Spain Country Risk Report & Analysis | Allianz Trade in Singapore

Pressure on companies, ambitious stimulus facing implementation hurdles

LOW RISK for enterprise

Economic risk
Business environment risk
Political risk
Commercial risk
Financing risk

Economic risk
Business environment risk
Political risk
Commercial risk
Financing risk

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GDP

USD1394,1bn (World ranking 13, World Bank 2019)

Population

47,08mn (World ranking 30, World Bank 2019)

Form of state

Parliamentary monarchy

Head of government

Pedro Sánchez

Next elections

General elections, 2023

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In Spain, four in 10 companies ended 2020 subjected to great financial pressure, as measured by the Bank of Spain, a +27pps increase compared to 2019; despite the new EUR11bn plan to bolster solvency, the risk of high insolvencies this year and in 2022 remains elevated. Renewed targeted sanitary restrictions and a fall in mobility could lead to a renewed GDP contraction in Q1 2021, delaying the recovery. On the other hand, the slow vaccination rollout should allow Spain to only remove gradually restrictions in Q2. We thus expect a stronger recovery in the second half of the year, with real GDP growing +4.8% in 2021 after falling -11% last year, followed by +5.7% in 2022.

The EU to the rescue and a green stimulus

Spain should benefit from the EU-wide relief programs i.e. ultra-accommodative ECB monetary policy and Next Generation EU program. First, Spain’s financing conditions will remain accommodative (low borrowing costs) at least until mid-2021 (horizon of the exceptional PEPP ECB bond-buying program) and most probably until end-2022 (when the ECB will stop reinvesting the proceeds of bonds it bought). This will prove crucial as the debt-to-GDP ratio spikes to close to 12°% of GDP. Second, Spain will receive 15% of the EUR500bn total of grants to be allocated by the Next Generation EU program, which represents 6% of its GDP or around EUR75bn. Spain will also be able to take advantage of a share of the EUR250bn loans of the program.

Policymaking during the recovery could be tilted towards households and a green stimulus as the two center-left and left-wing governing parties have initiated a rebalancing of the economy to benefit consumers more after years of reductions in corporate taxation and labor market reform following the Eurozone crisis. Striking the balance between helping companies and catering to the needs of the electorate will be delicate. In the medium-term, Spain's pre Covid-19 commitment to shift towards green growth with an ambitious stimulus plan could help the country get back on its feet and create new opportunities. The government’s stimulus should focus on public investment, which could lead to a higher fiscal multiplier. In 2021, the government is looking at EUR25bn measures mostly in public infrastructure investment (green and innovation).

Job market woes, political fragmentation and stimulus implementation risk

We expect the unemployment rate to peak at 16.5% this year, before gradually decreasing but remaining at an elevated level (15.2% in 2022). The duality of the job market and the 2012 labor market flexibilization reform mean that if the tourism sector does not recover, temporary jobs won’t recover either, and that the labor market tends to be procyclical (more layoffs during a crisis). But these forecasts will very much depend on the orientation of public policy. It is likely that the government will prolong furlough schemes for key sectors relating to tourism and hospitality until the end of 2021; these workers represent around a third of employees receiving such benefits.

As political fragmentation has yielded tensions during the crisis, it could hamper the post-crisis momentum for reforms. The current center-left/left-wing government is the first coalition government of Spain’s recent history amid a highly fragmented political landscape. It is likely that the government will have to make concessions to regionalist parties, and that policymaking will be frustrated by the continuing disagreements between the two governing parties (PSOE socialist party and left-wing Podemos).

Lastly, previous take up of EU funds is low (34%) in Spain and public sector effectiveness also relatively low (lower than France, Portugal but higher than Italy). This means Spain risks missing out on the full potential of the EU-led recovery as it could be unable to agree on spending allocation fast enough. - April 2021.

Trade structure by destination/origin

(% of total)

Exports	Rank	Imports

Trade structure by product

(% of total)

Exports	Rank	Imports

Payment terms and late payment interest are regulated in accordance with applicable EU rules; however the standards put in place are among the most lenient in Europe. As a result, DSO remains excessive at around 69 days.

Low
Medium
Sensitive
High

Payments
Court proceedings
Insolvency proceedings

Payments
Court proceedings
Insolvency proceedings

The court process is a major complication when it comes to collecting debt and it is advisable to first conduct negotiation with the support of collection specialists. When court is needed, Alternative Dispute Resolution methods and foreign courts (EU judgments will be fairly enforceable in Portugal) may be worth considering in order to avoid inefficient domestic courts.

Despite reforms conducted in 2012 to increase company rescue possibilities, insolvency proceedings often lead to the liquidation of the company and it is rare for unsecured debtors to recover their debt.