Spain Country Risk Report Q4 2018
Spain's new government led by the Spanish Socialists Workers' Party (PSOE) leader Pedro Sánchez is unlikely to last full term. With a minority in parliament, the new administration will suffer from the continuous pressure of regional, separatist and anti-establishment groups. That said, early elections will likely result in another weak government.
Our core view remains that Madrid and Catalonia will eventually come to the table to negotiate, and certain concessions and constitutional amendments will be agreed on in an attempt to appease separatists, namely greater fiscal autonomy. This will take time, however, and uncertainty is likely to persist as the negotia-tions take place, as well as ongoing civil unrest in light of remaining support for independence.
The Spanish economy will gradually lose steam over the coming years, largely as the economy begins to hit the limits of supply. Further headwinds will also build, including weak productivity gains, tighter monetary policy and weaker external demand.
Fiscal consolidation will slow over the coming years in Spain, as the PSOE minority government is forced into a number of fiscal concessions in order to pass legislation.
Spain's current account surplus will gradually narrow over the coming years, as external demand softens and imports remain robust. While we see few near-term external financing risks, direct investment inflows are likely to continue suffering as political uncertainty remains elevated.
Monetary policy will remain loose in the eurozone in 2018 and 2019, as core inflationary pressures fail to pick up substantially and economic data releases in-creasingly point towards a growth slowdown. While interest rates are unlikely to be hiked until the final quarter of 2019 at the earliest, there is a growing chance that the European Central Bank (ECB)'s asset purchase programme (QE) is extended beyond its notional September deadline.
Given that Spain's public debt will remain sizeable in the years ahead, we believe that the eventual normalisation of ECB monetary policy represents a significant medium-term risk for Spain.
Following the formation of a PSOE-led minority government, increasing political gridlock in the national parliament is likely to negatively impact legislation and political stability.
Enduring deep divisions surrounding Catalonia imply that a severe escalation of tensions at some point down the line cannot be precluded.
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