- In Standard & Poor's opinion, Spain is likely to have an extended period of subdued
economic growth, which weakens its budgetary position.
- We are lowering our long-term rating on the Kingdom of Spain to 'AA' from
'AA+'.
- The negative outlook reflects the possibility of a downgrade if Spain's
budgetary position underperforms to a greater extent than we currently
anticipate.
Standard & Poor's Ratings Services
today said it had lowered its long-term sovereign credit rating on the Kingdom
of Spain to 'AA'. At the same time, the 'A-1+' short-term sovereign credit
rating was affirmed. The outlook is negative. Standard & Poor's transfer and
convertibility assessment is unchanged at 'AAA'.
The downgrade primarily reflects Standard & Poor's downward revision of its
medium-term macroeconomic projections. "We now believe that the Spanish
economy's shift away from credit-fuelled economic growth is likely to result
in a more protracted period of sluggish activity than we previously assumed,"
Standard & Poor's credit analyst Marko Mrsnik said. "We now project that real
GDP growth will average 0.7% annually in 2010-2016, versus our previous
expectations of above 1% annually over this period."
We have also revised our views on the GDP deflator, so that we now expect
nominal GDP to regain the 2008 level by 2015; previously, we had assumed that
nominal GDP would exceed the 2008 level in 2013. In addition, and while not
factored into our base case, we have taken into account the possibility that
Spanish public and private sector borrowing costs could remain elevated in
2010-2011 and further slow Spain's recovery from the current recession. Our
conclusion is that challenging medium-term economic conditions will further
pressure Spain's public finances, and additional measures are likely to be
needed to underpin the government's fiscal consolidation strategy and planned
program of structural reforms.
We consider the main factors dampening Spain's medium-term growth prospects to
be:
- Private sector indebtedness at 178% of GDP, which in our estimation is
higher than that of many of Spain's peers;
- An inflexible labor market (we expect unemployment to reach 21% in 2010),
which we believe is likely to slow the recovery of external price
competitiveness;
- A fairly low export capacity--currently, Spain's exports are close to 25%
of GDP--coupled with eroded competitiveness due to past high increases in
unit labor costs compared with those of its peers;
- The financial system's asset quality, which in our opinion is under
pressure as reflected in the recent revision of our Banking Industry
Country Risk Assessment (BICRA) for Spain to group 3 from group 2.
Although the degree of possible additional official support for Spanish
banks is uncertain, we currently anticipate a cumulative fiscal cost of
at least 5% of GDP. This cost relates to the likely financing needs of
the Fondo de Reestructuraci?n Ordenada Bancaria (FROB; ?34 billion) and
the Fondo de Adquisici?n de Activos Financieros (?19 billion), which we
incorporate into our measure of the general government debt burden; and
- An unwinding of the government's fiscal stimulus as part of its current
strategy to reduce the general government deficit to 3% of GDP by 2013.
We continue to believe that the 2010 fiscal deficit will be broadly in line
with the government's target of 9.8% of GDP. However, over the medium term we
anticipate weaker revenue performance and higher spending pressures than what
the government envisages, mainly due to our view of more subdued economic
growth compared with the government's current estimates. As a result, Standard
& Poor's projects that the general government deficit is likely to still
exceed 5% of GDP by 2013, significantly higher than the government's official
target of 3%. Consequently, we estimate that gross government debt is likely
to rise above 85% of GDP in 2013 and continue to trend higher until the middle
of the decade. Increases in Spain's borrowing costs, beyond what we factor
into our base case, could, in our opinion, also reduce the government's
ability to meet its fiscal targets this year and next.
Our general government debt projections assume that banks will not draw more
than the ?27 billion in funds available and not yet used via the government's
FROB vehicle between now and 2013. However, under our current weaker baseline
growth scenario, we believe there is a possibility that the banking system's
capital needs could exceed this figure.
The negative outlook reflects the possibility of a downgrade if Spain's fiscal
position underperforms to a greater extent than we currently anticipate.
Conversely, we could revise the outlook to stable if the government meets or
exceeds its fiscal objectives in 2010 and 2011 and Spain's economic growth
prospects prove to be more buoyant than we currently envisage.
Spanish Government Economic Scenarios And Standard & Poor's Updated Baseline
Scenario
Average 2010-2013
Spain SGP S&P Baseline
Real GDP growth (% yoy) 1.9 0.6
Nominal GDP growth (% yoy) 3.4 1.4
GG deficit (% of GDP) 6.4 8.1
Gross GG debt (% of GDP, end-2013) 74.1 87.5
SGP--Stability and Growth Program. GG--General government. yoy--Year on year.
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