Sovereign
Outlook: Stable
Action date: 09/25/2020
Rating action: Downgrade

REINO DE ESPAÑA

We downgrade the unsolicited credit rating of the Kingdom of Spain to A- / Stable from A / Under Observation based on the deep impact that the health crisis is having on the national economy - fourth in importance within UE27 - for which we expect a contraction of the GDP of 11,8% this year - overtaking our initial forecasts- due to its high tertiarisation and higher dependency on tourism, activity that has being highly impact by the negative evolution of the health crisis during the summer season and in view of the uncertainty of the health crisis future evolution. We foresee that this fall of the activity enhace the structural problems of the labour market, in which the high temporarity will put upgrade preassure on the unmenployment rate until levels near the 20%, with particular emphasis on the young population - that are the ones with greater propensity to consumption- and the sectors directly linked to hospitality and tourism, where we are already observing an asymmetrical behaviour in terms of employment rates compared to the average of the rest of the productive sectors. Even though we value positively the respond given from the point of view of the economic policy, the deep deterioration we expect to see in the public finances- with a deficit that could exceed 10,4% this year- will increase the need for borrowing up to historical levels that could overcome 115% of the GDP, in the leading positions in the euro area, and even though on the short term the monetary context of low interest rate and high liquidity favours its sustainability, we must take into account that these high levels of debt raise the sensibility of the public finances in light of a normalization of the future monetary policy, for this reason, it is necessary to approve General State Budget that favours and inclusive and sustainable economic recovery but on the path of future fiscal consolidation. Finally, we would like to emphasise that our credit rating values the improvement of the economic resilience resulting from the performance of the economy prior to the outbreak of the pandemic, the better starting point for companies and households, the reorganisation of the financial system which will allow it to lead the recovery process, the gain in competitiveness which has favoured the sustained balance with the external economies and the convergence process in terms of wealth per capital with its European peers, without forgetting the process of fiscal consolidation interrupted by the health crisis as well as it situation as main beneficiary -together with Italy- of the funds contemplated in the EU Next Generation due to the important impact that we expect to see on future growth potential.

Rating

Unsolicited
Date last rating: 09/25/2020
Date first rating: 10/26/2018