Spain benefits from stronger eco­nomic growth, but debt level re­mains high

Financial Mirror (Cyprus) - - FRONT PAGE -

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.

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