ARCANO. The Case for Spain III: Further Beyond. Ignacio de la Torre, Ph. D.

Transcription

1 The Case for Spain III: Further Beyond Ignacio de la Torre, Ph. D. The full report can be downloaded at

2 The Pillars of Hercules and the Non Plus Ultra Classic History suggested that sailors could not go further beyond the PillarsofHercules(NonPlusUltra)astheyweretheendoftheknown world. In 1492, the Kingdom of Spain discovered a new continent, and since 1519, King Charles I included the motto Plus Ultra and the Pillars of Herculesinhiscoatofarms.Sincethen,itispartofthecoatofarmsof Spain. In 2012, many people stated that Spain would not be capable of recovering from the economic crisis, emulating the Non Plus Ultra. In2014,Spainwasalreadyleaderinjobcreationandgrowthamongthe big economies of the Eurozone. In 2015, Spain will grow twice as much as the Eurozone, and it can return to proudly affirm, Plus Ultra. 2

3 Plus Ultra Spanishcoat of arms, Plus Ultra and thepillars of Hercules 3

4 The Case for Spain: predictions against consensus November 2012: ThebestmomenttoinvestinSpainisnow. Spain is solvent but illiquid, the default risk is minimum. The contagion effect between sovereign, financial institutions and the real estate industry is over, pushing down the risk premium. Spain will have a current account surplus in The export revolution is structural, not temporary. October 2013: Financing of the private sector will increase imminently. Domestic demand will soon contribute to GDP growth. Domestic demand has an important upside potential in the medium term. January 2014: Spain will grow more than the Eurozone in

5 And what happened Since The Case for Spain I: The IBEX and Spanish bonds are growing intensively. Spain did not go bankrupt. Spanish risk premium shrank massively. Spain generated a 1.5% current account surplus in Spain has achieved a 35% GDP of goods and services exports for the first time in its history. Since The Case for Spain II: New credit flow to households and SMEs gave positive figures in December Consumption gave positive figures in the first quarter of Consumption and investment will lead the economic growth in SpainwillgrowtwiceasmuchastheEurozonein

6 Predictions of The Case for Spain III: Acceleration of the economy, employment, real estate market and financing 6

7 Index Real estate market acceleration Financing acceleration Economy and employment acceleration Ten risks of the Spanish economy Tenth risk and conclusion

8 Real estate market acceleration Financing acceleration Economy and employment acceleration Ten risks of the Spanish economy Tenth risk and conclusion I only believe in statistics that I doctored myself Attributed to Winston Churchill

9 The real estate market recovers 1. Adjustment in the sector has been excessive. 2. The stock of empty houses has recovered in many relevant locations 3. Financing is growing quickly 4. Increasing construction activity and house prices 9

10 Adjustment has been excessive 10

11 The sector is currently one third below its historical average Investments in construction (% of GDP) Mean : 7.3% Source: Spanish National Institute of Statistics (INE) 11

12 Impact on auxiliary industries Cement consumption in Spain (mm. of tons) Source: INE 12

13 House prices have decreased 40% House prices evolution in Spain National Total % Variation YoY 10% 8% 6% 4% 2% 0% -2% -4% -6% -8% -10% Source: Ministry of Development 13

14 Offering more affordable opportunities than many developed economies House price / Income (% of undervaluation or overvaluation vs. historical average) Source: OECD 14

15 35,000 new housing starts nowadays, just 6% of 2007 and 14% of historical average New housing starts (certified by the College of Technical Architects) 600, , , , , ,000 Histortical Average ,000 0 Source: Ministry of Development and Arcano 15

16 So there are only two new houses for every 10 that are sold New housing construction / New houses sold 2x 1,8x 1,6x 1,4x 1,2x 1x 0,8x 0,6x 0,4x 0,2x 0x Source: INE 16

