July 29, 2016 / 8:06 PM / a year ago

Fitch Affirms Spain at 'BBB+'; Outlook Stable

(The following statement was released by the rating agency) LONDON, July 29 (Fitch) Fitch Ratings has affirmed Spain's Long-Term Foreign and Local Currency Issuer Default Ratings (IDRs) at 'BBB+' with a Stable Outlook. The issue ratings on Spain's senior unsecured Foreign and Local Currency bonds have also been affirmed at 'BBB+'. The Country Ceiling has been affirmed at 'AA+' and the Short-Term Foreign and Local Currency IDRs at 'F2'. The issue ratings on Spain's Short-Term Foreign Currency commercial paper have also been affirmed at 'F2'. KEY RATING DRIVERS The IDRs and Outlook balance Spain's high value-added economy, strong economic recovery, ongoing financial sector repair and improved current account position with still high unemployment and debt ratios, fiscal slippage and political uncertainty. Spain has continued to underperform against its fiscal targets. The 2015 general government deficit was confirmed in April at a higher than expected 5.1% of GDP, down from 5.9% in 2014 but well above the 4.2% target. Revenues as a share of GDP fell to 38.2% in 2015, from 38.6% in 2014, largely due to income and corporate tax cuts. The main slippage was on the expenditure side, and regional government and social security budgets, and measures have been announced to address weak enforcement of fiscal powers over regions. In structural terms, the fiscal deficit is estimated to have increased by close to 1% of GDP in 2015, reversing a previous reduction. Government debt fell marginally to 99.2% of GDP in 2015, from 99.3% the year before, due to negative stock-flow adjustments totalling 1.5% of GDP. The fiscal deficit targets in Spain's 2016 stability programme were loosened by 0.8pp to 3.6% of GDP for 2016 and by 1.5pp to 2.9% for 2017. Fitch forecasts higher deficits of 4.3% of GDP in 2016, and 3.5% in 2017, with no structural deficit improvement. In response to missed targets, the European Council has initiated sanction proceedings against Spain. However, the European Commission has supported waiving a fine and an easing of deficit reduction to 3.1% of GDP in 2017, with a further extension of the timetable for exiting the Excessive Deficit Procedure to 2018. Fitch forecasts general government debt will increase to just above 100% of GDP in 2016 and fall only gradually over the medium term, reaching 95% in 2024. This leaves debt at an elevated level, and compares with a 'BBB' median of 40% of GDP. The June re-run of the national election again failed to deliver a decisive outcome, but there is little popular appetite for a third vote, which should prevent a further extension of the political hiatus. Relative to December's outcome, the result has somewhat lowered the risk that the new government will be reliant on more radical political elements, resulting in a reversal of earlier structural reforms or further fiscal loosening. The more established parties performed better than expected, with the Popular Party (PP) gaining 14 seats and the Socialist Party maintaining its position as the largest party of the left. While the potential coalition options continue to be problematic, the PP is better placed than before to form a government and to some extent to push back on policy concessions to other parties in its priority areas, such as protecting labour market reforms. Fitch does not expect substantial new structural reform such as that delivered in the first half of the last parliament, and there remains a risk that the next administration is unable to sustain sufficient support to effectively govern, which could lead to an early election. Tensions between the central and Catalan regional government have abated somewhat. Fitch views this as partly due to less cohesion in the Catalan government, for example on the degree of prioritisation of social versus constitutional reform, and to the interim nature of the central government. The formal position of the Catalonia regional government remains to press ahead with plans to establish new independent institutions. Full independence for Catalonia is not possible under the Spanish constitution and our base-case assumption is that there will be a settlement between Madrid and Barcelona on regional reform and more autonomy for Catalonia within Spain, but we continue to view this as a challenging process. Spain's strong domestic demand-led recovery continues, with 1H16 GDP growth broadly matching last year's 3.2%. Private consumption has so far proved resilient to domestic and external uncertainties and Fitch forecasts this will drive GDP growth of 2.9% in 2016. Domestic demand is supported by the low oil price, improving credit conditions, and a fall in unemployment to 19.8% in May from 22.5% a year earlier. Fitch views the impact of Brexit on