S&P Increases Spain’s Rating To BBB+ With “Stable” Outlook

5 October 2015 – Expansión

On Friday, the credit rating agency Standard & Poor’s (S&P), one of the world’s three main players in this sector, together with Fitch and Moody’s, announced an increase in its rating for Spain’s long term sovereign debt from BBB to BBB+, with a “stable” outlook. In this way, the agency rewarded Spain for the impact that the structural reforms approved in recent years have had on the economy.

In a statement, S&P said that “the increase in the rating reflects our view of the behaviour of the Spanish economy over the last four years – we consider that it has been strong and balanced, and that it is gradually benefitting the public finances”. The agency has been particularly encouraged by the two employment law reforms that have been approved since 2010 (under the governments of Zapatero and Rajoy), which have, in its opinion, improved the competitiveness of Spain’s exports and its service sector.

“The rating from S&P is a sign of confidence in the future of the Spanish economy and an acknowledgement that the political uncertainties do not carry significant weight”, said the Minister for the Economy, Luis de Guindos, yesterday, after S&P made its statement. In reality, the agency is not quite so optimistic – it says that there is still “considerable uncertainty” over whether the next government to emerge, following the elections on 20 December, will continue or even increase the pace of reforms that are still required to improve the economy and fulfil the growth and deficit targets in the medium term. “It is unclear just what a potential change in government would mean for the Spanish economy’s primary weakness, its unemployment rate”, it said.

S&P does not see much danger in the secessionist challenge and believes that Cataluña will continue to form part of Spain; furthermore, it expects that the tension between the central Government and the regional authorities will gradually dilute. However, it warns that a hypothetical independence would hit the Spanish economy hard, including its GDP per capita, its foreign trade balance and the public finances.

Risks still remain

Nevertheless, there are also some purely macroeconomic factors that could divert the country from its positive path…”We would consider reducing the rating if economic growth does not reach our projections; if the monetary policy does not manage to stop the deflationary pressures from eroding the fiscal performance and growth in Spain; and if, contrary to our expectations, net debt exceeds 100% of GDP”. The agency expects this ratio to decrease as the economy improves, and forecasts that it will peak at 98.4% this year and drop to 98% in 2016.

Similarly, the agency says that it is important to remember that certain exogenous factors have favoured the (recent) economic recovery, such as for example, the price of oil and the euro exchange rate.

For the time being, Standard & Poor’s expects nominal GDP to grow by around 4% over the next three years. Last Wednesday, the agency improved its growth forecast for Spain in 2015 by 2 p.p., from 3% to 3.2%, and by 1 p.p. in 2016, to 2.7%. Its estimation for 2017 is 2.4%. (…).

Original story: Expansión (by Yago González)

Translation: Carmel Drake

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