17 Financing to the real estate sector improves 17

18 Liquidity injected by central banks affects asset prices (including real estate) 60% 50% 40% 30% 20% 10% 0% Central banks assets (% of GDP) Eurosystem (ECB) USA (Fed) Japan (BoJ) United Kingdom (BoE) Source: Bloomberg, ECB, Bank of England 18

19 The economic recovery and improvements in liquidity and solvency of banks have pushed mortgage loans up 40% 30% 20% 10% 0% -10% -20% -30% -40% -50% New mortgage loans (YoY change) Source: INE 19

20 Foreign investors inject liquidity into the Spanish real estate market Main real estate transactions ( ) Year Buyer Seller Amount Description 2014 Merlin Properties Invest Cos, controlled by Manuel Jove 260mn Mall, hotel and offices (La Coruña) 2014 Zurich Generalitat Catalunya 201mn Building lot (Barcelona) 2014 Tiaa Henderson Lar Group/ Grosvenor / Ivanhoe C. 210mn Islazul Mall (Madrid) 2014 Northwood Avestus 150mn Diagonal Mar Mall (Barcelona) 2014 Oaktree CBRE Global Investors 115mn Gran Via Mall (Vigo) 2013 IPIC Bankia 450mn Foster Tower (Madrid) 2013 Fibra uno Moor Park 300mn Sabadell Bank Branches 2013 Emin Capital Aguas de Barcelona 250mn Agbar Tower (Barcelona) 2013 Goldman Sachs Ayuntamiento de Madrid 201mn Housings 2013 The Art of Real Estate Consorcio 200mn Vela Hotel (Barcelona) Source: Arcano 20

21 Real Estate Investment Trusts (SOCIMIs) have provided significant liquidity to invest LAR Real Estate Spain Hispania Merlin Properties Axial Real Estate Investment Manager (IM) Extern: Grupo LAR Extern: Azora Intern Intern Raised funds ( mm) , Agreement to purchase 880 office Start trading assets None None premises and 5 buildings from BBVA None in Spain Investment Policy Investment style Active management, Active management, Active management and Active management and value-added and property value-added and property value-added value-added development development Assets Direct and indirect investment Direct and indirect investment Direct and indirect investment Direct and indirect investment in real in real estate and real estate in real estate and real estate in real estate assets and debt estate debt as collateral debt as collateral Type More than 80 % offices and Mainly residential, offices, hotels Offices, 70 %; logistics, 10%; retail; remaining 20 % for Offices, retail, logistics and hotel and student residences 10% retail residential Geography Spain, especially Madrid and Barcelona Spain, especially Madrid and Barcelona Spain and to a lesser extent Portugal (maximum 25%) Spain, especially Madrid and Barcelona Leverage Up to 50% Up to 40% Up to 50% Unlimited Source: Arcano 21

22 The stock of empty houses is disappearing 22

23 There is still stock of empty houses, but it is decreasing Construction and transactions of new houses (LHS) and stock of empty houses (RHS) 600, , , , , , New housing construction New housing transactions 700, , , , , , , Housing Stock Source: INE Source: Ministry of Development 23

24 and it is asymmetrically distributed, pushing prices up in areas with less stock Stock of empty houses/ Total housing stock (2013) Mean: 2.81 Spanish Historical Average: 1.91 Source: Ministry of Development and Arcano 24

25 Construction and prices are reactivating 25

26 House prices will not go back to historical averages due to monetary policies Is the past a reflection of the future? Housing price / Gross household income Source: Bank of Spain and Arcano The past is not a reflectionof the future, for3 reasons: 1) ECB balancesize 2)Interest rates 3) % of foreign purchases in Spain 26

27 Liquidity injected by central banks slowly moves to the real estate market YoY increase in house prices Source: OECD 27

28 House purchases are increasing House transactions in Spain (per quarter) thousands Quarter average: 75,142 Quarter average: 86,427 1Q13 2Q13 3Q13 4Q13 1Q14 2Q14 Source: Ministry of Development 28

