The Spanish Economic Perspectives: The Spanish Economic Perspectives: Rafael Doménech EUI-NOMICS 2016: DEBATING THE ECONOMIC CONDITIONS IN THE EURO AREA AND BEYOND European University Institute, 29th of April, 2016
Main messages 1. After six years of crisis, Spain is finally recovering due to a favourable combination of external and domestic factors 2. Although it is difficult to estimate their contribution, behind the domestic factors are the effects of structural reforms, in labour and product markets, the financial system or the public sector 3. Both domestic and external factors have improved financial conditions since the end of 2012, interacting together in the recovery 4. The effects of better financial conditions are reinforced by structural reforms to reduce structural unemployment, and increase competitiveness and size of firms, productivity and quality of jobs, human capital and the quality of institutions Page 2
Spain is finally recovering due to a favourable combination of external and domestic factors Spain: GDP growth Source: BBVA Research 1.4 % 2014 3.2 2015 % 2.7 2016 % Page 3
Spain is finally recovering due to a favourable combination of external and domestic factors Spain: Employment (LFS, millions) Source: BBVA Research based on INE 21,0 20,5 Between 2014 and 2016 almost 1.5 million jobs will be created 20,0 19,5 19,0 18,5 18,0 17,5 17,0 16,5 Dec. 2004 Dec. 2016 By 2016, employment could be back to the level at the end of 2004,,, and GDP per capita to the 2008 level 16,0 2003 2005 2007 2009 2011 2013 2015 2017 Page 4
Spain is finally recovering due to a favourable combination of external and domestic factors External factors Domestic factors ECB monetary policy Euro depreciation Banking union Lower oil prices Internal forces of a free market economy Structural reforms More expansionary fiscal policy Page 5
Uncertainty on the effects of shocks and reforms If structural reforms are behind domestic factors, which is the contribution of structural reforms to the economic recovery? Difficult question without a straightforward answer: Short time span after the reforms for a proper evaluation Counterfactual exercises: we have to rely on models that, in many cases, have not been designed for the evaluation of the reforms Many reforms interact simultaneously with financial conditions making difficult to disentangle their effects Academic debate: structural reforms in a ZLB: Eggertsson, Ferrero and Raffo (2014), Krugman (2014), Andrés, Arce and Thomas (2014) Page 6
Better financial conditions for the Spanish economy External factors ECB monetary policy Banking union Portugal, Ireland & Cyprus conclude their programmes Third Greek rescue Domestic factors Restructuring of the financial system Adjustment and deleveraging Structural reforms Page 7
1. Restructuring the financial system Phase 1 of the restructuring 2008 Creation of FAAF and increased coverage of DGF 2009 Creation of FROB. Injection of 10bn into savings banks 2010 Reform of legal framework of savings banks 2011 Minimum capital requirement of 8% (general) or 10% Phase 2 of the restructuring: asset valuation, stress tests and capital increases Feb-May 2012 New regulation: 80bn in provisions and capital buffers June-Sep 2012 Financial assistance program, MOU and capital needs by bank Post-MOU Creation of Sareb and asset valuation in the European banking union and stress tests 2014-5 New legislation promoting capital markets and the ECB as single supervisor Page 8
1. Financial system restructuring Number of branches of Spanish banks Source: BBVA Research based on Bank of Spain Solvency and liquidity of Spanish banks Source: BBVA Research based on Bank of Spain 47000 45000 43000 41000 39000 37000 35000 33000 31000 2000 2001 2002 2003 2004 2005 2006 2007 2008-15: -33% 2008 2009 2010 2011 2012 2013 2014 2015 After the restructuring process of the the Spanish banking system: Best performer in the 2014 AQR exercise and the third in the stress tests Flow of new credit growing since the end of 2013 (SME and households) 170% 160% 150% 140% 130% 120% 110% 100% 90% 80% 158% 5,6% 2008 152% Credit/deposits, private sector 5,9% 2009 149% 150% 5,5% 2010 6,5% 2011 137% 5,7% 2012 7,7% 123% Capital and reserves/total assets (rhs) 2013 7,9% 119% 2014 8,2% 8,2% 114% 113% 2015 Jan-16 8,5% 8,0% 7,5% 7,0% 6,5% 6,0% 5,5% 5,0% Page 9
