Spanish Economy Returns To A Grade

The recent upgrade of Spain’s credit rating by international ratings agency Standard & Poor’s to A- (from BBB+) marks an important move away from the Eurozone “periphery” towards the bloc’s better-rated countries like Belgium, France and Ireland. This group is often referred to as the “semi-core” in market jargon, whereas the “core” refers to AAA rated countries like Germany and Luxembourg.

S&P is the second agency to give the Spanish economy an A- rating, following an upgrade by Fitch to this same level in mid-January. The last of the three major rating agencies, Moody’s Investors Services, rates Spain at Baa2, two notches below that of S&P and Fitch. However, that might change on April 13^th, when Moody’s will issue its updated decision on the country’s creditworthiness.

S&P notes that Spain’s overall economic and budgetary performance has not been hampered by political tensions in Catalonia, as many had feared. The country’s GDP increased by 3.1% in 2017 and last week the Bank of Spain raised its economic forecast for this year to 2.7%, up from a December forecast of 2.4%.

The government followed suit the last week of March, as the 2018 budget unveiled by Prime Minister Mariano Rajoy and new Minister of Economy Ramon Escolano also assumes GDP growth of 2.7%. This is a change from October 2017 when the government predicted the economy would grow by just 2.3% in 2018.

“We have revised upwards our GDP forecasts, with an intense rate of employment creation and an economic model based on the external competitiveness of our companies. With this scenario, we will achieve our objective for 20 million employed people by 2020,” said Mr. Escolano in a verified tweet.

Spain’s economy shrank from 2009 to 2013, but rebounded in 2014 and has since grown for 18 consecutive quarters, outstripping much of the EU with growth of more than 3 percent.

“We expect that Spain’s GDP will expand faster than the Eurozone average over 2018-2021 and that the government’s budget deficit will continue to shrink,” said S&P in its report. The budget deficit narrowed to 3.1% of GDP in 2017 (down from 4.5% in 2016), with Prime Minister Rajoy announcing that the country had met the 2017 deficit reduction target it agreed upon with the European Union.

The agency raised its ratings on Spain in view of the country’s “continuously strong economic performance, accompanied by ongoing budgetary consolidation and a solid current account surplus,” which reflects “the strong export performance on persistent global trade gains and the beneficial impact of lower interest rates through improved borrowing conditions.”

S&P believes that the economic performance of the country will remain balanced “with domestic demand remaining the main driver of growth.” The rating agency expects to see “rising private consumption on the back of employment growth, low inflation, favourable financial conditions and strong consumer sentiment.” They predict that these gains will lead to “increasing investment activity, ongoing recovery in the housing and constructing sectors, and solid demand.”

S&P notes that if external risks such as the rise of global protectionism increase, Spain’s export sector will continue to reap the benefits thanks its increasingly competitive stance in the international market.

However, Standard and Poor’s also points out the potential “danger zones” for the Spanish economy. These include a further rise in oil prices or euro appreciation that could reduce the contribution of exports to economic growth, as well as the flaring of political tensions in Catalonia. Another reason for concern is the high unemployment rate. While 16.1% (February 2018) may be far lower than the peak of 26.9% in 2013, it is still the second highest in the EU after Greece.

Finally, S&P also stresses that in its view, “the minority government’s capacity to implement policy is constrained by the fragmented parliament, as shown by the delay in passing the 2018 budget,” which was presented in Spanish Parliament on April 3^rd.

On a whole, the upgrade is a clear sign of confidence in the prospect of the Spanish economy, which could spark renewed interest for Spanish bonds, opening the country up to more conservative investors that demand A-level ratings to buy Eurozone debt.