We believe the EUR100bn bank rescue announced in June will mark the first of many external bailouts for the Spanish economy, and in light of the rapid worsening of financing conditions in recent months, we expect Spain to receive a full-blown sovereign bailout in the next six months or so. Alongside the continued deterioration in economic activity and confidence across the eurozone, this underpins our dismal outlook for the Spanish economy over the next few years. All components of GDP by expenditure are set to suffer given the pressures facing the housing, banking, fiscal and external sectors of the economy.
In light of the depression scenario envisaged for the domestic economy over the next few years as well as the prospect of continued aggressive fiscal austerity, we expect Spain's external asymmetries to continue narrowing over the medium term, even taking into account lacklustre demand for Spanish exports from abroad.
Spain's crisis appears to have accelerated since Prime Minister Mariano Rajoy came to power and this is at least partly the result of weak, and at times delayed responses by the political leadership to the country's economic woes. With a eurozone sovereign bailout for Spain looking unavoidable, fiscal austerity unlikely to moderate, and a lost decade ahead for the domestic sector, we believe the People's Party will find it difficult to arrest the decline in its popularity, leaving re-election in 2015 looking highly unlikely.
Key Risks To Outlook
The biggest domestic risk to the Spanish economy is that the government pursues over-aggressive fiscal austerity. If the government is forced to introduce even greater spending cuts and tax hikes over the next few years owing to financial pressures from abroad, the ultimate effect on the government's fiscal position could be even worse given how weak the domestic economy already is.
The weakening economic picture in the wider eurozone presents a huge threat to the Spanish economy. Macroeconomic conditions could worsen significantly from current levels in the common currency bloc should there be little to no progress on the financial/banking integration front, and this would in turn prompt us to reassess Spain's growth potential in the medium-term.
Table of Contents
Executive Summary
Core Views
Key Risks To Outlook
Chapter 1: Political Outlook
SWOT Analysis
BMI Political Risk Ratings
Domestic Politics
Pressure Mounting On Rajoy To Seek Bailout
In the same way that Greece has been a test bed for combined internal devaluation and fiscal consolidation, Spain will become a crucial
case study for the efficacy of the European Central Bank's recently proposed sovereign bond purchase programme
TABLE: POLITICAL OVERVIEW
Long-Term Political Outlook
Political Challenges Beyond The Recession
Spain's ongoing economic malaise has put several structural political issues into the spotlight Challenges over the next decade will
include unemployment, demographic changes and constitutional questions
Chapter 2: Economic Outlook
SWOT Analysis
BMI Economic Risk Ratings
Economic Activity I
Bailout Would Provide Relief But Not A Cure
The Spanish economy is in the midst of a major economic depression, with a return to the 2008 peak unlikely before 2019 Although
it is increasingly likely that the government will seek a financial bailout, we stress that this will provide short-term relief rather than a
long-term cure Overcoming double-digit unemployment and a 'brain drain', restructuring the banking sector and restoring international
competitiveness will be a long and arduous task, with significant risks to economic growth and financial stability in the meantime
TABLE: ECONOMIC ACTIVITY
Balance Of Payments
BoP Adjustment Gaining Ground
Although Spain's fiscal account has come under increasing scrutiny, it is easy to forget that there has also been a substantial shortfall
in the current account over the past decade However, the current account has narrowed significantly during the global financial crisis
to the point in which the first surplus since 1998 was recorded in July Ultimately this is beneficial in terms of longer -term economic
rebalancing
TABLE: CURRENT ACCOUNT
Monetary Policy
VAT Hike Drives Inflation Spike
Spanish inflation surged higher in September on the back of an increase in value-added tax at the beginning of the month Although
inflation is likely to edge higher in the subsequent months as the VAT hike filters through the economy, this will prove a temporary
dynamic which will give way to more subdued inflation over the medium term
TABLE: INFLATION
Economic Activity II
Housing Correction Has Much Further To Run Up
The Spanish property market has been a thorn in the side of the economy since the global financial crisis Plagued by eroding demand
from both domestic and foreign buyers, coupled with a huge supply glut left over from the construction boom years, have underpinned
a sharp correction in property prices There are few signs that the property market is turning the corner, raising the prospect of further
asset devaluation and household wealth destruction going forward, which will weigh on the economic recovery
Banking Sector
State Bailout Key To Stability
The Spanish banking sector continues to struggle in the face of weak domestic demand and is weighed down by poor asset quality
A state bailout for Spain would afford some support as this would presage a round of government bond purchases by the European
Central Bank which would go some way to shore up balance sheets
Chapter 3: 10-Year Forecast
The Spanish Economy To 2021
A Lost Decade Ahead
In order to correct for the massive imbalances built up during Spain's decade-long economic boom, the economy is now in the first
stages of rebalancing that will result in a lower long-run growth potential Household spending in particular, which was the primary driver
of growth since adoption of the euro, is set to temper significantly amid an environment of tighter credit conditions and deleveraging
While an internal devaluation will help restore some of Spain's competitiveness over the long run, the process will prove long and
painful Ultimately, compared with the levels of growth enjoyed since euro adoption, the next 10 years are likely to prove a lost decade
for Spain
TABLE: LONG-TERM MACROECONOMIC FORECASTS
Chapter 4: Business Environment
SWOT Analysis
BMI Business Environment Risk Ratings
Business Environment Outlook
Institutions
TABLE: BMI BUSINESS AND OPERATION RISK RATINGS
Infrastructure
TABLE: BMI LEGAL FRAMEWORK RATING
TABLE: LABOUR FORCE QUALITY
Market Orientation
TABLE: TRADE AND INVESTMENT RATINGS
Operational Risk
TABLE: TOP EXPORT DESTINATIONS, 2001-2009 (US$MN)
Chapter 5: Key Sectors
Oil & Gas
TABLE: OIL & GAS – HISTORICAL DATA AND FORECASTS, 2009-2016
Other Key Sectors
TABLE: AUTOS SECTOR KEY INDICATORS
TABLE: FOOD & DRINK SECTOR KEY INDICATORS
TABLE: DEFENCE & SECURITY SECTOR KEY INDICATORS
TABLE: PHARMA SECTOR KEY INDICATORS
TABLE: TELECOMS SECTOR KEY INDICATORS
TABLE: FREIGHT SECTOR KEY INDICATORS
Chapter 6: BMI Global Assumptions
Global Outlook
Mixed Signals For The New Year
TABLE: GLOBAL ASSUMPTIONS
TABLE: DEVELOPED STATES REAL GDP GROWTH FORECAST
TABLE: REAL GDP GROWTH CONSENSUS FORECASTS
TABLE: EMERGING MARKETS REAL GDP GROWTH FORECAST 39
