THE SPANISH ECONOMY: FACTS THAT CANNOT BE

THE SPANISH ECONOMY:
FACTS THAT CANNOT BE
OVERLOOKED
Luis de Guindos
Minister of Economy and Competitiveness
6 September 2012
Accumulated Imbalances of the Spanish
Economy
1. Private sector indebtedness
Fast credit growth in 2003-09, encouraged
by the lax monetary policy stance, was
financed with external debt
2. Housing Bubble
82% increase in housing
prices from 2003 to its peak
in 2008
3. Loss of Competitiveness
Drastic increase ( 30%) in Unit Labour
Costs since joining the Eurozone
Source: Bank of Spain
Consequences of the accumulated imbalances
1. Deterioration of Public Finances
2. Increase in Unemployment
The public deficit soared as a result of a
strong discretionary fiscal expansion
(reflected in the structural deficit trend)
While the public deficit jumped to
11 % of GDP from a 2% surplus in
2007, the unemployment rate
shot up from 8.3% to 21.6%
Source: Ministry of Finance
3. Deterioration of financial
sector balance sheets as a
result of their high exposure to
the Real Estate sector.
Credit to Real Estate developers
rose from €78 billion in 2003 to
€324 billion in 2009, growing
three times faster than total
credit to the private sector.
2
On-going correction of imbalances and
strengths of the Spanish economy
 The accumulated imbalances are in the path of being corrected
 The Spanish economy has significant strengths:
1. Spain is a competitive economy