29 Prices start to increase House price index (%) General Index New Housing Second Hand Housing Source: INE 29

30 Builders confidence improves (ISCOF) ISCOF 20% 15% 10% 5% 0% -5% -10% -15% -20% Source: Ministry of Economy 30

31 Housing development recovers Housing starts (units) 5,000 4,500 4,000 3,500 3,000 2,500 2,000 1,500 1, Source: Ministry of Development 31

32 Conclusion:recovery is arriving to the real estate market 1. Financing has arrived much sooner than expected to the industry. 2. Prices have reached rock-bottom throughout the country, and they will rise more than expected in Madrid, Catalonia and the Basque Country. 3. The reason for this is the high demand from foreigners (a third of the total) and households, which have lightened their balance sheets and thus been able to obtain mortgages. 4. The development of new houses in areas with low stock is reactivating: building 200,000 new houses (close to historical average) will imply 500,000 new jobs. 5. The impact of such an acceleration in the economy will be very relevant: auxiliary industries will reactivate, tax collection will increase (reducing the deficit), and delinquency will fall, thus improving bank solvency, increasing the granting of loans. These factors will accelerate economic growth. 32

33 Real estate market acceleration Financing acceleration Economy and employment acceleration Ten risks of the Spanish economy Tenth risk and conclusion To arrive in the first place, you first have to arrive Warren Buffett

34 Consensus is wrong about Spain Spain s growth estimates IMF EU 0.2% October 2013 Estimation 0.6% January 2014 Estimation OECD 0.9% April 2014 Estimation 1.2% July 2014 Estimation 1.0% 0.5% November 2013 Estimation 0.8% 1.0% February 2013 Estimation FUNCAS 1.2% 1.1% May 2013 Estimation 1.3% 0.4% 0.5% May 2013 Estimation November 2013 Estimation May 2014 Estimation November 2013 Estimation March 2014 Estimation September 2014 Estimation Source: IMF, EU, OECD and FUNCAS 34

35 Partly for not predicting the financing recovery Money quantitative theory- Irving Fisher M = Amount of money in circulation V = Velocity of circulation of money,number of times it changes hands P = Price level (inflation) Q = Level of output (GDP) 35

36 Financing is accelerating Therelevantfigureforgrowthisthegrossnewcreditflow Banks are already lending to SMEs and households. Big companies are saving cash and constantly issuing new bonds. Non bank finance is accelerating,it has doubled in two years and will tripleinthenextfiveyears. SMEs will be the big surprise of future financing. 36

37 Relevance of the new credit flow 37

38 What is relevant for the economy and employment is that new credit flow grows New credit flow Total Companies Homes Less than More than amounts Total Millions 1 million 1 million Total Housing Consumption Remaining Monthly Jan-14 32,809 28,419 10,577 17,842 4,390 2,016 1,146 1,228 Feb-14 30,210 25,655 10,694 14,961 4,555 2,021 1,244 1,290 Mar-14 35,834 30,562 11,795 18,767 5,272 2,433 1,315 1,524 Apr-14 33,218 28,407 12,137 16,270 4,811 2,115 1,301 1,395 May-14 31,355 26,478 11,924 14,554 4,877 2,184 1,350 1,343 Jun-14 43,882 38,375 12,462 25,913 5,507 2,519 1,478 1,510 Jul-14 36,387 30,798 13,990 16,808 5,589 2,489 1,528 1,572 Aug-14 23,537 20,341 9,051 11,290 3,196 1, yoy Variation Jan % -9.7% 5.0% -16.9% 18.4% 27.2% 23.6% 2.2% Feb % -19.3% 6.0% -31.0% 17.5% 25.8% 32.5% -3.1% Mar % -9.4% 5.1% -16.7% 22.8% 40.9% 26.3% 0.0% Apr % -11.1% 2.8% -19.3% 4.5% 3.6% 11.7% -0.3% May % -13.2% 4.9% -24.0% 3.8% 4.1% 11.5% -3.4% Jun % -1.6% 10.0% -6.3% 14.8% 26.0% 14.8% 0.1% Jul % -9.0% 12.4% -21.5% 12.1% 17.6% 16.1% 1.2% Aug % -3.4% 5.5% -9.5% 0.2% -3.4% -6.1% 13.6% Source: Bank of Spain 38

