Spain

Good performances, but the end of the economic miracle is near

A1

LOW RISK

  • Economic risk

  • Business environment risk

  • Political risk

  • Commercial risk

  • Financing risk

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GDP USD1,311.32bn (World ranking 14, World Bank 2017)
Population 46.57mn (World ranking 30, World Bank 2017)
Form of state Parliamentary monarchy
Head of government Pedro Sánchez (awaiting the formation of a new coalition)
Next elections Municipal, Autonomous and European elections May 2019, general elections 2023
  • Good performance and competitiveness in some specific sectors, although competitiveness gains are starting to reverse
  • Presence of large international companies
  • Fiscal deficit now below 3% of GDP, and public debt-to-GDP ratio has started to decrease
  • Bridge between Latin America and the rest of the world
  • Large economy
  • Good infrastructure network
  • Still high public debt (>97.4% of GDP)
  • High private debt
  • Still high unemployment (14.5%) despite progress
  • No recent structural reform on education and training
  • Fragmented political landscape, internal tensions over sovereignty issues (Catalonia)

A normalization, after a miracle

Between 2014 and 2018, Spain experienced a second economic miracle: GDP grew by +2.8% on average p.a., exports grew by +4.2% on average p.a. and 2.6mn Spaniards were brought back to work. The 2010 and 2012 labor market reforms help explain this outperformance but the share of workers’ wages in national wealth dropped from 54.7% in 2010 to 51.8% in 2017.

In January 2019, Prime Minister Pedro Sánchez increased the minimum wage (Salario Mínimo Interprofesional or SMI) by a whopping +22.3% to rebalance the economy, and partially offset growing social discontent. We estimate that this measure could have a net positive impact of +0.1pp on GDP growth in 2019, but a negative impact of -0.1pp in 2020 as competitiveness drops. Companies’ margins are expected to be indented by -1pp to 42% of value-added, and the measure could also cause around 100 additional insolvencies in 2019, especially in the construction and service sectors, but also among some exporters.

The elections on April 28 will plausibly yield a fragmented political landscape, making structural reforms harder to pass. Our forecasts for Spain point to a deceleration to +2% growth in 2019, and +1.8% in 2020 – from +2.6% in 2018. In 2019, the SMI boost barely compensates for: (i) the slowdown in foreign demand, which could reduce export growth from +2.3% in 2018 to +1.0% in 2019, subtracting -0.4pp from Spain’s GDP growth, and (ii) the deceleration of domestic demand (consumption, investment and public expenditures) on the back of slowing employment gains. In 2020, as growth in major trade partners rebounds, Spanish exports would follow (+1.5%), this time with a drag from higher wage bills, marking the end of the Spanish miracle.

Successful rebalancing, but not fully there yet

The financing risk has improved with fiscal deficit reduction (below -3% in 2018 for the first time since 2007, and expected around -2% in 2019), cleaning of the banking sector, better public financing conditions and stronger external position. Political uncertainty (including the Catalonia crisis) has had a negligible impact on Spanish borrowing costs and financing conditions, supporting the downward trend of debt ratios. No significant banking sector crisis has occurred in the past 60 months.

Economic risk remains in the medium-term on the back of the lingering effects from the financial crisis. Although rapidly recovering, the economy still has weaknesses: notably, the unemployment rate remains high (now to 14.5%, but down from highs of 26.9% in Q1 2013). A key persistent issue is the duality of the labor market (temporary vs. permanent jobs), which maintains the natural unemployment rate high. Fiscal consolidation is still ongoing, while the public debt-to-GDP ratio remains high (97.4%), although it has been decreasing since 2015. Private debt, although diminishing, also remains at elevated levels, while credit outstanding continues to contract, albeit at a lower pace. The share of doubtful loans over total loans has dropped from its 2013 high of 13.5% and has reached 6%.

Good business environment

We see low risks related to the business environment that proves robust thanks to the ease of doing business, relatively low corruption, good rule of law and regulatory quality. However, there is still room for improvement, notably on procedures needed to start a business, protecting investors, resolving insolvencies. There seems to be a general commitment to business-friendly structural reforms, although going forward, the new government is likely to focus on demand-side policies rather than supply-side policies.

Political risk is low thanks to a peaceful transition to democracy following the death of Dictator Francisco Franco in 1975. The democratic system has worked well since then, with peaceful power transmissions. Spain joined the EU in 1986, and the Eurozone in 1999. However tensions over the Catalonia issue have fragmented the political landscape. Going forward, the victory of the socialist party at the 28 april 2019 elections mean the central governernment will not adopt a confrontational stance with Catalan independentists.

Trade structure by destination/origin

(% of total)

Exports Rank Imports
France 15%
1
14% Germany
Germany 11%
2
11% France
Italy 8%
3
7% China
United Kingdom 8%
4
7% Italy
Portugal 7%
5
5% Netherlands

Trade structure by product

(% of total)

Exports Rank Imports
Road vehicles 19%
1
13% Road vehicles
Vegetables and fruits 7%
2
8% Petroleum, petroleum products and related materials
Articles of apparel & clothing accessories 5%
3
6% Articles of apparel & clothing accessories
Medicinal and pharmaceutical products 4%
4
5% Electrical machinery, apparatus and appliances, n.e.s.
Electrical machinery, apparatus and appliances, n.e.s. 4%
5
5% Medicinal and pharmaceutical products

Payment terms and late payment interest are regulated in accordance with applicable EU rules; however the standards put in place are among the most lenient in Europe. As a result, DSO remains excessive at around 69 days.

  • Low

  • Medium

  • Sensitive

  • High

  • Payments

  • Court proceedings

  • Insolvency proceedings

The court process is a major complication when it comes to collecting debt and it is advisable to first conduct negotiation with the support of collection specialists. When court is needed, Alternative Dispute Resolution methods and foreign courts (EU judgments will be fairly enforceable in Portugal) may be worth considering in order to avoid inefficient domestic courts.

Despite reforms conducted in 2012 to increase company rescue possibilities, insolvency proceedings often lead to the liquidation of the company and it is rare for unsecured debtors to recover their debt.

Download the entire collection complexity PDF:

Collection complexity Spain

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Contact

Contact Euler Hermes

Economic Research Team

research@eulerhermes.com

Contact Georges Dib

Economist for Latin America, Spain and Portugal

georges.dib@eulerhermes.com

 

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