IMF Executive Board Concludes 2017 Article IV Consultation with Spain

October 6, 2017

On September 20, 2017, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation [1] with Spain. This also included a discussion of the Financial System Stability Assessment, based on the work of the Financial Sector Assessment Program (FSAP) missions. [2]

Strong, balanced, and employment-intensive expansion of the Spanish economy continued during the first half of 2017, and the recovery reached a significant milestone when real GDP surpassed its pre-crisis peak. The economy grew by 3.3 percent in 2016 and is expected to expand by 3.1 percent this year. Past structural reforms, wage moderation and resulting cost competitiveness gains, favorable monetary and external conditions, and fiscal relaxation have provided impetus to the recovery. As some external tailwinds dissipate, economic activity is projected to moderate to 2.5 percent in 2018 in the absence of any major boost in productivity growth.

A shift in resources toward the competitive export sector, with the services sector creating most new jobs, has played an important part in the economic rebound. Unemployment dropped to its lowest level in seven years, but at 17.2 percent the rate is still among the highest in Europe, with significant shares of youth and long-term unemployment and amid widespread labor market duality. The current account recorded its fourth consecutive annual surplus in 2016—a trend that is expected to continue in the medium term. Nevertheless, Spain’s net debtor position with the rest of the world is still large. Headline inflation increased earlier this year due to higher energy prices, but is gradually converging towards core inflation, which has remained below 1.4 percent so far in 2017. Public debt is close to 100 percent of GDP, while population aging is contributing to fiscal pressures.

The banking system has become more resilient since the last FSAP. It has strengthened its solvency and continued to reduce nonperforming loans (NPLs) for business in Spain to 8.4 percent of total loans at end-June 2017. Nevertheless, NPLs remain especially elevated for some sectors. At the same time, private sector deleveraging has reduced the debt-to-GDP ratio by 70 percentage points from its pre-crisis peak to end-2016. Banking system profitability, though higher than the euro area average, declined and remains a challenge in the environment of low interest rates, high legacy problem assets, and continued excess capacity. Systemic interconnections of the financial system are on the rise with cross-sectoral and cross-border claims picking up.

Executive Board Assessment [3]

Executive Directors welcomed Spain’s continued strong and balanced growth, accompanied by healthy job creation, which highlight the contribution of past structural reforms to making the economy more competitive, flexible and resilient. Nonetheless, Directors noted that structural weaknesses persist, vulnerabilities have not been fully overcome, and the unemployment rate remains high while productivity lags EU peers. In addition, public and private sector balance sheets remain vulnerable to shocks. With this backdrop, Directors recommended gradual fiscal tightening. They also underscored the need to preserve and deepen reforms, including steps to reduce structural unemployment, strengthen the business environment and competition, and make the financial sector more resilient along the lines of recommendations in the Financial Sector Stability Assessment (FSSA).

Directors welcomed the return to structural fiscal consolidation in 2017. Given the limited fiscal space and supportive cycle, Directors encouraged the authorities to maintain the current pace of adjustment until structural balance is reached. They noted that room lies mostly on the revenue side, including gradually reducing the number of goods and services that qualify for reduced VAT rates, reducing tax system inefficiencies, and raising environmental taxes, while adequately shielding vulnerable groups. Directors noted the importance of applying the expenditure rule and measures to increase expenditure efficiency. To alleviate age‑related spending pressures, Directors called for full implementation of ongoing pension reforms and public disclosure of reform tradeoffs to support workers’ retirement planning.

Notwithstanding strong employment creation, Directors stressed the need for further actions to reduce high structural unemployment. To this end, Directors called for a holistic approach, including improvements in the quality of education and training which would also reduce the risk of poverty and exclusion among vulnerable groups. Maintaining competitiveness would be critical for sustaining employment gains. Directors emphasized that well‑designed and targeted active labor market polices, along with enhanced performance of the Public Employment Services, could help low‑skilled youth and the long‑term unemployed to return to work. Further efforts are also needed to reduce labor market segmentation.

Directors stressed the need to accelerate competition‑enhancing reforms to boost growth prospects. They emphasized the need to fully implement the Market Unity Law, jumpstart the liberalization of professional services, ease access to equity financing for startups, and make public research and development spending more efficient. Directors welcomed efforts to minimize regulation‑induced disincentives for firm growth.

Directors commended the significant progress made in strengthening banking sector soundness, as reflected in the FSSA. They welcomed plans to enhance and modernize the financial sector institutional set‑up and strengthen the cooperative sector. Recognizing remaining weaknesses and legacy issues, Directors encouraged the authorities to accelerate bank balance sheet cleanup, including through ambitious NPL reduction. Directors underscored the importance for banks to further raise high‑quality capital and reduce operating costs to improve profitability and enhance resilience. Directors also called for rigorous monitoring of interest rate and bond market risks, and stressed the need for greater focus on contagion risk within the financial system and cross‑border spillovers. The macroprudential toolkit should be expanded to strengthen the ability to deal with build‑up of systemic risks. Establishing a systemic risk council would augment the capacity for risk oversight, policy coordination and crisis prevention.

