Spain benefits from stronger economic growth, but debt level remains high
Spain’s (Baa2 positive) strengthening economic growth continues to support the narrowing of the fiscal deficit, but its high public debt level is unlikely to stabilize before 2016, Moody’s Investors Service said in its annual Spain Credit Analysis.
According to Moody’s, structural reforms have helped Spain strengthen its institutions, the banking system and the labour market.
The rating agency expects that Spain’s economic growth will continue to recover in 2015-16, largely led by domestic demand. Moody’s forecasts growth rates of 2.7% and 2.2% for 2015 and 2016 respectively. Private consumption and investment are likely to again prove to be the main driving forces in the economy, benefiting from improved confidence, better financing conditions, and improvements in the labour market, Moody’s said.
In addition, the rating agency expects that growth in exports of goods and services will accelerate in the coming years, and notes that Spain has already started to reverse losses in world export market share.
Nevertheless, net exports’ contribution to growth is likely to be somewhat negative, as the growing strength of the domestic economy is, in turn, fuelling stronger import growth.
The rating agency expects Spain’s still-high budget deficit to decrease over the coming years, as economic growth boosts government revenue. As a result, Moody’s forecasts that Spain’s deficit will fall further to 4.5% and 3.5% of GDP in 2015 and 2016, respectively.
However, Spain’s high debt levels continue to represent a constraint on its sovereign rating, despite the recent improving trends of economic, fiscal and financial data, says Moody’s. Under its current base case assumptions, the debt ratio will peak in 2016 at above 100% of GDP and stabilise through 2018, assuming a continued economic recovery and continued fiscal consolidation.
Spain’s fluid political environment introduces some elements of uncertainty as to policy direction in the coming years. While the rating agency does not foresee a disruptive change in economic policies after national elections, it may be more challenging to pass legislation during the next administration. As such, there is a risk of a slowdown in the reform momentum experienced during the current administration.