39 New credit flow is accelerating 39

40 Spanish banks have balanced their loans and deposits. They are now ready to lend Balance sheet of the Spanish financial system (in thousand Euros) 2,000,000 1,800,000 1,600,000 1,400,000 1,200,000 1,000, , , , ,000 0 July-07 July-08 July-09 July-10 July-11 July-12 July-13 July % 160% 140% 120% 100% 80% 60% 40% 20% 0% Loans to private sector (LHS) Total deposits (LHS) Loans to private sector / total deposits (RHS) Source: Bank of Spain 40

41 Spanish financial institutions are solvent, as the stress tests of October showed, which facilitates credit Solvency of the Spanish financial system (billion Euros) % 25% Jul-08 Jul-14 Loans to private sector Capital + Provisions Source: Bank of Spain 41

42 Liquidity and solvency push credit to the private sector Loans to households (YoY growth) 40% 30% 20% 10% 0% -10% -20% -30% -40% -50% Source: Bank of Spain 42

43 Non bank finance is accelerating 43

44 Europe has a long way to go in non bank finance US vs. Eurozone US Eurozone 2013 GDP (I) $16.8 tr. $17.4 tr GDP Growth forecast (2) 2.1% 0.7% Size of the banking system (3,4) $13 tr. $59 tr. Size of the banking system (GDP%) 77% 340% Size of capital markets for corporate bonds (5,6) $6 tr. $2 tr. Securitization market size (7) $9 tr. $2 tr. Size of capital markets (GDP%) 89% 23% Source: World bank,(2) OECD,(3) US Federal Reserve March 2013,(4) Data from the Participatory Eurozone banks March 2013,(5) the US Federal Reserve December 2012,(6) the European Central Bank. February 2013 and(7) Securities Industry and Financial Markets Association 44

45 and specially Spain Capital markets financing Source: "Financial Globalization: Retreat or Reset?" McKinsey Global Institute. March 2013, p

46 Spain has gone from having 50 financial institutions to just 15 Spanish financial system Banco Santander: - Banco Santander -Banesto Abanca: - Caixa Galicia -Caixanova Banco Popular: -BancoPopular - Banco Pastor Liberbank: -Cajastur -CCM - Caja Extremadura -Caja Cantabria BFA - Bankia: - Caja Madrid -Bancaja - Caja Insular -Canarias - Caixa Laietana -Caja Ávila - Caja Segovia -Caja Rioja Bankinter: -Bankinter BBVA: -BBVA - Caixa Sabadell - Caixa Terrassa - Caixa Manlleu -Unnim - Catalunya Caixa Other medium banks: -Evo Banco -Banca March Kutxa Bank: -BBK -Caja Sur -Caja Vital -Kutxa Unicaja: -Unicaja -Caja Jaén -Caja Duero - Caja España CEISS Banco Sabadell: - Banco Sabadell - B. Guipuzcoano -CAM - Caixa Penedés - Banco Gallego Caixabank: -La Caixa - Caixa Girona - Banco Valencia -Cajasol - Caja Guadalajara - Caja Navarra - Caja Burgos - Caja Canarias -Banca Cívica Ibercaja: -Ibercaja -CAI - Caja Círculo - Caja Badajoz Banco Mare Nostrum: - Caja Murcia - Caja Granada -Caja de las Baleares Caja 3 Source: Arcano 46

