LONDON (MNI) – Ratings agency Standard and Poor’s has today
affirmed Spain’s AA/A-1+ credit rating. The outlook remains negative.
S&P said it believes that Spain will continue to adhere to its
front-loaded budgetary, although enduring economic and financial
weaknesses will likely continue to weigh on the current ratings.
S&P said the negative outlook reflects the possibility of a
downgrade if Spain’s fiscal position deviates materially from the
government’s budgetary targets for 2011 and 2012
Standard & Poor’s credit analyst Marko Mrsnik said that the rating
reflects the benefits of a diversified economy.
“The ratings on Spain reflect the benefits of what we view as a
modern and relatively diversified economy, as well as our opinion of the
government’s continuing political resolve to deal with the outstanding
challenges, as reflected in a significant acceleration in both budgetary
consolidation and the structural reform effort since 2010,” he said.
Full Text Of Statement Below:
Following the 0.2% contraction in GDP we estimate for 2010, we
anticipate that the economy will return to positive growth rates of
approximately 0.7% in 2011 and 1.5% in 2012.
This recovery, in our opinion, is subject to significant downside
risk due to a combination of the private sector’s continuous
deleveraging; what we consider to be restrictive fiscal policies;
limited growth prospects, in our opinion, on the back of the global
economic recovery; persistently high unemployment; financial-sector
stress; and large net external debt (we forecast a level equivalent to
78% of GDP in 2011). We believe that these factors make the economy
vulnerable to sudden shifts in external financing conditions, possibly
complicating the country’s economic recovery.
In an unfavorable economic climate in 2010, the government put in
place what we view as a substantial reform effort, including a
front-loaded budgetary consolidation strategy and a comprehensive set of
structural reforms. We estimate that the 2010 general government deficit
target of 9.3% of GDP was met, on the back of the government’s fiscal
package involving tax hikes and spending cuts.
This is mainly due to the significantly better-than-expected
central government deficit (5.1% of GDP versus a planned 5.9%), more
than compensating for the slippage at the local and regional government
level. We anticipate that the general government deficit will decline to
6.3% of GDP in 2011, broadly in line with the government’s target of 6%,
and to 5.1% of GDP in 2012. The difference between our 2011 forecast and
that of the government is attributable to our lower forecast of
underlying economic growth, and its impact on the budget.
As a result, we forecast an increase in net government debt to
61.6% of GDP in 2011 and 65% in 2012, from an estimated 56.2% in 2010.
Further growth in borrowing costs could result in higher interest
outlays than the government currently plans, although the increase in
the average interest rate on Spain’s outstanding government debt in 2010
was negligible (3.69%, versus 3.53% in 2009 and 4.32% in 2008)–despite
negative market sentiment–thus limiting the potential additional burden
on the budget. Our current government debt projection does not include
the anticipated income from the announced partial privatization of the
airport operator AENA and the National Lottery.
Similarly, it does not include potential additional capital
injections by the state to further strengthen the financial sector. In
our opinion, such costs could surpass 20 billion–a level recently
mentioned by the government–with the excess driven either by
higher-than-expected losses in financial institutions’ property-related
loan portfolios; failure of financial-sector entities involved in
integration processes to reduce their operating expenses; or higher
funding costs, since, in our opinion, the financial sector’s approximate
760 billion of gross external debt at year-end 2010 leaves it
vulnerable to exogenous shocks.
We believe that in the medium to long term, the recently adopted
pension reform program, if fully implemented, will likely lead to
important savings in social security outlays. The reform program
includes increases in the retirement age–to 67 for standard retirement
and 63 for early retirement–an extension of the pension calculation
period to 25 years from 15, and the introduction of a “sustainability
factor” linking the financial sustainability of the pension system to
the future evolution of life expectancy.
While it is too early, in our view, to assess the impact of labor
reform on Spain’s economic growth prospects, we believe that the reform
measures implemented to date are a step in the right direction, though
stopping short of a fundamental overhaul of the labor market. Additional
labor reform measures planned by the government for the first quarter of
2011 in the areas of active market policies and collective bargaining
procedures could, however, further reduce some of the structural
rigidities that we believe constrain labor demand in the economy.
A downgrade could also occur if the impending correction in
private-sector leverage results in what we would consider to be a
disorderly adjustment in the financial sector, leading to a sharper
deterioration of the Spanish government’s balance sheet or lower
economic growth than we currently anticipate, possibly coupled with
resurging deflationary pressures. Moreover, we could lower the rating if
vulnerabilities persist related to external financing conditions or
delays in the implementation of structural reforms.
Conversely, we could revise the outlook to stable if the government
meets or exceeds its budgetary objectives in 2011 and 2012, risks to
external financing conditions subside, and Spain’s economic growth
prospects prove to be more buoyant than we currently envisage as a
result of a smooth economic adjustment and restructuring process.
–London newsroom: 4420 7862 7491; email: wwilkes@marketnews.com
[TOPICS: M$X$$$, M$$EC$,MR$$$$]
