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Spain Country Risk Report Q1 2016

Spain Country Risk Report Q1 2016

Core Views

Spain's economic growth story will remain relatively strong in 2016.

However, elevated political risk (elections, Catalonia) will dampen consumer and investor confidence in Q415 and Q116, leading to a deceleration in growth in the coming quarters.

Sustained current account surpluses mean Spain's external imbalances will pose fewer threats to financial stability than in years gone by. However, these surpluses will be insufficient in size to materially unwind the country's large net external liability position.

A further leg down in global oil prices means deflation has further to run. This is net positive for Spain's economic recovery, by boosting household real incomes, reducing the energy import bill, and by increasing the chances of ECB QE being extended beyond its original time frame.

The result of the Catalan regional election in September is unlikely to help the secession movement. Full independence remains a distant and unlikely prospect.

Major Forecast Changes

Recovering demand from core eurozone economies and a lower energy import bill (due to collapsed global oil prices) have prompted us to revise our current account forecasts to 1.0% of GDP in 2015 and 0.9% in 2016, from 0.7% and 0.6% previously.


Executive Summary
Core Views
Major Forecast Changes
Key Risks
Chapter 1: Political Outlook
SWOT Analysis
BMI Political Risk Index
Domestic Politics
Election Bodes Poorly For Catalan Secession
The outcome of the September Catalan regional election is unlikely help the secessionist movement. Full independence remains a
distant and unlikely prospect.
TABLE: POLITICAL OVERVIEW
Long-Term Political Outlook
Political Challenges Beyond The Recession
Spain's ongoing economic malaise has put several structural political issues into the spotlight. Challenges over the next decade will
include unemployment, demographic changes and constitutional questions.
Chapter 2: Economic Outlook
SWOT Analysis
BMI Economic Risk Index
Economic Growth Outlook
Economy Health Check: Election Uncertainty Dents Growth Outlook
While Spain will remain a eurozone growth outperformer, real GDP growth will soften over the coming quarters.
TABLE: ECONOMIC DASHBOARD
GDP By Expenditure Outlook
TABLE : PRIVATE CONSUMPTION FORECAST
TABLE: REAL GDP FORECAST
TABLE: GOVERNMENT EXPENDITURE FORECAST
TABLE: FIXED INVESTMENT FORECAST
TABLE: NET EXPORT FORECAST
External Trade And Investment Outlook
Surpluses Mask Underlying Problems
Sustained current account surpluses mean Spain's external imbalances will pose fewer threats to financial stability than in years gone
by. However, these surpluses will be insufficient in size to materially unwind the country's large net external liability position.
Outlook On External Position
TABLE: CURRENT ACCOUNT
TABLE: FINANCIAL ACCCOUNT
Fiscal Policy And Public Debt Outlook
Debt Sustainability Profile To Remain Shaky
As long as government borrowing costs remain low, Spain's large public debt load and wide fiscal deficit are unlikely to threaten
financial stability. However, extremely favourable financing conditions will not last forever, and a significant rise in borrowing costs would
make Spain's debt sustainability profile look increasingly precarious.
Structural Fiscal Position
TABLE: FISCAL POSITION
TABLE: GOVERNMENT DEBT
Monetary Policy
Deflation Net Positive For Economy
A further leg down in global oil prices means deflation has further to run. This is net positive for Spain's economic recovery, by boosting household real incomes, reducing the energy import bill, and by increasing the chances of ECB QE being extended beyond its original timeframe.
TABLE: REVENUE AND EXPENDITURE SOURCES
Eurozone Monetary Policy
More ECB Easing To Weigh On Euro:
Banking Sector Update
Stability Much Improved
The outlook for Spain's banking sector has been much improved by healthy capital accumulation in recent years, meaning the sector is now much less likely to pose systemic risks to financial stability. Weak lending means banks will remain too reliant on reducing operating costs and lower provisions for profits.
Banking Sector Risk Components
TABLE: MARIO DRAGHI QUOTES FROM INTRODUCTORY STATEMENT & PRESS CONFERENCE OF 22 OCTOBER 2015
TABLE: BANKING SECTOR RISK SNAPSHOT
Chapter 3: 10-Year Forecast
The Spanish Economy To 2024
Slow, But Steady Growth Ahead
In order to correct for the massive imbalances built up during Spain's decade-long economic boom, the economy is now coming through a period of rebalancing that will result in a lower long-run growth potential. While an internal devaluation will help restore some of Spain's competitiveness over the long run, the process will prove long and painful. Ultimately, compared with the levels of growth enjoyed since euro adoption, the next 10 years will show only modest economic growth rates.
TABLE: LONG-TERM MACROECONOMIC FORECASTS
Chapter 4: Operational Risk
SWOT Analysis
Operational Risk Index
Operational Risk
TABLE: DEVELOPED STATES - LABOUR MARKET RISK
TABLE: DEVELOPED STATES - LOGISTICS RISK
TABLE: DEVELOPED STATES - CRIME AND SECURITY RISK
TABLE: DEVELOPED STATES - TRADE AND INVESTMENT RISK
Chapter 5: BMI Global Macro Outlook
Global Outlook
Exit The Dragon
TABLE: GLOBAL ASSUMPTIONS
TABLE: DEVELOPED STATES, REAL GDP GROWTH, %
TABLE: BMI VERSUS BLOOMBERG CONSENSUS REAL GDP GROWTH FORECASTS, %
TABLE: EMERGING MARKETS, REAL GDP GROWTH, %

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