Spanish Economy

Financial Times. Tuesday September 9, 2008

Obviously, Spain is no exception. After 13 years of solid growth, economic activity has weakened considerably and unemployment is rising. So far, there is nothing striking about Spain’s economic performance; indeed, according to the second-quarter figures, we are still doing a bit better than the euroszone’s average in terms of gross domestic product growth.

This is not to say that we are unconcerned. We cannot say that the worst is already over – we expect a further deterioration during the coming quarters, mainly because of the continuing severe adjustment in the domestic housing sector. However, we remain confident that the economy will bottom out in 2009 and reach growth rates close to potential in 2010. We are optimistic because our economy has experienced a radical structural transformation during the past two decades that has put us in a much better position to face the challenges.

I would like to stress some of the strengths the Spanish economy can count on to help it emerge from the slowdown.

First, Spain is today much better capitalised than in the past. Spanish companies, families and the government have all helped to push up the level of investment in the domestic economy. Spain has improved considerably the quality of its infrastructure, companies are better equipped and engaging in research and development, and young workers entering the labour market are more qualified than those retiring, with tertiary attainment reaching unprecedented levels.

This process of rapid capital accumulation has already brought significant gains in productivity during the past two years, which is bound to expand further in the medium term.

This investment effort together with a stable savings rate has led to a considerable current account deficit. In contrast to other countries with large deficits, in Spain this is the outcome of investment decisions made by the private sector. Meanwhile, the government has run a sound and prudent fiscal policy.

Second, I want to emphasise the resilience of the Spanish financial system. Spanish banks are solvent, efficient and profitable, and well placed to withstand ongoing turmoil. Spanish financial intermediaries have not been hit directly by the subprime crisis but indirectly by tighter international credit conditions, as is the case in many other countries, and by a sharp adjustment in the domestic housing market.

However, despite strong credit growth in recent years, lending practices have remained prudent under the strict supervision of the Bank of Spain. While, undoubtedly, the rate of non-performing loans is mounting, it is still lower than in previous downturns and is less than half the rate of the three largest economies in the eurozone.

Third, our financial institutions have made high provisions in the past, and these have been enhanced by the demands of a counter-cyclical dynamic provision introduced a few years ago by the regulator.

It is also worth mentioning that the Spanish credit institutions are focused on retail banking and so can raise financing by increasing deposits. In recent months, Spanish banks have also increased borrowing from the European Central Bank, but this liquidity amounts to only 1.3 per cent of their balance sheets and is in line with the representation of Spanish banks in the eurozone. Moreover, Spanish financial intermediaries own enough high-quality collateral to cover their current financing needs several times over and to meet any extra demands if the ECB tightens its collateral policy.

Fourth, Spain has become a very open economy and our companies are proving to be competitive in all markets. International trades represents 60 per cent of GDP – one of the highest rates among the bigger countries – and is 15 percentage points higher that at the start of the 1990’s.  Spanish companies have become global operators in sectors including energy, telecommunications, banking and the public infrastructure, among others. Despite the current account deficit, exports are performing well and foreign demand has begun to contribute positively to growth.

Finally, after many years of prudent fiscal policy, in 2007 the Spanish government delivered a surplus above 2 per cent of GDP and managed to cut its public debt to just 36 per cent of GDP, 30 percentage points below the average for the eurozone.  This allows us to implement some countercyclical measures to mitigate the downturn. The government is fully committed to further structural reforms, such as implementing the European Union services directive.

The long period of strong growth has brought lasting economic changes that have turned Spain into a modern, competitive and internationally integrated economy. These structural changes are here to stay. Certainly, a severe adjustment is under way and the economy will remain weak until next year, with unemployment rising and high but declining inflation. Fortunately, we have room for manoeuvre and will help to offset the social cost of the downturn while maintaining the investment in infrastructure and education needed to enhance future productivity.   We are convinced that in 2010 our economy will enter a new period of sustainable strong growth benefiting from our structural transformation.

The writer is Spain’s finance minister