Research Update:

Ratings On Spain Raised To 'BBB/A-2'

On Improved Economic Prospects;
Outlook Stable
Primary Credit Analyst:
Frank Gill, London (44) 20-7176-7129; frank.gill@standardandpoors.com
Secondary Contact:
Marko Mrsnik, Madrid (34) 91-389-6953; marko.mrsnik@standardandpoors.com
Analytical Group Contact:
SovereignEurope; SovereignEurope@standardandpoors.com
Table Of Contents
Overview
Rating Action
Rationale
Outlook
Key Statistics
Related Criteria And Research
Ratings List
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Research Update:
Ratings On Spain Raised To 'BBB/A-2' On
Improved Economic Prospects; Outlook Stable
Overview
We have revised our average 2014-2016 real GDP growth projections for
Spain upward to 1.6% from 1.2% reflecting the effects of labor and other
structural reforms.
We are therefore raising our long- and short-term sovereign credit
ratings on Spain to 'BBB/A-2' from 'BBB-/A-3'.
The outlook is stable, reflecting our current view that risks to the
ratings on Spain will remain balanced over the next two years.
Rating Action
On May 23, 2014, Standard & Poor's Ratings Services raised the long- and
short-term foreign and local currency sovereign ratings on the Kingdom of
Spain to 'BBB/A-2' from 'BBB-/A-3'. The outlook is stable.
Rationale
The upgrade reflects our view of improving economic growth and competitiveness
as a result of Spain's structural reform efforts since 2010, including the
2012 labor reforms. Reflecting the effects of these reforms and our
expectation that monetary policy in the eurozone will remain highly
accommodative, we have revised our average 2014-2016 GDP growth projections
for the Spanish economy to 1.6% from 1.2%. We also expect that recovering
employment will contribute to improvements in the country's fiscal position
and the stabilization of financial system asset quality.
Preliminary Eurostat estimates of first-quarter 2014 real GDP growth indicate
that the economy grew 1.6% on an annualized basis. While this figure may be
subject to considerable revisions, it nevertheless appears to be supported by
a gradual recovery in employment growth across a broadening range of sectors,
as indicated by social security data, particularly in tourism, but also in
manufacturing, as well as in the non-tradeables sector. In our view, recent
reforms to the retail sector deregulating opening hours, liberalizing
temporary contracts, and business start-ups also appear to be supporting
Spain's economic recovery.
Most competitiveness metrics show considerable gains for the Spanish economy,
supporting the economy's reorientation toward external demand:
Unit labor costs have declined by an estimated 8% since 2009 (Eurostat
data), the strongest adjustment in the eurozone over the period with the
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exception of Greece and Ireland.
Spain's export share in global trade has continued to grow. The real
effective appreciation of the euro since mid-2012 has so far not
undermined Spanish companies' favorable export performances, but could
pose a risk should it continue unabated.
Very low inflation, at close to zero since September 2013, is a
reflection of excess economic capacity in the labor market, in our view.
This is confirmed by declining wages, especially in the domestic
non-tradables sector.
At the same time, however, declining nominal earnings have slowed down the
process of economy-wide deleveraging. While Banco de Espaa (central bank)
data indicates that, between 2010 and 2013, household and corporate debt
declined by an estimated 25% of GDP to 206% of GDP (even as GDP itself was
declining), public sector indebtedness increased by some 30 percentage points
to almost 92% of GDP over the same period. Therefore, total leverage in the
economy (corporates, households, and general government) stood at more than
300% of GDP in the third quarter of 2013, only surpassed by Ireland and
Portugal in the eurozone. When the euro was introduced in 1999, the Spanish
economy's total debt ratio was just over 150% of GDP.
We believe that Spain's recovering economy will support fiscal consolidation
and enable public debt to gradually decline, as private debt continues to be
gradually paid down. We view stronger tax receipts so far in 2014 as
indicating a cyclical improvement in the budgetary position.
We also continue to see net export growth as an important contributor to GDP,
given expectations of further deleveraging in the public and private sectors.
Nevertheless, in our view the still very high debt levels in the economy will
probably lead to an extended period of relatively subdued domestic demand as
companies and households attempt to reduce leverage. Should inflation remain
at the extremely low levels of the last six months for extended periods, the
deleveraging process might take longer still.
Last year, Spain's current account was in surplus for the first time since
Spain joined the European Economic Community in 1986, implying a net external
adjustment of more than 10% of GDP since 2008. Over the last five years, the
Spanish economy has become more open; exports are now equivalent to 34% of GDP
compared with 27% in 2008, though the large current account adjustment also
reflects a 13% decline in nominal domestic demand over the period. Rising
current account receipts (CARs), initial private-sector deleveraging, and
replacing foreign debt with equity liabilities have enabled a reduction in
narrow net external debt to 2.8x CARs in 2013 from a 2009 peak of 3.8x.
