According to Moody’s, which at the same time warns of that the fulfillment of its fiscal objectives has met the challenges of the Catalan independence crisis and the high level of debt.
This follows from the last annual report on Spain published by the rating agency Moody’s, where it explains that, although Spain will continue to benefit from the favorable ‘wind’ offered by the recovery of the eurozone and its virtuous cycle of employment boost, households, and investment, the continuing political tension related to Catalonia –19.1% of the Spanish Gross Domestic Product (GDP) – will limit the economic activity of the country as a whole, while the high level of debt will continue to limit its credit profile.
“Spain has one of the largest economies in the world and its growth has been one of the strongest in the euro area in recent years,” said senior vice president of Moody’s and analyst and co-author of the report, Sarah Carlson. “That said, the acceleration of its growth has a strong cyclical component and we predict that real annual GDP growth will slow to just under 2% by the end of this decade,” he said.
Spain’s moderate susceptibility to risk is driven by the internal political conflict linked to Catalonia, although Moody’s continues to believe that the likelihood of independence is low. However, he admits that the rapid escalation of tensions, together with the current political stalemate, suggests that the possibilities have increased “somewhat”, as well as its negative implications on the economic environment and for policymaking.
Any resolution that increases the fiscal autonomy
the Spanish regions could have negative implications for the sovereign issuer, given the challenges that regional finances have represented for the general government’s finances in recent years,” Moody’s argues. On the contrary, a quick resolution of the political crisis could allow the economic and financial impulse to benefit the credit profile.
Catalonia is one of the richest regions of Spain, which represents a very important proportion of national GDP, trade, and foreign direct investment, so the secessionist process will have a “negative and moderate” impact on the economy since Tensions also generate uncertainty about economic confidence and spending on the consumer. Moody’s expects Spanish GDP to grow 2.3% in 2018, in line with the Executive’s forecast.
“The political instability is having a clearly greater negative impact on the Catalan economy, with the confidence of depressed foreign investors and the arrival of tourists on the downside,” he says. According to Moody’s, more than 3,000 companies have moved out of the region, of which around 1,000 have also moved their tax offices. In the hospitality sector, overnight stays by non-residents decreased 4.2% annually in October and November 2017, in contrast to a national expansion of 1.9% in the same period, while retail sales in Catalonia They stagnated during the second semester of 2017.
HIGH DEBT LEVEL
According to the US firm in its report, the high level of debt in Spain will continue to limit the sovereign credit profile, despite the recent trends of improvement in economic, fiscal and financial data. In this sense, it considers that the structural fiscal reforms and the performance of the budgets of the regional governments will be key factors to improve the variables of the deficit and the reduction of the debt.
“The fiscal dynamics of Spain continues to be a challenge due to a series of structural weaknesses, among which the imbalance of the Social Security system is included,” he said in the document, which also refers to private debt. “There has been a significant deleveraging of the private sector in general, but household debt is still relatively high,” he says. Moody’s considers that there has been a change in the composition of the debt of the Spanish economy, with a shift from the private sector to the public.
RESTRUCTURED BANKING SECTOR
The solid economic recovery of Spain has allowed to rebuild the credit fundamentals, especially the quality of assets, of the country’s banking entities. “The Spanish banking sector has been restructured, with higher capital ratios and stronger financing structures,” Moody’s states in its report.
Similarly, it welcomes the fact that the governance, regulatory and supervisory frameworks have also been revised and improved, especially with the introduction of the Single Supervisory Mechanism (MUS), which carries out the supervision of the thirteen largest banking groups in Spain.
However, he explains that the stock of non-performing loans from Spanish banks remains high, although he points out that it has been gradually decreasing since it peaked at the end of 2013- most of my research from here. “Banks will continue to reduce their reserves of problematic assets, and The decline will be accelerated by large portfolio sales, such as those announced last year by Banco Santander and BBVA, “he says.
In June 2017, Banco Popular became the first bank to be resolved by the Single Resolution Board (SRB) of the European Union, created in 2015 to minimize the financial impact of bank failures on taxpayers. “Popular’s resolution, under which it was acquired by Banco Santander at the symbolic price of 1 euro, is consistent with the EU Banking Resolution and Recovery Directive (BRRD), which restricts the use of public funds to rescue bankrupt banks. “, underlines Moody’s.
In sum, the agency believes that the Government of Spain will not have to provide more material support to the country’s banking system, with the exception of Sareb, the bad bank that assumed 50,500 million euros in real estate assets with problems of the country’s banks. 2013
“The size and evolution of this contingent liability will depend to a large extent on the evolution of the Spanish property market,” Moody’s concludes. “There is a possibility that, in the unlikely event that Sareb has additional capital needs, the government may be the only entity willing to support it, but we also recognize that Sareb has 15 years to dispose of its assets, so therefore, the additional capital requirements are not likely to materialize in the short term, “he concludes.