Spain as similar to the eurozone average, reducing 2017 GDP growth by around 0.2pps. We maintain our view that Spain's cyclical recovery will slow, with GDP growth of 2.0% in 2017 and 1.9% in 2018, converging to a medium-term potential of 1.5% as economic slack is steadily absorbed. Earlier structural reforms and ongoing balance sheet repair contribute to this higher than eurozone average growth path. There has been an improvement in Spanish banks' fundamentals this year, particularly their asset quality and in most cases, capital. The key challenge for the sector is bringing down further the level of problem assets, which together with low interest rates and business volumes, is weighing on profitability. In terms of the external sector, the current account surplus increased to 1.4% of GDP in 2015, from 0.9% in 2014 due to the low oil price and a fall in income payments. Spanish export volumes have picked up since the middle of 2015, and Fitch forecasts only a slight narrowing of the current account surplus to 1.3% of GDP in 2017. Despite a current account adjustment of 11% of GDP since 2008, net external debt remains very high, at above 90% of GDP and compares with the 'BBB' median of 6% of GDP. SOVEREIGN RATING MODEL (SRM) and QUALITATIVE OVERLAY (QO) Fitch's proprietary SRM assigns Spain a score equivalent to a rating of 'AA-' on the Long-Term FC IDR scale. In accordance with its rating criteria, Fitch's sovereign rating committee decided to adjust the rating indicated by the SRM by more than the usual maximum range of +/-3 notches because in our view the country is recovering from a crisis. Consequently, the overall adjustment of four notches reflects the following adjustments:- - Public Finances: -1 notch, to reflect general government debt at close to 100% of GDP; the SRM does not capture "non-linear" vulnerabilities at such a high level of public debt. - External Finances: -2 notches, to reflect: a) Spain's very high net external debt, which is not captured in the SRM; and b) the 2-notch SRM enhancement for "reserve currency status" has been adjusted to 1-notch given Spain's financial crisis experience. - Structural Features: -1 notch, to reflect downside political risks of a disorderly resolution of the Catalan government's call for independence. Fitch's SRM is the agency's proprietary multiple regression rating model that employs 18 variables based on three year centred averages, including one year of forecasts, to produce a score equivalent to a LT FC IDR. Fitch's QO is a forward-looking qualitative framework designed to allow for adjustment to the SRM output to assign the final rating, reflecting factors within our criteria that are not fully quantifiable and/or not fully reflected in the SRM. RATING SENSITIVITIES The following factors may, individually or collectively, result in positive rating action: - Further progress in reducing the budget deficit at the general government level, leading to a downward trend in public debt to GDP. - Lower risk of unstable government or of disorderly resolution of tensions between the central and Catalan regional governments. - Improvement in Spain's external balance sheet. - Increased confidence of stronger long-run growth potential without creating macroeconomic imbalances, particularly if supported by structural reforms. The following factors may, individually or collectively, result in negative rating action: - Further loosening of Spain's fiscal policy stance, resulting in an increase in general government debt to GDP. - A protracted period of political uncertainty, unstable government, weaker commitment to reform, or heightened tensions between Catalonia regional and central government. - Emergence of a current account deficit, further weakening the net external position. KEY ASSUMPTIONS - Fitch's long-term debt sustainability analysis assumes trend real growth of 1.5%, and a primary surplus that averages 0.1% of GDP from 2016-2025. - Political uncertainty will not derail the economic recovery, and Catalonia remains part of Spain. Contact: Primary Analyst Douglas Winslow Director +44 20 3530 1721 Fitch Rating Limited 30 North Colonnade London E14 5GN Secondary Analyst Federico Barriga Salazar Director +44 20 3530 1242 Committee Chairperson Tony Stringer Managing Director +44 20 3530 1219 Media Relations: Peter Fitzpatrick, London, Tel: +44 20 3530 1103, Email: peter.fitzpatrick@fitchratings.com. Additional information is available at www.fitchratings.com. Applicable Criteria Country Ceilings (pub. 20 Aug 2015) here Sovereign Rating Criteria (pub. 18 Jul 2016) here Additional Disclosures Dodd-Frank Rating Information Disclosure Form here _id=1009739 Solicitation Status here Endorsement Policy here ail=31 ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.

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