47 But Spanish companies have increased bond issuances since 2013 Issues by non-financial companies that had not issued bonds in the past but which have done so in Issuer Coupon Term Currency Source: Bloomberg, Factset (*) Axesor Rating has rated this issue on a positive solvency report. 47 Date of Issue Size ( M) Rating Abengoa SA 6.25% 6 years EUR 17-ene n.a. Ferrovial 3.38% 5 years EUR 30-ene BBB- Ence SA 7.25% 7 years EUR 1-feb BB- Abengoa SA 8.88% 5 years EUR 5-feb B+ ONO 8.5% 7 years EUR 7-feb B+ Prosegur SA 2.75% 5 years EUR 2-abr BBB Gestamp 5.87% 7 years EUR 3-may BB Gestamp 5.62% 7 years EUR 3-may BB Grupo Avanza 7.50% 5 years EUR 31-may B+ Grupo Avanza 9.50% 6 years EUR 31-may B- NH Hoteles 6.87% 6 years EUR 8-nov B Empark 6.75% 6 years EUR 18-dic BB- Port Aventura 7.25% 7 years EUR 19-dic B- Port Aventura Eurb+562 bps 6 years EUR 19-dic B- Copasa 7.50% 5 years EUR 19-dic BB Grifols 5.25% 8 years USD 05-mar-14 1,000 B+ Grupo Antolín 4.75% 5 years EUR 11-mar Ba3 Almirall 4.62% 7 years EUR 11-mar BB- Isolux 6.62% 7 years EUR 13-mar B Enagás 2.50% 8 years EUR 27-mar A- Aldesa 7.25% 7 years EUR 27-mar B Tecnocom 6.50% 5 years EUR 31-mar BB+ Redexis Gas 2.75% 7 years EUR 01-abr BBB- Elecnor (Pagarés) 2.50% 1 year EUR 01-abr n.a. * Tubacex (Pagarés) 2.50% 1 year EUR 25-may n.a. * Europac (Pagarés) 2.15% 1 year EUR 17-jun n.a. * Grupo Ortiz 7.00% 5 years EUR 17-jun BB+ DIA 1.50% 5 years EUR 22-jul BBB- EYSA 6.90% 7 years EUR 17-jul BB+ Acerinox 5.00% 5 years EUR 25-jul n.a. * Audax Energía 5.75% 5 years EUR 29-jul BB+

48 Non bank finance is not only growing: it will accelerate Non-bank financing Source: Arcano Stock of non-bank financing (Billion Euros) % 20% 15% 10% 5% 0% Volume of non-bank financing (% of GDP) 11.4% 22.4% % 30% 25% 20% 15% 10% 5% 0% Market share of non-bank financing 31.2% 17.2%

49 Financing to SMEs is finally increasing 49

50 SMEs are key to the economy and employment % of employment generated by SMEs * 100% 80% 60% 40% 20% 0% UK Germany France EU Spain Italy Source: European Commission"SBA Fact Sheet 2013" (*) SMEs: enterprises with a revenue less than 50M 50

51 Bank concentration has coincided with a massive credit crunch for SMEs Market share of loans to SMEs (2013) 32% 2% 3% 5% 5% 8% 13% 8% 13% 11% Popular Santander Caixabank BBVA Sabadell Bankinter Bankia BMN Liberbank Remaining Source: Finae Partners

52 SMEs have reacted cleaning up their balance sheets SMEs net debt / EBITDA Source: Finae Partners and Bank of Spain 52

53 Banks progressively lend money to SMEs New credits (up to 1 M) to non-financial enterprises 20% 10% 0% -10% -20% -30% -40% Source: Bank of Spain 53

54 Non bank financing to SMEs is increasing 1. Securitizations 2. Covered bonds 3. Project bonds 4. MARF (Fixed Income Alternative Market) 5. Debt funds 6. Equity financing 54

55 Financing conclusions 1. To predict the future it is essential to predict financing; new credit flow iskeytoestimategdpgrowth. 2. Banks are solvent and liquid; they are lending and these loans will grow. 3. Non bank finance is intensively growing. 4. Credit conditions for SMEs will ease in the following quarters. 5. As a consequence, economic activity will accelerate. 55

