Dear members,

We are pleased to inform you about the recent publication of the March edition of FUNCAS’ SEFO-Spanish Economic and Financial Outlook. Below you can read FUNCAS’ summary on the main SEFO findings.

Best regards,
The Association Executive Board


“In this issue, the SEFO provides evidence of the on-going recovery of the Spanish economy and financial sector, while examining outstanding challenges to both.

The Spanish recovery is gaining strength, but global risks, such as instability from moderation of US expansionary monetary policy and tensions in the Ukraine, have increased. If global threats do not materialize, we forecast growth in 2014 at 1.2%, two tenths higher than previously, and that for 2015 at 1.8%. In light of these recent developments, the March SEFO also examines the possible implications for Spain and other euro area countries from a slowdown in emerging economies. Fortunately, Spain´s trade exposure is weighted towards emerging markets that are not likely to be the focal point of renewed financial stress. Therefore, growth will remain intact even if pressures escalate.

Nevertheless, the recovery continues to be sluggish and the crisis has had important implications for Spain´s public debt levels, elevating public debt to GDP ratios from 36.3% in 2007 to 93.9% in 2013, and raising concerns about future growth. Spain´s net external debt has also deteriorated, placing additional pressure on borrowing rates. That said, Spain is not alone among European economies in having a debt overhang problem, and recent correction in the current account balance and a reduction of sovereign spreads are helping the country to improve its currently high net international investment position and reduce the growth of the stock of public debt.

In this context, we highlight the newly released Experts´ Committee report on fiscal reform, commissioned by the Government. The report contains numerous proposals for improving the current tax system with the aim of simplifying it and making it more efficient, facilitate growth friendly fiscal adjustment, and employment creation. Although the proposal is not the Government´s official proposal, it likely anticipates some of the debates that will take place throughout the legislative approval process. Moreover, it represents a step forward in that it attempts to tackle some of the difficult issues facing the Spanish fiscal system.

In this number, we also take a look at the health of the Spanish banking sector ahead of the European Comprehensive Assessment scheduled for November of this year. Our analysis of a representative sample of Spanish banks on the basis of end 2013 data reveals continued improvement in profitability and solvency, with the main challenge still the reactivation of lending to the private sector. More importantly, our simulation exercise reveals that a transformation is becoming evident within the Spanish banking sector. We add a word of caution, however, that there are two outstanding issues, which could affect Spain´s performance on the upcoming EU Comprehensive Assessment – the holdings of debt and some loan exposures. The ECB´s decision regarding the treatment of these issues, which remains to be finalized, could ultimately affect Spanish banking sector results.

Finally, we analyze the latest reform of Spain´s electricity sector in an effort to correct the tariff deficit by adjusting the remuneration for renewable energies, together with a toll on self-consumption and modifications for the current energy pricing auctions system. While it is true that further efforts are needed to end the revenue deficit, the new reform will generate uncertainty over Spain´s investment climate.

FUNCAS hopes you find this publication a valuable tool to support your analysis and we look forward to receiving your feedback.”

Spanish Economic and Financial Outlook

March 2014

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Editors’ message
Spain´s recovery gains strength

In this issue of the SEFO, we provide evidence of the on-going recovery of the Spanish economy and financial sector, while examining outstanding challenges to both. The recovery initiated in 2013 has gained strength over the first few months of 2014, with expected further improvement in 2015, in part supported by the effects of the electoral cycle on the pace of fiscal adjustment and tourism. While recent instability in emerging markets threatens to undermine the recovery, growth prospects for Spain should remain intact. The high level of public debt, however, continues to be an important concern for future growth, while high net external debt places upward pressure on borrowing rates. Fiscal pressures also arise from the need to finance the electricity deficit, which the Government is attempting to tackle through its latest version of the energy reform. As regards the financial sector, o ur simulation exercise reveals improvement on profitability and solvency indicators for the Spanish banking system. However, given the need to finalize treatment of issues related to some types of loan exposures and debt holdings, we are cautious to anticipate Spain´s performance on the upcoming EU level review.

This Issue highlights

Spain’s economic recovery is gaining strength, but remains sluggish
Global growth continues to be moderate, with an improvement in developed countries versus a loss of dynamism in the emerging economies. In Spain, the recovery initiated in 2013 has gained strength over the first few months of 2014, with expected further improvement in 2015, in part supported by the effects of the electoral cycle on the pace of fiscal adjustment and tourism.

Spanish banks: Boosting solvency and performance ahead of the comprehensive assessment
European supervision will commence this November with a comprehensive balance sheet assessment of the EU banking sector on the basis of December 2013 accounts. Most Spanish banks have already released their 2013 statements, allowing us to present in this article the results of a simulation exercise, which reveals improvements in the Spanish banking sector´s profitability and solvency ahead of the EU level review.

Public debt sustainability: Spain in the European context
As is the case of other distressed euro area countries, the impact of the crisis has deteriorated Spain´s public debt ratio, as well as its net international investment position. Current debt dynamics are raising concerns among investors over the country´s debt sustainability outlook, given growth and interest rate assumptions for the coming years, together with expected difficulty in reaching the necessary primary surplus. Market tensions have eased in the near term, but continued correction of fiscal and external imbalances will be needed.

The impact of the slowdown in emerging markets on the Spanish economy
Recent instability in some emerging markets threatens to undermine the recovery in major developed economies, in particular in Spain and other euro area countries, as strong external demand remains a key factor for economic growth.

The reform of the Spanish electricity sector
The electricity tariff deficit of 2013 is expected to have reached 4.5 billion euros, below the 5.6 billion euros deficit of 2012, mostly due to energy taxes which entered into force on January 1st, 2013. Including the 2013 result, the accumulated debt stock is projected to rise above 30 billion euros. Recent regulatory measures aim to correct this imbalance through a deep cutback in revenues from renewable energies, but not without generating uncertainty over Spain´s investment climate, as well as the need for renegotiation of outstanding debt tied to renewables projects.

Recent key developments in the area of Spanish financial regulation

Spanish economic forecasts panel: March 2014

Fundación de las Cajas de Ahorros. FUNCAS. Caballero de Gracia, 28.  28013  Madrid, Spain