Trade balance in surplus with the Euro zone

Good performance of exports

Declining Unit Labour Costs are boosting competitiveness

Fast Adjustment in the current account deficit
2. Spain is a sustainable economy

The private sector is de-leveraging at a fast speed

Public Finances are sustainable

Spain is well prepared to address ageing population challenges

Potential Growth compares well with Eurozone peers thanks to structural reforms

A very sound financial sector after the new provisioning requirements and
3
restructuring regulations
Spain is a competitive economy
The Trade Balance is in surplus with the Eurozone since 2010
Trade surplus with France,
Italy, Austria, among others
 The trade surplus (goods and
services) with the Eurozone has
recorded a fivefold increase in
the fist half of 2012.
The traditional trade deficit
with Germany has
been
drastically reduced  in the first
half of 2012 it declined by 52%
and exports to Germany grew
7.4% y-o-y.
At a global level: Spain records
a non-energy goods surplus and
Tourist and Non-tourist services
surplus.
4
Spain is a competitive economy
Good performance of Exports
Since 2001, Spanish goods exports have increased by 70%, the same as in Germany. Italian exports have
grown by 41% and French exports by 30%.
Source: Bank of Spain
5
Spain is a competitive economy
Declining Unit Labour Costs are boosting competitiveness
 Manufacturing
labour
costs have decreased by
more than 12% since its
peak in march 2009.
 As a result, exports
diversification
is
significantly improving
 The non-EU share in
total
exports
has
increased to 35% from
28% in 2010.
Source: Bank of Spain
6
Spain is a competitive economy
Fast adjustment in the current account deficit
 The financing needs
of
the
Spanish
economy
are
significantly
narrowing. From a
deficit of 10% of
GDP in 2007, the
current account is
expected to be close
to balance in 2013.
IMF FORECAST
Source: Ministry of Economy and Competitiveness for actual data and IMF for forecast
 The
primary
account
balance
(excluding
foreign
debt
interest
payments) is in
surplus since 2011
and is improving
further.
7
Spain is a sustainable economy
1.
The private sector is de-leveraging at a fast speed
2.
Public Finances are sustainable
a) The public debt ratio is below the EU and the Eurozone average:
Public Debt in 2011 in terms of GDP (Eurostat)  Spain: 68.5%; EA-average: 87.2; Germany: 81.2%
b) It is expected that the public sector will approach to primary surplus ( public account excluding
interest payments) in 2013, ensuring the sustainability of Spanish public finances
c) Strong fiscal consolidation is ongoing at all levels of Administration
3.
Spain is better prepared to address ageing population challenges
4.
Potential Growth compares well with Eurozone peers thanks to structural reforms
5.
Financial Sector:
•
Aggressive clean-up of balance sheets
•
New legislation on a new framework for the restructuring and resolution of financial institutions.
•
The relative weight of the financial sector in Spain is lower than in other European economies:
Ireland ( 829% of GDP);
UK (603% of GDP);
France (375% of GDP)
Spain (326% of GDP)
Germany (310% of GDP)
8
Spain is a sustainable economy
The private sector is de-leveraging fast
Both corporate and household debt have significantly
decreased since their peak levels
With the current pace of deleveraging, private sector
debt will be below the EC’s reference ratio by the end
of this decade
160
Source: Deutsche Bank
Source: Bank of Spain
9
Spain is a sustainable economy
Strong Fiscal Consolidation in all levels of Administration
 The Government is firmly committed to comply with the new consolidation path set up
under the Excessive Deficit Procedure in July
 The structural adjustment effort will be huge: above 7% of GDP in 3 years (2012 until
2013)
 A substantial improvement in the Spanish Fiscal Framework has been adopted and is
already effective
•
•
Constitutional Reform introduced even before the Fiscal Compact adoption
Law on Budgetary Stability provides for further fiscal discipline and far-reaching
enforcement tools
monitoring and
• Ambitious Fiscal Adjustment measures have been adopted since December 2011, both
on the expenditure and the revenue side. Total adjustment between 2012 and 2014
amount to more than 102 billion euros.
• Fiscal recommendations addressed to Spain under the European Semester have
already been implemented
• The multi-annual budget plan for 2013-14 was presented by the end of July 2012, as
envisaged. This plan fully specifies the structural measures to achieve the correction of
the excessive deficit by 2014.
10
Spain is a sustainable economy
Spain is well prepared to address the Ageing Challenge
Germany
Spain
France
US
% of GDP. Age-related expenditure (per year)
2010
2020
Pensions
10,8
10,9
Health Care
8
8,6
Long-term Care
1,4
1,7
Total
20,2
21,2
2010
2020
Pensions
10,1
10,6
Health Care
6,5
6,5
Long-term Care
0,8
0,9
Total
17,4
18,0
2010
2020
Pensions
15,3
14,5
Health Care
6,6
6,6
Long-term Care
1,9
2
Total
23,8
23,1
2010
2020
Pensions
4,9
5,1
Health Care
3,1
3,4
Long-term Care
2,5
3,2
Total
10,5
11,7
Source: European Commission (2012), CBO
Change
1,0
Change
0,6
Change
-0,7
Change
1,2
11
Spain is a sustainable economy
Growth Potential compares well with European peers
Growth potential by the end of this decade
Spain
Italy France Germany
Change in working age
population
0,2
-0,2
0,0
-0,6
Change in employment ratio
Change in productivity
POTENTIAL GDP GROWTH
0
1,2
1,4
0,4
0,1
0,3
0,1
1,2
1,3
1
1,2
1,6
Source: Deutsche Bank
According to Deutsche Bank calculations, the potential GDP growth of
Spain is similar to Germany’s and France’s and bigger than Italy’s,
thanks to the structural reforms implemented
12
Spain is a sustainable economy
Aggressive Clean-up of Balance Sheets
Coverage of Real Estate assets linked to loans to developers (€ 307 billion).
Coverage of Real estate assets linked to loans to developers
Coverage of Real estate assets linked to loans to developers
(in percent)
(in € bn)
Problematic Assets
•Total provisions + capital buffer → € 100 bn
•Total Balance → € 184 bn
Performing Assets
•Total provisions → € 37 bn
•Total Balance → € 123 bn
TOTAL
•Total coverage → € 137 bn
•Total Balance → € 307 bn
13
Spain is a sustainable economy
Results of the Financial Sector Clean-up
After the cleaning-up, Spanish Banks will be among the strongest in Europe
Goldman Sachs research on European Banks –
Supervisory metrics and Ranking
Quartile on
Rank
1
2
3
4
5
6
7
8
9
10
Bank
Leverage
Santander (post RDL)
2nd
Banco Popular (post RDL)
1st
BBVA (post RDL)
1st
Erste Bank
3rd
Bankinter (post RDL)
3rd
Sabadell (post RDL)
2nd
Intesa SanPaolo
1st
Commerzbank
3st
Banco BPI
2nd
Société Générale
4th
NPA coverage
Liquidity
(chg.)
1st
1st
3rd
1st
3rd
1st
1º
1st
2º
1st
3º
1st
2º
3rd
1º
2nd
2º
3rd
1º
2nd
Sum
4
5
5
5
6
6
6
6
7
7
Source: Goldman Sachs
14
Far-reaching Structural Reforms have been
implemented to boost the flexibility and
competitiveness of the Spanish economy
Main structural reforms already implemented
1.
2.
3.
4.
5.
Labour Market Reform
Financial Sector Reform
Retail sector: liberalization of opening hours and elimination of restrictions on sale activities
Liberalization of the Housing rental Market
Health and Education
A Labour market reform to foster wage moderation and job creation
Main measures adopted:
Firm-level wage bargaining prevails over national, regional or sector agreements
Collective dismissals without administrative authorization are allowed for firms posting falling profits for
three or more consecutive quarters
Elimination of procedural wages
Convergence of dismissals costs to the EU average
• Unfair dismissal: severance pay 45 days up to 42 months  33 days per year worked up to 24
months
• Fair dismissal: severance pay of 20 days per year, up to 12 months
Clarification of objective causes for fair dismissal
Creation of a new permanent contract directed at SMEs
15
Further strengthening of the Financial Sector:
A new framework for Bank Restructuring and
Resolution
Legislation was adopted on August, 31st setting up a new framework for the
restructuring and resolution of financial institutions
 Essential tool in the crisis management of financial institutions
 Sets up a comprehensive framework to deal with financial institutions in
stressed situations.
 Reinforcement of intervention tools at all stages of crisis management:
1. Early intervention for mild difficulties
2. Restructuring measures for institutions with temporary troubles that
can be solved with public support
3. Orderly resolution for non-viable institutions
 Early introduction of provisions foreseen in the future European Directive on Bank
Recovery and Resolution currently under negotiation at the EU level
 Establishment of an Asset Management Company (AMC)
16
An ambitious economic Reform Agenda
for the Second Semester 2012
The reform agenda will gain momentum this Autumn – Measures:
1.
A Market Unity Law will be adopted to ensure that all goods and services lawfully produced
in one Region can be supplied in all others without any additional formalities
2.
National Competition and Markets Authority Law to improve the efficiency and quality of
supervision
3.
Further Liberalization of Professional Services to foster competition and market access
4.
Energy Market reform to increase efficiency and solve the electricity system tariff deficit
5.
Developing new funding sources for SMEs to reduce dependence on commercial banking
funding
6.
Putting the Autonomous Regions Liquidity Fund in function to help Regions to face their
liquidity constrains  Resources amounting to 18 billion €.
7.
Completing remaining steps envisaged in the MOU:

Regulatory development of the Asset Management Company (AMC)

Presentation of recapitalisation plans identifying how capital shortfalls will be covered

Presentation and adoption of restructuring plans and injection of financial assistance
into banks by November
17