1. Financial system restructuring: NPLs Non-performing loans rate (%) Source: BBVA Research based on Bank of Spain 40% 35% 30% 25% 20% 15% 10% 5% Const. & RE (le<) Total ConsumpAon Other corp. Housing 0% mar-08 mar-09 mar-10 mar-11 mar-12 mar-13 mar-14 mar-15 16% 14% 12% 10% 8% 6% 4% 2% 0% The NPL rate begun to fall in 2014 for the first time since 2006 (excluding the transfer to Sareb), despite the denominator reduction Economic recovery and active management of non-performing loans will continue to support this trend 204bn accumulated provisions from 2008 to 2015. The cost of risk has fallen from 4% in 2012 to 0.7% in 2015 Page 10
2. The deleveraging process of the private sector Private debt: households and non-financial corporations (% of GDP) Source: BBVA Research based on ECB and the Federal Reserve 220 210 200 Spain UK EMU The deleveraging process of the private sector is well advanced, (as % of GDP) 190 180 170 160 USA... particularly if the debt of the real estate and construction sector is excluded,.. 150 140 130 120 and it is expected to converge close to the EMU average in 2016 110 2000 2003 2006 2009 2012 2015 Page 11
3. Better public finances: liquidity measures Liquidity measures to local and regional governments by central government (% GDP) Source: BBVA Research based on MINHAP 18 16 14 17.4% In 2012 the central government injected 2.5% of GDP to pay local and regional governments arrears to suppliers (effect 0.4-0.95% on GDP) 12 10 8 6.7% From 2012 to 2015 liquidity measures to suppliers amounted 79.1bn (6.7% of GDP) 6 4 2 0 2.5% Suppliers arrears, 2012 Suppliers, 2012-15 All liquidity measures, 2012-15 Total amount of all liquidity measures to regional and local governments from 2012-15: 184bn (17.4% of GDP)* * See CDGAE (2015), http://goo.gl/yem3x6 Page 12
3. Better public finances: a slow but steady fiscal consolidation Main public sector aggregates in per capita terms (euros of 2015) Source: BBVA Research based on MINHAP, Stability Program Update 2015-2018 Expenditures and revenues (euros of 2015) 11000 10000 9000 8000 7000 6000 5000 Total expenditures Primary expenditures Total reveues Budget balance (right) -9.6% +9.3% +55.4% 2000 2003 2006 2009 2012 2015 2018 3000 2000 1000 0-1000 -2000-3000 Budget balance (euros of 2015) A sizeable fiscal adjustment from 11.2% of GDP in 2009 to 5% in 2015: a reduction of 55.4% in per capita terms that has been the result of a reduction in public expenditures (excluding interests) of 9.6%, but still slightly above pre-crisis levels and an increase of 9.3% in public revenues. Other measures: Budget Stability Law, pensions reform, CORA, AIReF, etc. Page 13
Significant fall of interest rates spreads Interest rates on new bank lending to non-financial corporations, up to 1 million (%) Source: BBVA Research based on ECB Determinants of interest rates on new bank lending (to non-financial corporations, less than 1 million ) Source: BBVA Research based on ECB and Bloomberg 5,5 5,0 4,5 4,0 3,5 Spain Italy EMU Germany France France Spain Italy Commercial policy 1.55 -- -- ECB official rate 0.79 1.37 1.26 Spread 12 months (12m-Euribor) 1.19 0.83 -- Spread EMU (10y-Euribor) 0.28 0.41 0.18 Spread sovereign (10y country-10y EMU) -- 0.70 0.69 Firms default rate -- 0.12 0.21 3,0 2,5 2,0 ene-10 ene-11 ene-12 ene-13 ene-14 ene-15 ene-16 The fall of sovereign spreads and credit risk (default rates) has resulted in a significant reduction of interest rates Page 14
Significant recovery of new credit flows Growth of new credit flows to the private sector: loans to households and firms (less than 1 mn) Source: BBVA Research 35% 25% 15% 5% -5% -15% -25% Credit, YoY Credit, trend M&I investment, YoY -35% sept-04 mar-06 sept-07 mar-09 sept-10 mar-12 sept-13 mar-15 +7,2% (feb-16) The recovery of activity and employment has been accompanied by the recovery in the flow of new credit As repayments exceed the flow of new credit, the deleveraging process continues but without harming economic activity (investment) Is the recent deceleration the consequence of political and economic uncertainty? Is it anticipating a deceleration of investment? Page 15
