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Spain Country Risk Report Q1 2017

  • November 2016
  • -
  • Business Monitor International
  • -
  • 47 pages

Core Views

Growth in Spain will moderate over the coming years, although it will remain marginally above the eurozone average. Factors that will weigh on economic activity in the years ahead include an unstable domestic political environment, fading tailwinds of low global energy prices and inflation, as well as a weak recovery in the eurozone.

Private consumption growth, despite remaining the primary growth driver in the years ahead, is set to drop off as a number of cyclical factors fade out. Specifically, we see increasing global energy prices and inflation eroding real wages in Spain, and this will result in lower spending among households. We see Spain's services sector recording relatively robust growth over the coming years, driven in large part by the domestic tourism industry, which accounted for more than 15% of Spanish GDP in 2014. The pace of fiscal consolidation in Spain will slow over the coming years and the budget deficit will not meet the EU-mandated target of 3.0% of GDP by 2018. Although public debt will remain elevated, it poses little risk in the near term and maturing debt will be refinanced at lower interest rates and longer maturities.

Spain's current account surplus will gradually shrink over the coming years, primarily as weak growth across the eurozone weighs on external demand. Flattening productivity growth will further inhibit a stronger expansion of export market share in the coming years. The Spanish Socialist Party's decision to abstain in an investiture vote in parliament will allow the formation of a People's Party-led minority government and avoid a third election. Despite this, the resulting political situation will be relatively unstable and the government will find it increasingly difficult to pass legislation.

Table Of Contents

Spain Country Risk Report Q1 2017
Executive Summary 5
Core Views 5
Key Risks5
Chapter 1: Economic Outlook7
SWOT Analysis 7
BMI Economic Risk Index 7
Economic Growth Outlook 8
Unstable Political Environment To Take Shine Off Growth 8
Growth in Spain will moderate over the coming years, although it will remain marginally above the eurozone average Factors that will
weigh on economic activity in the years ahead include an unstable domestic political environment, fading tailwinds of low global energy
prices and inflation, as well as a weak recovery in the eurozone
GDP By Expenditure Outlook 10
TABLE: GDP GROWTH FORECASTS 10
TABLE: PRIVATE CONSUMPTION FORECASTS 10
TABLE: GOVERNMENT CONSUMPTION FORECASTS10
TABLE: FIXED INVESTMENT FORECASTS 11
TABLE: NET EXPORTS FORECASTS 11
Fiscal Policy And Public Debt Outlook12
Extended 2018 Fiscal Deadline To Be Missed 12
The pace of fiscal consolidation in Spain will slow over the coming years and the budget deficit will not meet the EU-mandated target of
3 0% of GDP by 2018 Although public debt will remain elevated, it poses little risk in the near term, and maturing debt will be refinanced
at lower interest rates and longer maturities
Structural Fiscal Position 13
TABLE: FISCAL AND PUBLIC DEBT FORECASTS 14
TABLE: MAIN REVENUE AND EXPENDITURE SOURCES 14
External Trade And Investment Outlook 15
Waning Competitiveness Will Weigh On Trade Balance 15
Spain's current account surplus will gradually shrink over the coming years, primarily as weak growth across the eurozone weighs on
external demand Flattening productivity growth will further inhibit a stronger expansion of export market share in the coming years
Outlook On External Position 17
TABLE: CURRENT ACCOUNT BALANCE FORECAST 17
TABLE: TOP 5 GOODS EXPORTS 17
TABLE: TOP 5 GOODS IMPORTS18
TABLE: CAPITAL and FINANCIAL ACCOUNT BALANCE 18
Monetary Policy 19
ECB Tightening A Long Way Off 19
The European Central Bank (ECB) will extend its asset purchase programme from March 2017 to at least September 2017 There is a
growing likelihood that asset purchases will begin slowing by the end of 2017, but the ECB will keep policy extremely accommodative
regardless, with policy rates at very low levels through at least 2019, and other programmes launched to promote bank lending
Furthermore, the risks are firmly tilted toward further easing, as eurozone macroeconomic fundamentals remain poor
Currency Forecast 21
EUR: Further Downside Ahead As Inflation Pressures Rise21
The euro looks set for further weakness following the break of support at USD1 10/EUR, and the next level to watch will be USD1 06/
EUR in the near term Real interest rate differentials continue to support euro weakness and the decline in the value of the British pound
is putting upside pressure on the euro's real effective exchange rate We continue to see long-term weakness towards parity with the US
dollar
TABLE: BMI EUROZONE CURRENCY FORECASTS21
Contents
Chapter 2: 10-Year Forecast 23
The Spanish Economy To 2025 23
Slow, But Steady Growth Ahead 23
In order to correct for the massive imbalances built up during Spain's decade-long economic boom, the economy is now coming through
a period of rebalancing that will result in a lower long-run growth potential While further internal devaluation would help restore some of
Spain's competitiveness over the long run, the process will prove long and painful and has little political support Ultimately, compared
with the levels of growth enjoyed since euro adoption, the next 10 years will show only modest economic growth rates
TABLE: LONG-TERM MACROECONOMIC FORECASTS 23
Chapter 3: Political Outlook 25
SWOT Analysis 25
BMI Political Risk Index25
Domestic Politics26
Political Impasse Over, But Risks To Stability Still High 26
The Spanish Socialist Party's decision to abstain in an investiture vote in parliament will allow the formation of a PP-led minority
government and avoid a third election Despite this, the resulting political situation will be relatively unstable and the government will find
it increasingly difficult to pass legislation
TABLE: POLITICAL OVERVIEW 26
TABLE: TIMELINE OF POLITICAL EVENTS27
Long-Term Political Outlook 28
Political Challenges Beyond The Recession 28
Spain's economic malaise has put several structural political issues into the spotlight Challenges over the next decade will include
unemployment, demographic changes and an increasingly fractured political system
Regional30
Austerity Has Peaked, But No Major Fiscal Easing Ahead 30
The European Union's commitment to austerity will continue to wane in light of rising eurosceptic sentiment Meanwhile, ultra-loose
monetary policy has eased fiscal constraints and blunted the link between bond yields and fiscal sustainability, thus diminishing
incentives for fiscal reform However, the EU institutions will continue to push for conservative budget management, and outright fiscal
expansion remains off the table for the time being
Chapter 4: Operational Risk 33
Operational Risk 33
TABLE: DEVELOPED STATES - LABOUR MARKET RISK 33
TABLE: DEVELOPED STATES - LOGISTICS RISK 36
TABLE: DEVELOPED STATES - CRIME AND SECURITY RISK 39
TABLE: DEVELOPED STATES - TRADE AND INVESTMENT RISK 41
Chapter 5: BMI Global Macro Outlook43
Global Macro Outlook 43
Austerity Has Peaked, But Populism Is Not Yet Policy 43
TABLE: GLOBAL ASSUMPTIONS43
TABLE: DEVELOPED STATES, REAL GDP GROWTH, % 44
TABLE: EMERGING MARKETS, REAL GDP GROWTH, % 45
TABLE: MACROECONOMIC DATA and FORECASTS 47

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