56 Real estate market acceleration Financing acceleration Economy and employment acceleration Ten risks of the Spanish economy Tenth risk and conclusion The day is not far off when the economic problem will take the back seat whereitbelongs,andthearenaoftheheartandtheheadwillbeoccupiedor reoccupied, by our real problems the problems of life and of human relations, of creation and behaviour and religion. John Maynard Keynes

57 Financing accelerates the economy 57

58 As financing arrives, the economy grows Spanish GDP evolution 2.0% 1.5% 1.0% 0.5% 0.0% -0.5% -1.0% -1.5% -2.0% -2.5% -1.2% -1.6% -1.7% -2.1% -1.9% -1.6% -0.2% -1.1% 0.5% 1.3% 1.6% QoQ Change YoY Change Source: INE 58

59 Future growth is solid First: Employment and consumption will accelerate 59

60 Spain is the Western economy that can reduce unemployment more via GDP increases (Okun s law) Okun s Coefficient Austria UK Ireland Belgium Italy France USA Holland Portugal Germany Finland Spain Source: National Bureau of Economic Research, Ball, L.M., Leigh D. and Loungani (2013) 60

61 Employment has been decreasing at a pace of 300,000 people per year. In the future, unemployment could be reduced by 450,000 With a growth of 1.3%, Spain will create 320,000 new jobs in With an expected growth of 2014 new jobs could reach 400,000. The construction industry is key to such recovery. Furthermore, around 100,000 active people leave Spain. 7,000 6,000 5,000 4,000 3,000 2,000 1,000 0 Unemployed population level (thousands) Source: INE 61

62 Incipient recovery of employed population Employed population level (millions) Source: INE 62

63 Improvements in the labor market increases consumer confidence Consumer Confidence Index Source: CIS 63

64 Improvements in consumer confidence increases consumption YoY consumption (%) variation 6% 5% 4% 3% 2% 1% 0% -1% -2% -3% -4% -5% Source: INE 64

65 There is further room for consumption normalization 1,800,000 1,600,000 1,400,000 1,200,000 1,000, , , , ,000 0 Vehicle registration Mean : 1,472,323 Source: DGT and Arcano 65

66 Future growth is solid Second: exports, investments and public spending 66

67 Spain has turned into an export leader Services and goods exportations (as a % of GDP) Source: Eurostat 67

68 Thanks to labor competitiveness and productivity Unit Labor Costs (Base 2008) 120% 115% 110% 105% 100% 95% 90% 85% 80% Germany Spain France Italy Source: OECD 68

69 Improvements in financing and domestic demand have reactivated investments Investment in fixed capital vs. new lending to SMEs 10% 5% 0% -5% -10% -15% -20% -25% -30% New lending to SMEs (YoY change) Investments in fixed capital (YoY change) Source: Bank of Spain and INE 69

70 both in construction and capital goods YoY construction and capital goods investment increases 15% 10% 05% 00% -05% -10% -15% Construction Investments Capital goods investments Source: INE 70

71 Yet there is great potential for them to reach normalized levels Total investments (GDP %) 33% 31% 29% 27% 25% 23% 21% 19% 17% 15% Source: Bank of Spain 71

72 Future fiscal adjustment will be less intense Fiscal stability plan (2014) Capacity (+) /Necessity (-) of Central Government. Excl. Financial Sector (punctual) (GDP %) Forecast Central Government Autonomous Communities Local Governments Social Security Administration Government Nominal Adjustments Structural Balance Structural Primary Balance Financial Sector (punctual) Source: Public Treasury 72

73 By 2017, Spain will be the European country that is most austere and with more private activity Public expenditure as GDP % (2013) 70% 60% 57.1% 58.5% 47.1% 48.7% 49.1% 50.6% 50% 44.7% 44.8% 40% 30% 20% 10% 0% Source: Eurostat Public expenditure as GDP % (2013) (GDP%) AAPP Expenses AAPP Incomes Source: Public Treasury 73

