By Mr. Agustín Navarro de Vicente-Gella, Economic and Commercial Counsellor with the Embassy of Spain to Bucharest
Spain is actively addressing the imbalances of its economy, structuring its economic policy around three main pillars: a clear commitment to sustainable public finances, guaranteeing a sound and solvent financial sector via a thorough clean-up and recapitalization and fostering growth, competitiveness and productivity via structural reforms. Past trends are being reverted and Spain’s structural imbalances are being corrected. Public deficit is being progressively reduced. The financial sector’s exposure to real estate is falling, allowing for a healthy reallocation of resources, while the private sector continues to deleverage. The labour market reform is pushing unit labour costs down and improving competitiveness. Partly as a consequence, exports are performing very well and a current account surplus is being reached.
Public deficit fell by roughly two percentage points in 2012, compared to 2011. According to the IMF, Spain was the second advanced economy with the highest structural adjustment in 2012. The public sector governance will be further improved though a Transparency Law and the creation of an Independent Fiscal Responsibility Authority, among others. During 2013, the pension system will also be further reformed in order to guarantee its long-term sustainability. In 2013, by June, the Spanish Treasury has already issued €133 billion, 57.8% of estimated financing needs, with an average life of debt outstanding stable around 6.29 years.
According to the IMF and external evaluator, 70% of the Spanish financial sector is sound and never required additional capital. Capital needs were concentrated among the 4 banks owned by FROB, which account for 18% of the banking system. These banks received a €37 billion capital injection. Total support for the financial sector amounted to €41.3 billion, less than 4% of GDP. During 2011 and 2012, especially during the latter, banks have provisioned €78 billion on exposures related to real estate developers. Banks’ provision coverage over credits reached a suitable 11.9% by the end of 2012, 4.9 percentage points above the level reached one year before, in a context of ambitious policy reforms in the financial sector. The sector has removed the excess capacity built up during the housing boom. Employment has fallen by 13% since its peak, and branches by 17%, with current levels below those of the early 2000s. The total number of entities has decreased from 50 in 2009, to 12 (excluding credit cooperatives and foreign branches), thanks to a sizeable reduction in the former savings’ banks, which have, moreover, been transformed into banks. Legislation has been developed to strengthen and clarify the governance structure of former savings’ banks and of commercial banks controlled by them. Enhanced transparency has been reached through the disclosure of key areas of banks’ portfolios, such as restructured and refinanced loans, or NPLs. Restructured operations amount to €200 billion, i.e. 13% of the total loan portfolio in Spain, 60% of which has already been provisioned. The balance is made of performing loans. Among the refinanced portfolio, 32% is related to real estate developers and these exposures have already been significantly provisioned by 2012. SAREB, the asset management company, has been transferred assts worth €50.6 billion, for a gross book value of €106.6 billion, meaning an overall average impairment close to 52%. Among the nearly 200,000 assets transferred, 107,000 are foreclosed real estate assets and 90,500 are loans to real estate developers.
As a consequence of recent policies, Spanish banks are better capitalised to withstand severe shocks. The capitalisation of the FROB owned banks and the transfer of assets to SAREB has boosted capital ratios and Spanish banks are performing better than international peers in terms of capital ratios. They have increased their loss absorption capacity and solvency as a result of stricter provisioning requirements and the transfer of assets to SAREB.
The adjustment in the real estate sector is well advanced. Nominal house prices are below 2004 levels, although the situation is heterogeneous and more intense around the most populated and coastal provinces. The average nominal price decline since their peak stands at 30% for new dwellings and well above 40% for second-hand ones.
The private sector continues to deleverage, with gross debt of non financial corporate and households falling to 210.5% of GDP by the end of 2012, 10.5 percentage points below the level at end-2011. The degree of deleveraging reached so far is above that of the U.S. and of the U.K. and significantly above the average rate in the Eurozone.
At the same time, a number of measures have been launched to mitigate the effects of credit restriction and to increase the range and flexibility of the financing sources available to companies, with particular attention to companies in international stages. An alternative fixed income market is being launched, which will facilitate the movement between alternative and organized stock markets. The Law on Venture Capital entities is being reformed, the FOND-ICO Global facility in being launched and the Network of business Incubators is being developed.
A broad number of policy reforms are being carried out to increase Spain’s competitiveness, among which, those in the fields of labour market, education, intellectual property, energy, telecom and information society, building sector, transport and justice. Measures are being taken to create an enhancing legislative framework for economic activities and to support firms and entrepreneurs and their going international, as well as their R&D activities. The liberalisation of services’ activities is also progressing at an adequate pace.
That is why, the unemployment rate has already started to abate slightly in the second quarter of 2013, with about 150,000 more people employed and more than 200,000 less people unemployed, although, the unemployment rate obviously continues to be at unsatisfactory levels.
Unit labour costs have fallen by 9.4% since their peak in 2009 and are at similar levels to those of 2007. They fell by 1.5% in 2011, by a further 3.6% in 2012 and the latest available figure is a 3.2% drop in April, 2013, year-on-year. Moreover, this increase in price competitiveness has been achieved, to a large extent, thanks to gains in productivity, which increased by 2.2% in 2011, by 3.2% in 2012 and by 2.6% in April, 2013, year-on-year. Since the first quarter of 2008, labour productivity has increased by 13.8%.
Thanks to the gains in competitiveness, Spanish exports of goods and services, especially of non-touristic services, such as services to firms and construction services, are growing fast. Exports of goods have risen by 8% in the first half of 2013, compared to the same period of 2012, reaching €118.7 billion, outpacing those of competing countries, such as Japan (+4.2%), the U.S. (1.1%), Germany (-0.6%), France (-1.7%) and Italy (-0.4%). Due to exports’ good performance over the last few years, Spain has a trade surplus with the Eurozone and with the EU since 2011.The trade surplus with the latter reached almost €12.6 billion in 2012 and already €10.5 billion in the first half of 2013. Spain is also increasing its non-energy goods surplus from €14.7 billion for the full year of 2012, to already €15.2 billion in the first half of 2013.
Moreover, the geographical diversification of these exports is increasing, with a 13.8% growth to non EU markets in the first half of 2013 and an increasing weight of faster growing economies. Exports to these markets have gained momentum since 2009. During the first half of 2013, exports are growing, year-on-year, at a pace of 64.2% to South Africa, 40.4% to Brazil, 13.4% to China, 69.6% to gulf-countries and 5.4% to the U.S. The first category of Spanish exports are machinery and equipments, representing 21.2% of total in the first half of the year and posting an 18.7% growth, year-on-year. Within this category, industry-specific machinery exports have grown by 48.3%.