A glimmer of hope
The analysts are pinning their hopes for Spain’s gross
domestic product on foreign trade. The increase in unem-
ployment and wage freezes are driving unit labour costs
down (substantially below those of the eurozone core
nations) and fostering swift productivity and competitive
gains. These circumstances are evident in the growth in
export volumes (faster than growth in major emerging
economies such as China), to which most of the listed
Spanish companies are testament. The tourism industry
is also faring relatively well and is managing to offset the
sharp drop in spending in the local tourism segment.
Meanwhile imports are falling sharply. As a result, GDP
is contracting, but by less than it would be without the
export buffer. Thanks to this, the current account deficit
has narrowed from close to 10% of GDP three years ago to
an estimated 2% in 2012. Some analysts are forecasting a
slight surplus in 2013.
The risks ofmissing thedeficit targets
The prospect of job creation is being continually
pushed back and unemployment is not expected to dip
below 25% in the next couple of years.
This stark reality is what undermines the credibility of
the budget and economic forecasts presented by the
government last October: are the revenue projections
overly optimistic despite the dramatic reduction in
actual and projected spending? This question is hard to
answer as it depends on highly subjective forecasting
and assumptions. With the help of bank restructuring,
which at last looks to be being taken sufficiently seri-
ously, and some support from the ECB and European
Commission bigwigs in terms of helping Spain to over-
come this economic debacle, it seems as if the debt
markets are beginning to bet on an improvement in
conditions over the medium term. The sovereign risk
premium has deflated substantially since summer 2012
and share prices turned bullish as volatility began to
subside tangibly in the final weeks of last year.
With or without help from Europe, it is unlikely that
Spain’s deficit will come in at 6.3% of GDP as targeted
because the ramifications of the austerity measures on
economic activity are proving more significant than
initially estimated, and not just in Spain. Inevitably,
the process of cleaning up the public finances and the
financial sector, coupled with gradual deleveraging in
the corporate sector, will translate into modest growth
in government debt to around 90-92% of GDP in 2013.
Spain is faced with a harsh correction and formidable
financing deficit which must lead to step change in
how the Spanish economy is organised and operated,
meaning both the productive and services segments
(particularly financial services). One of the opportu-
nities along this path is the chance to reduce Spanish
companies’ excessive reliance on bank debt. Against
this backdrop, the securities markets can offer alter-
natives for building a new regime for financing flows
underpinned by security, liquidity and, ultimately,
lower risk for businesses and job stability.
Annual
Report 2012
/ BME
19
Market Environment
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