2 per cent). During the fourth quarter of the year, the economy experienced a positive growth of 0.5 per cent quarter-on-quarter, surpassing the average of the European Union (0.1 per cent) and the German economy, whose growth was 0 per cent.
However, the crisis caused by coronavirus will make a dent in the Spanish economy, especially because of its dependence on the tourism industry and the slowdown of the industrial activities. In this sense, a contraction of 5.5 per cent is expected during 2020. Still, we consider that this is a one-off shock which will lead to a progressive recovery throughout the second semester. We further believe that a rebound in activity, that could exceed 5.9 per cent, will occur in 2021. At this point, the health alert situation that is unfolding, does not affect the credit rating of the Kingdom of Spain, although we do change the trend from stable to under observation based on the uncertainties surrounding these economic scenarios.
Among the strengths of the Spanish economy to tackle an uncertain economic outlook are the lower levels of debt of households and businesses compared to the years before the 2008 economic crisis, the persistence of the current account surplus driven by the good performance of the foreign sector and the dynamism of the labour market, despite the symptoms of exhaustion. Factors that are driven by the ultra-expansionary monetary policy implemented by the European Central Bank and low oil prices. Likewise, the positive evolution of GDP per capita (which still remains below the EU average) that we expect will elude the possible impact of the lengthening of the health crisis.
These factors are also supported by a strong institutional framework, reinforced by its membership in the European Union and the growing leadership position of Spain within the European institutions. Risks are determined by the expected deterioration of public finances that could double the deficit figure of 2019 (-2.64 per cent) as well as the increase in public debt which will again exceed 100 per cent of GDP. Additionally, the impact of the health crisis in the tourism industry (which represents 15 per cent of GDP) will be transferred to the labour market burdened by duality. The excessive dependence on external debt, high dependency ratio and an increased population at risk of social exclusion, are also factors that are taken into account.
Emergency measures to stem the crisis of the COVID-19
The credit rating A stable under observation considers the measures taken by the Government of Spain -whose allocation amounts to 200 billion Euros (20 per cent of GDP)- in order to mitigate the impact that the health crisis caused by the coronavirus COVID-19 will have on the Spanish economy. Although some of these measures are still in process, we believe they will have positive effects on the crisis, helping to prevent a crisis of liquidity.
In this regard, we have a positive view of the 100 billion Euros line to guarantee financing to SMEs, as well as the 12 billion Euros through ICO and CESCE. However, if the downturn in activity lasts until the summer season, these measures could be insufficient and, therefore, it is foreseeable that the Government will increase the initial allocation.
Labour market and dependency ratio
At Axesor Rating we consider that the labour market will suffer the most from the economic shock caused by the COVID-19 crisis. However, channeling it through temporary layoffs will prevent a rebound of the current unemployment rate (13.7 per cent) to the maximum levels reached during the last economic crisis, although we expect a higher incidence in temporary jobs, especially in those most affected by this health crisis.Employment will be the major victim of the crisis and we expect null creation, during the months the exceptional situation lasts. Furthermore, the future growth potential of the Spanish economy will be limited by the dependency ratio of 54.3 per cent, one of the highest in the European Union, which is expected to continue to grow.
Fiscal policy, debt and liquidity
Regarding fiscal policy, we are concerned that the fiscal consolidation effort of previous years has reversed in 2019 and that, for the first time since the beginning of recovery, deficit has increased by 2.64 per cent of GDP, or 32.9 billion Euros. The fact that Social Security system represented almost half of the deficit reveals the need to carry out structural reforms to remedy this situation. Moreover, amid the current uncertain outlook, we estimate that deficit will increase again to levels that could exceed 5 per cent of GDP in 2020, a situation that could even worsen depending on the duration that this conjunctural situation finally has. Regarding public debt, we believe that the exceptional measures approved to mitigate the effects of the health crisis will boost public debt to thresholds above 100 per cent of GDP. However, the upturn in the economy in 2021 would help to stabilize levels of debt around, once again conditioned to the duration of this conjunctural crisis.
Foreign sector, monetary policy and banking
The rating takes into account the value of the dynamism that has been occurring in the foreign sector since the years of the economic recovery and that, despite trade and geopolitical tensions, has managed to maintain itself, contributing 0,4% to GDP growth in 2019. In this regard, at Axesor Rating we believe that this trend will continue this year and underline the persistence of the current account surplus. With regard to the expansive monetary policy implemented by the ECB, we point out the beneficial effect it is having on the Spanish economy. We also believe that the liquidity package of 750 billion Euros intended to, among other things, the purchase of sovereign bonds, will help to avoid the destabilization of the risk premium. With regard to the financial sector and despite the challenge of the change towards more profitable models that Spanish banks are facing - not benefited by the negative interest rate environment - we want to point out the improvement of the risk map of the banks, as well as liquidity and capitalization levels. In addition, we assess positively the measures adopted by the Government and financial institutions to mitigate the impact of the crisis of the coronavirus COVID-19, such as the moratorium on mortgage payments on primary residences, commercial premises and offices for the self-employed, as well as the new proposal for consumer loans.
With regard to the fulfillment of the Sustainable Development Goals and the 2030 Agenda, at Axesor Rating we value positively the steps taken by Spain. We want to highlight the launch of the issue of ICO green bonds in the first half of 2019 for an amount of 500 million euros. However, we also express the delay that political instability has caused in the compliance of important goals such as reducing poverty (goal 1), education (goal 4), gender equality (goal 5), inclusive economic growth (goal 8) or reducing inequalities (target 10).