74 Conclusion about the economy: Spain grows and will grow the most among the largest economies of the Eurozone 74

75 PMI indicators predict future economic growth: over 50 show acceleration in future growth Composite PMI Germany Spain France Italy Source: Markit 75

76 Spain grows and will grow more than twice as much as the Eurozone GDP growth (QoQ) Spain vs. Eurozone 0.8% 0.4% 0.0% -0.4% -0.8% -1.2% Spanish GDP Growth Eurozone GDP Growth Sourcte: INE, OECD and Arcano 76

77 Spain generates 80% of the reduction of unemployment in the Eurozone Source: Eurostat Unemployment evolution in the Eurozone July 2013 June 2014 Germany Eurozone Spain France Italy Change vs. maximum (thousands) YoY Change (thousands)

78 Real estate market acceleration Financing acceleration Economy and employment acceleration Ten risks of the Spanish economy Tenth risk and conclusion Everybodythinks of changingtheworldbut no onethinks of changing himself Leo Tolstoy

79 The ten risks of Spain 1. Unemployment 2. Demography 3. Fiscal sustainability 4. Indebtedness 5. Institutional crisis 6. Long-term growth 7. Wage recovery 8. Limited inflation 9. Energy Let s analyze in the following slides certain ideas about unemployment, demography and indebtedness. 79

80 Spanish unemployment is unacceptable Employment data (third quarter 2014) Population 45,998,600 Active population 22,931,700 Inactive population 23,066,900 Employed 17,504,000 Employed in the public sector 2,925,600 Employed in the private sector 14,578,400 Unemployed 5,427, Employed and unemployed population (millions) Employed population Unemployed Spanish Unemployed foreigners Sourcee: INE Source: INE 80

81 Little work in Spain Employed population / Working-age population 80% 70% 60% 50% 40% 30% 20% 10% 0% Source: Eurostat, and Bureau of Labor Statistics 81

82 But we have a huge proportion of population willing to work Participation rate 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% Source: Eurostat and Bureau of Labor Statistics 82

83 Demographic questions on economic growth and the sustainability of pensions Population growth until ,000, , , , , , , Births - deaths Migration flow Population (RHS, millions) Source: INE 83

84 Emigration will help reduce unemployment by 100,000 people per year, but it will question future growth Migration flows thousands ,642 12,845-42,675-37, , ,849 Immigration Emigration Migration Balance Source: INE 84

85 It will take several generations to repay public debt 1,200 1, Treasury debt distribution (T.D.) and debt issued by Autonomous Communities (billion Euros) T.D. held by foreign investors T.D. held by local investors T.D. in the hands of domestic banking Debt issued by autonomous communities Source: Public Treasury and IMF 85

86 Household debt reaches recurrent levels, but is sensitive to rising interest rates Composition of household debt (GDP %) 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% Housing credit Consumer credit Other Credits Source: Bank of Spain 86

87 External indebtedness is enormous -1,200-1, Net external indebtedness of the Spanish economy (billion Euros) Direct investments Other investments Portfolio Investments Bank of Spain Source: Bank of Spain 87

88 Current account surplus will not be enough to repay external debt, nominal GDP must grow faster 10% 8% 6% 4% 2% 0% -2% -4% -6% -8% -10% -12% Current account balances (GDP %) Germany Spain France Italy United Kingdom Source: IMF 88

89 Long-term growth depends on having more medium and less small enterprises Distribution of companies by country turnover 100% 80% 60% 40% 20% 0% Distribución de empresas por país según facturación Spain Italy France UK Germany EU < 2M (Micro) 2-10M (Small) 10-50M (Medium) > 50M (Big) Source: European Commission " SBA Fact Sheet 2013" 89

90 Conclusions about the risks 1. Spain still faces enormous risks. It is important to highlight the institutional crisis. 2. However,theserisksarelowerthanthosefacedbythecountryin2008 because:i) Spain now exports capital to the rest of the world,whereas previously we depended on external flow to grow, which increased indebtedness; ii) the financial system is now healthy and with real accounts,and it has started lending again;and iii) Spain is now able to grow without increasing the credit stock, our growth model is not based on debt. 3. These risks can be managed provided that Spain does not incur in the tenth risk. 90