Despite the decline, we expect that the figure will remain the 12th highest
among the 129 sovereigns rated by Standard & Poor's (see
http://www.spratings.com/sri; click on "All countries" and select the
"External Balance Sheet" tab).
We project that the Spanish government will broadly meet and potentially
slightly improve its revised general government budgetary deficit target of
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Research Update: Ratings On Spain Raised To 'BBB/A-2' On Improved Economic Prospects; Outlook Stable
5.5% of GDP in 2014. However, we see risks to achieving the more ambitious
2015 and 2016 budgetary targets of 4.2% and 2.8%, respectively (equivalent to
a nominal adjustment of 1.35% of GDP annually). While we believe that the
economic recovery will help reduce the deficit--through the cyclical increase
in revenues from consumption, and income taxes, as well as gradually reduced
unemployment transfers--we believe that without further deficit-reduction
measures, the government is unlikely to meet its targets.
We also expect that with the upcoming 2015 regional and general elections,
ongoing deep socioeconomic challenges and significantly reduced capital market
pressure could lead to fiscal and structural policy slippages. This could
jeopardize medium-term government deficit and economic growth targets.
We expect Spain's net general government debt to increase to about 93% of GDP
in 2017 from 88.5% of GDP in 2014, excluding the guarantees related to the
European Financial Stability Facility (EFSF; see "S&P Clarifies Its Approach
To Accounting For EFSF Liabilities When Rating The Sovereign Guarantors,"
published on Nov. 2, 2011, on RatingsDirect). At the same time, average
general government interest payments will likely represent about 9% of general
government revenues during 2014-2017. Finally, we do not expect the Spanish
government to incur additional significant fiscal costs linked to banks'
recapitalization.
The rating remains constrained by what we classify as very high private and
public debt levels, a weak external economic balance sheet, and a weak
monetary transmission mechanism that appears to be placing parts of Spain's
corporate sector at a competitive disadvantage in terms of relative financing
costs. At the same time, we expect persisting tensions between the central
government and regional authorities to be contained.
Outlook
The stable outlook incorporates our current view that risks to Spain's ratings
will remain balanced over the next two years.
We could consider raising the ratings on Spain if:
The budget deficit declines further and general government debt metrics
stabilize; or
The external position continues to improve, bringing narrow net external
debt to below 150% of CARs or markedly easing the cost of or access to
financing for the private sector.
The ratings could come under renewed downward pressure if:
Economic growth prospects falter; or
It appears to us that net general government debt will likely overshoot
100% of GDP (regardless whether this is due to fiscal slippage, weakening
growth, deflationary pressures, or one-off items that push up debt, such
as the crystallization of contingent liabilities); or
Interest payments rise sustainably above 10% of general government
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Research Update: Ratings On Spain Raised To 'BBB/A-2' On Improved Economic Prospects; Outlook Stable
revenues; or
Spain's current account balance weakens again.
Key Statistics
Table 1
Kingdom of Spain - Selected Indicators
2007 2008 2009 2010 2011 2012 2013e 2014f 2015f 2016f 2017f
Nominal
GDP (US$
bil)
1,441 1,593 1,454 1,385 1,454 1,322 1,359 1,368 1,384 1,432 1,484
GDP per
capita
(US$)
32,186 34,891 31,452 29,790 31,166 28,238 29,116 29,228 29,479 30,407 31,418
Real GDP
growth
(%)
3.5 0.9 (3.8) (0.2) 0.1 (1.6) (1.2) 1.3 1.8 1.8 1.8
Real GDP
per capita
growth
(%)
1.7 (1.1) (5.0) (0.7) (0.3) (2.0) (0.9) 1.0 1.5 1.5 1.5
Change in
general
government
debt/GDP
(%)
(0.8) 5.0 12.2 7.6 8.7 12.5 7.1 6.8 5.3 3.4 3.4
General
government
balance/GDP
(%)
2.0 (4.5) (11.1) (9.6) (9.6) (10.6) (7.1) (5.4) (4.8) (3.4) (2.9)
General
government
debt/GDP
(%)
36.3 40.2 54.0 61.7 70.3 84.0 91.6 96.5 99.3 100.1 100.0
Net
general
government
debt/GDP
(%)
23.8 27.9 40.6 51.5 61.8 75.0 84.3 88.5 91.4 93.0 93.1
General
government
interest
expenditure/revenues
(%)
3.9 4.3 5.0 5.3 7.0 8.2 9.0 9.2 8.9 8.9 8.9
Oth dc
claims on
resident
non-govt.
