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Summary of Recent Developments in the Spanish Economy & Funding Outlook

Core Content

The Spanish economy is currently in a sustained and competitive growth phase, driven by export-led and labour-intensive recovery. The growth has been supported by a sound financial sector, which has fostered efficient resource reallocation. Public and private deleveraging have been progressing, with the general government debt peaking in 2014 and decreasing by 2 percentage points of GDP since then. The 2018 Budget Law has been approved, which is expected to keep the general government deficit clearly below the 3% EU reference value.

Main Views

• Growth Pattern: The current expansion is export-led and labour-intensive, with a higher weight on the services sector and reduced investment in construction. Investment levels have converged to the Euro Area average.
• Labour Market Recovery: Increased real labour productivity has improved competitiveness and efficiency in the allocation of labour. Falling unemployment has contributed to internal demand growth.
• Banking Sector Adjustment: The banking sector has undergone significant restructuring, with downsizing and loss recognition. Capitalisation and profitability have improved, and non-performing loans (NPLs) have decreased to levels below the Euro Area average.
• Deleveraging: Public sector debt has decreased, and private sector debt has been reduced to align with Euro Area averages. This has created more fiscal space for regions.
• Inflation: Core inflation in Spain has converged with Euro Area levels. Wage inflation and administered prices remain stable, while energy prices continue to influence headline inflation.
• Current Account Surplus: The current account surplus is in sync with economic growth, indicating a more diversified growth model with contributions from both internal and external demand.
• Macroeconomic Scenario (2018-2021): Growth is expected to continue through both internal and external demand. Unemployment is projected to decrease further, while net lending/borrowing with the rest of the world (RoW) is expected to remain stable.
• Fiscal Policy Framework: The general government deficit is expected to fall below 3% by the end of 2018. The Social Security deficit is projected to decline significantly by 2020. Fiscal forecasts for 2018-2021 show a gradual reduction in deficits across all levels of government.
• Treasury Funding Programme (2018): The net issuance in 2018 is expected to be €40 billion, with a total issuance up to July 4th of €120.2 billion (55.8% of the programme). The majority of the issuance is expected to be in medium- and long-term debt (€81.7 billion, 62.2%), while short-term debt (Letras del Tesoro) is expected to be €38.5 billion (45.9%).
• Cost and Life of Debt: The average cost of debt is at a historic low (2.50%), and the average life of debt has increased from 6.20 years in 2013 to 7.45 years by 2018. The slight increase in 2018's cost is due to longer tenors issued.
• Investor Base: Non-residents continue to be the leading investors, holding around 45% of Spanish bonds. Spanish banks have been reducing their holdings, but the Bank of Spain has increased its share to 21.8%.
• Ratings: Recent rating upgrades have led to expectations of a wider and deeper investor base. Spain's credit ratings are currently at A- with positive outlook from S&P, A- with stable outlook from Fitch and DBRS, and Baa1 with stable outlook from Moody's.

Key Information

• Growth Drivers: Export competitiveness, improved productivity, and reduced unemployment.
• Debt Reduction: General government debt has decreased by 2pp of GDP since 2014; private sector debt has decreased by 59.7pp of GDP since 2010Q2.
• Fiscal Outlook: General government deficit is expected to fall below 3% by 2018, with a projected surplus by 2021.
• Investment Trends: Increased focus on services and exports, with a decline in construction investment.
• Inflation Trends: Core inflation in line with Euro Area levels, while energy prices remain a key driver of headline inflation.
• Current Account: Surplus is aligned with economic growth, showing a balanced and diversified growth model.
• Treasury Programmes: €40 billion net issuance in 2018, with a significant portion in medium- and long-term debt.
• Investor Dynamics: Non-residents dominate the investor base, with the Bank of Spain increasing its holdings to offset declining bank holdings.
• Rating Outlook: Positive and stable ratings from major agencies, indicating improved economic and fiscal health.

Conclusion

Spain's economy is on a path of sustainable and competitive growth, supported by improved export competitiveness, a sound financial sector, and successful public and private deleveraging. The fiscal policy framework is well-structured, with a clear path to reducing deficits and aligning with Euro Area standards. The Treasury's funding programme in 2018 reflects a strategic approach to managing debt at historically low costs and extended maturities, while the investor base continues to expand, driven by recent rating upgrades. Overall, the economic outlook is positive, with a balanced and diversified growth model that is resilient to external shocks.