91 Real estate market acceleration Financing acceleration Economy and employment acceleration Ten risks of the Spanish economy Tenth risk and conclusion

92 The Colossus and the tenth risk

93 Tenth risk: complacency The Colossus shows a Spanish landscape devastated by the Spanish War of Independence. Population is running away from the French army. A Colossus emerges, facing north, ready to face the horror and overcome it. The paint also shows a donkey that remains still, doing nothing, complacent. It is in our hands to be remembered by future generations as the donkey or as the Colossus. 93

94 Conclusions 1. Sacrifice and effort of the Spanish population have led them to leave the recession behind and confront the crisis. 2. Real estate activity recovers and house prices will rise. Half a million newjobswillbecreatedinthisindustry. 3. Financing(both bank and non bank) will accelerate, focusing on SMEs. 4. Economic activity and employment will accelerate, this time on solid foundations: Spain is the fastest growing large economy in the Eurozone. SpainwillgrowmorethantwiceasmuchastheEurozone. 5. Spaincangrowmore than 2% in2015.unemploymentwill declineata rate of 450,000 people per year. 6. There are nine major risks to fight,and Spain must therefore not fall into the tenth risk. 94

95 Spain has become the locomotive of the eurozone Bear in mind Sancho, that one man is worth no more than another unless he does more. All these squalls that we have met with are merely a sign that the weather is going to clear and everything will turn out for the best; for it is impossible that either good or evil should be lasting; and from this it follows that, the evil having lasted so long, the good must be near at hand. Cervantes, Don Quijote 95

96 Thanks Ignacio de la Torre

97 About Arcano: the reference firm to invest in Spain Arcano is a leading independent advisory services firm, with presence in Europe and the United States. Three specialized areas: Investment Banking,Asset Management and Multifamily Office Our team is formed by more than 70 qualified professionals that work to offer financial advisory services and tailored solutions for our clients with a unique, independent approach. Arcano offers financing solutions to mid-market companies via bonds, equities and hybrid instruments. The responsible of the Capital Markets team is Constantino Gómez (cgomez@arcanogroup.com). Through its equity & fixed income desk, Arcano has developed in-depth analysis over specific securities with which implement the macro vision about Spain deployed in this report. With regard to ideas related to equities please contact Sergio Ruiz (sruiz@arcanogroup.com). With regard to ideas related to fixed income securities please contact Angel Fernández-Pola (afernandezpola@arcanogroup.com). Arcano s Investment Banking team is leader in the Spanish mid-market segment, especially in M&A with clients like private equity firms, family-owned businesses and listed companies. The responsible of the team is Jorge Vasallo(jvasallo@arcanogroup.com). Arcano has a team specialized in the real estate industry that offers financial advisory to real estate companies, investment funds and family-offices, in M&A and general financial advisory (Borja Oria, boria@arcanogroup.com) as well as capital markets solutions(reits, bonds, equities, coordinated by Gonzalo Roca, groca@arcanogroup.com) Arcano also runs several funds linked to different sectors of the Spanish economy. The responsible of the Asset Management team is José Luis del Río(jldelrio@arcanogroup.com). Furthermore, through the Multifamily Office division, Arcano offers advice to high net-worth individuals. The responsible of this team is Iñigo Susaeta(isusaeta@arcanogroup.com).

98 About the author IgnaciodelaTorrehasbeenapartnerofArcanosince2008. He holds seventeen years of work experience in investment banking and capital markets, working in the research and sales departments of Deutsche Bank and UBS Investment Bank. The Author is an associate professor of Economics and Finance at IE Business School and holds an MBA from INSEAD and PhD in Medieval History from UNED.He has published four books and wontheeverisprizein2009asacoauthor