sector/GDP
(%)
167.0 172.0 175.9 177.6 171.8 157.3 142.1 133.6 131.4 129.9 127.8
CPI
growth
(%)
2.8 4.1 (0.2) 2.0 3.1 2.4 1.5 0.1 0.5 0.5 1.2
Gross
external
financing
needs/CARs
+use. res
(%)
291.8 331.8 373.0 367.9 308.3 297.6 260.5 242.9 219.2 207.4 197.5
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Research Update: Ratings On Spain Raised To 'BBB/A-2' On Improved Economic Prospects; Outlook Stable
Table 1
Kingdom of Spain - Selected Indicators (cont.)
Current
account
balance/GDP
(%)
(10.0) (9.6) (4.8) (4.5) (3.7) (1.2) 0.8 2.1 2.1 1.8 1.8
Current
account
balance/CARs
(%)
(29.0) (29.0) (16.0) (13.3) (10.0) (3.1) 2.0 5.1 4.9 4.2 4.1
Narrow
net
external
debt/CARs
(%)
299.5 286.6 379.2 329.5 278.9 295.0 282.5 254.5 231.0 208.7 187.6
Net
external
liabilities/CARs
(%)
244.2 227.1 322.0 266.4 228.7 247.0 254.2 232.8 213.4 190.0 167.9
Other depository corporations (dc) are financial corporations (other than the central bank) whose liabilities are included in the national definition
of broad money. Gross external financing needs are defined as current account payments plus short-term external debt at the end of the prior year
plus nonresident deposits at the end of the prior year plus long-term external debt maturing within the year. Narrow net external debt is defined as
the stock of foreign and local currency public- and private- sector borrowings from nonresidents minus official reserves minus public-sector liquid
assets held by nonresidents minus financial sector loans to, deposits with, or investments in nonresident entities. A negative number indicates net
external lending. CARs--Current account receipts.
The data and ratios above result from S&Ps own calculations, drawing on national as well as international sources, reflecting S&Ps independent
view on the timeliness, coverage, accuracy, credibility, and usability of available information.
Related Criteria And Research
Related Criteria
Sovereign Government Rating Methodology And Assumptions, June 24, 2013
Methodology For Linking Short-Term And Long-Term Ratings For Corporate,
Insurance, And Sovereign Issuers, May 7, 2013
Criteria For Determining Transfer And Convertibility Assessments, May 18,
2009
Related Research
Sovereign Defaults And Rating Transition Data, 2013 Update, April 18,
2014
Outlook On Spain Revised To Stable From Negative On Economic Rebalancing;
'BBB-/A-3' Ratings Affirmed, Nov. 29, 2013
S&P Clarifies Its Approach To Accounting For EFSF Liabilities When Rating
The Sovereign Guarantors, Nov. 2, 2011
In accordance with our relevant policies and procedures, the Rating Committee
was composed of analysts that are qualified to vote in the committee, with
sufficient experience to convey the appropriate level of knowledge and
understanding of the methodology applicable (see 'Related Criteria And
Research'). At the onset of the committee, the chair confirmed that the
information provided to the Rating Committee by the primary analyst had been
distributed in a timely manner and was sufficient for Committee members to
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Research Update: Ratings On Spain Raised To 'BBB/A-2' On Improved Economic Prospects; Outlook Stable
make an informed decision.
After the primary analyst gave opening remarks and explained the
recommendation, the Committee discussed key rating factors and critical issues
in accordance with the relevant criteria. Qualitative and quantitative risk
factors were considered and discussed, looking at track-record and forecasts.
The chair ensured every voting member was given the opportunity to articulate
his/her opinion. The chair or designee reviewed the draft report to ensure
consistency with the Committee decision. The views and the decision of the
rating committee are summarized in the above rationale and outlook.
Ratings List
Upgraded
To From
Spain (Kingdom of)
Sovereign Credit Rating BBB/Stable/A-2 BBB-/Stable/A-3
Senior Unsecured BBB BBB-
Short-Term Debt A-2 A-3
Local Currency AAA
Fondo de Amortizacion del Deficit Electrico
Senior Unsecured* BBB BBB-
Fondo de Reestructuracion Ordenada Bancaria (FROB)
Senior Unsecured* BBB BBB-
Banco de Sabadell S.A.
Banco Financiero y de Ahorros S.A.
Bankinter S.A.
CaixaBank S.A.
Senior Unsecured* BBB BBB-
*Guaranteed by the Kingdom of Spain.
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Research Update: Ratings On Spain Raised To 'BBB/A-2' On Improved Economic Prospects; Outlook Stable
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