Significant recovery of new credit flows New credit flows to non-financial corporations (% GDP) Source: BBVA Research based on ECB 100% 90% 80% 70% 60% 50% 40% 30% 20% Spain Spain (trend) EMU Italy Germany France As a result of the credit recovery, the flow of credit to non-financial corporations relative to GDP bottomed out in mid-2014 Despite the convergence to the EMU average, the flow of credit to NFC per unit of GDP still doubles that of Germany and France as a result of the high dependence of small firms to banking credit, among other reasons 10% mar-03 sept-05 mar-08 sept-10 mar-13 sept-15 Page 16
A supply shock in Spanish financial markets Shocks in the demand and supply of credit Source: BBVA Research Interest rate 2012 Restructuring, ECB and banking union ΔY Flow of new credit 2015 The fall of interest rates and the increase in the flow of new credit is consistent with the hypothesis that the supply shock has been larger than the demand shock of credit The particular contribution of different factors to the supply shock of credit is difficult to assess Page 17
Effects of better financial conditions on unemployment Spain: historical decomposition of unemployment rate changes (%) Source: Doménech, García and Ulloa (2016) 6 4 2 0 Trend Labour supply Productivity Aggregate demand Prices Wages U rate Changes in financial conditions may partially explain price shocks, which first increased and later reduced the unemployment rate Firms more dependent on credit increased mark ups during the liquidity crisis (Gilchrist et al, 2013, and Montero & Urtasun, 2014), -2-4 +0.5% Effect on Spanish GDP 2008 2009 2010 2011 2012 2013 2014 2015 to substitute external by internal financial resources. This shock has been partially reversed whith better financial conditions Page 18
Effects of better financial conditions on GDP Spain: forecast impact on GDP of a 100bp fall in banking credit spread (pp) Source: BBVA Research. Box 3, Spain Economic Outlook 4Q14 1.0 0.8 Interest rates on small and medium size firms have dropped by 200 bp during the last two years, 0.6 0.4 with a likely contribution of 1 pp to GDP growth in 2015 0.2 0.0-0.2-0.4 +0.5% Effect on Spanish GDP 2014 2015 2016 2017 2018 2019 It is difficult to estimate to what extent this effect is the result of external or domestic factors, such as structural reforms Page 19
Effects of better financial conditions on GDP Spain: GDP growth (cyclical component) Source: Preliminary results by Boscá et al (2016) 8% 6% 4% 2% 0% -2% -4% -6% -8% Financial Fiscal Trade Other Growth -10% 2003Q1 2006Q1 2009Q1 2012Q1 2015Q1 + Financial + Trade + Fiscal - Financial - Trade + Fiscal - Financial - Fiscal + Trade + Financial + TFP + reforms Fiscal neutral Page 20
Main messages 1. After six years of crisis, Spain is finally recovering due to a favourable combination of external and domestic factors 2. Although it is difficult to estimate their contribution, behind the domestic factors are the effects of structural reforms, in labour and product markets, the financial system or the public sector 3. Both domestic and external factors have improved financial conditions since the end of 2012, interacting together in the recovery 4. The effects of better financial conditions are reinforced by structural reforms to reduce structural unemployment, and increase competitiveness and size of firms, productivity and quality of jobs, human capital and the quality of institutions Page 21
The Spanish Economic Perspectives: The Spanish Economic Perspectives: Rafael Doménech EUI-NOMICS 2016: DEBATING THE ECONOMIC CONDITIONS IN THE EURO AREA AND BEYOND European University Institute, 29th of April, 2016
Economic policy uncertainty Economic Policy Uncertainty (EPU) Index: Spain s idiosyncratic component 2.0 1.5 Iraq war 1.0 0.5 0.0-0.5-1.0-1.5 Mar-01 Mar-02 Mar-03 Mar-04 Mar-05 Mar-06 Mar-07 Mar-08 Mar-09 Mar-10 Mar-11 Mar-12 Mar-13 Mar-14 Mar-15 Mar-16 General Elections Source: BBVA Research based on EPU of Baker et al. (2015) 23
Economic policy uncertainty GDP reaction to the economic policy uncertainty shock observed in 1Q 2016 (Deviation from base scenario growth rates) 0.00-0.05-0.10-0.15-0.11 The increase in uncertainty seen in January could cut growth by between 0.2 and 0.4 percentage points in the next two years -0.20-0.25-0.30-0.35-0.40-0.45-0.17-0.24-0.26-0.42 2016 2017 2018 2019 2020 If uncertainty remains at these levels over the next six months, the impact on GDP could reach 0.5 percentage points in 2016 and 1.3 percentage points in 2017 Source: BBVA Research. Shock equivalent to that seen in January 2016 Table 1 of Review Spain Economic Outlook First Quarter of 2016 24