Spain: Main Economic Indicators, 2012–2022

(Percent change unless otherwise indicated)

Projections

2012

2013

2014

2015

2016

2017

2018

2019

2020

2021

2022

Demand and supply in constant prices 1/

Gross domestic product

-2.9

-1.7

1.4

3.2

3.2

3.1

2.5

2.0

1.9

1.7

1.7

Private consumption

-3.5

-3.1

1.6

2.9

3.2

2.7

2.4

2.0

1.8

1.7

1.7

Public consumption

-4.7

-2.1

-0.3

2.0

0.8

0.7

0.7

0.7

0.7

0.3

0.3

Gross fixed investment

-8.6

-3.4

3.8

6.0

3.1

4.3

3.3

2.8

2.5

2.0

2.1

Total domestic demand

-5.1

-3.2

1.9

3.4

2.9

2.6

2.2

1.9

1.8

1.5

1.5

Net exports (contribution to growth)

2.2

1.5

-0.5

-0.1

0.5

0.5

0.3

0.2

0.2

0.2

0.2

Exports of goods and services

1.1

4.3

4.2

4.9

4.4

7.0

4.6

4.2

3.8

3.5

3.5

Imports of goods and services

-6.4

-0.5

6.5

5.6

3.3

5.9

4.0

4.1

3.7

3.3

3.3

Real GDP per capita

-3.0

-1.3

1.7

3.3

3.3

3.2

2.7

2.2

2.0

1.8

1.8

Savings-Investment Balance (percent of GDP)

Gross domestic investment

20.0

18.7

19.4

20.1

20.4

20.6

20.7

20.8

20.8

20.8

20.9

Private

17.5

16.5

17.2

17.6

18.5

18.6

18.6

18.7

18.7

18.7

18.8

Public

2.5

2.2

2.1

2.5

1.9

2.0

2.1

2.1

2.1

2.1

2.1

National savings

19.8

20.2

20.5

21.4

22.3

22.4

22.6

22.7

22.8

22.8

22.9

Private

23.4

24.3

24.0

24.0

24.5

23.6

23.0

22.7

22.6

22.7

22.9

Public

-3.7

-4.0

-3.5

-2.6

-2.2

-1.2

-0.4

0.0

0.1

0.1

0.0

Foreign savings

0.2

-1.5

-1.1

-1.4

-1.9

-1.9

-1.9

-1.9

-1.9

-2.0

-2.0

Household saving rate (percent of gross disposable income)

8.5

9.6

9.0

8.2

7.7

7.4

7.5

7.6

7.7

7.9

8.0

Private sector debt (percent of GDP)

252.9

241.4

230.4

218.0

208.7

200.4

195.2

190.4

185.9

181.8

177.7

Corporate debt

167.8

159.6

152.8

145.3

139.4

135.5

130.7

127.2

124.4

121.9

118.7

Household debt

85.2

81.8

77.6

72.7

69.3

64.9

64.5

63.2

61.5

60.0

59.1

Credit to private sector

-9.9

-10.2

-6.5

-4.2

-4.1

0.9

1.4

1.4

1.5

1.6

1.7

Potential output growth

0.2

0.0

0.3

0.7

1.0

1.4

1.5

1.6

1.6

1.6

1.7

Output gap (percent of potential)

-6.1

-7.8

-6.8

-4.5

-2.3

-0.7

0.3

0.8

1.0

1.0

1.0

Prices

GDP deflator

0.1

0.4

-0.3

0.5

0.3

1.2

1.5

1.7

1.6

1.7

1.8

HICP (average)

2.4

1.5

-0.2

-0.6

-0.3

2.0

1.4

1.7

1.7

1.8

1.9

HICP (end of period)

3.0

0.3

-1.1

-0.1

1.4

1.2

1.4

1.6

1.8

1.8

1.9

Employment and wages

Unemployment rate (percent)

24.8

26.1

24.4

22.1

19.6

17.3

15.6

15.0

14.3

13.9

13.9

Labor productivity 2/

2.0

1.8

0.3

0.2

0.4

0.4

0.6

1.3

1.2

1.3

1.7

Labor costs, private sector

1.1

0.3

0.1

0.2

0.1

1.5

1.5

1.5

1.6

1.7

1.8

Employment growth

-4.3

-2.8

1.2

3.0

2.7

2.6

1.9

0.7

0.6

0.4

0.0

Labor force growth

0.0

-1.1

-1.0

-0.1

-0.4

-0.3

-0.1

-0.1

-0.1

-0.1

-0.1

Balance of payments (percent of GDP)

Trade balance (goods and services)

1.5

3.3

2.5

2.4

2.9

2.9

3.2

3.3

3.5

3.6

3.7

Current account balance

-0.2

1.5

1.1

1.4

1.9

1.9

1.9

1.9

1.9

2.0

2.0

Net international investment position

-89.9

-94.3

-97.5

-91.3

-85.7

-79.9

-74.4

-69.3

-64.6

-60.1

-55.7

Public finance (percent of GDP)

General government balance 3/

-10.5

-7.0

-6.0

-5.1

-4.5

-3.2

-2.5

-2.1

-2.0

-2.0

-2.1

Primary balance

-8.0

-4.1

-3.0

-2.4

-2.0

-0.6

0.0

0.3

0.5

0.5

0.5

Structural balance

-3.5

-2.5

-2.0

-2.4

-3.1

-2.6

-2.5

-2.5

-2.5

-2.5

-2.6

Primary structural balance

-0.5

1.0

1.5

0.6

-0.3

0.2

0.2

0.2

0.2

0.2

0.2

General government debt

85.7

95.5

100.4

99.8

99.4

98.5

97.1

95.6

94.3

93.2

92.2

Sources: IMF, World Economic Outlook; data provided by the authorities; and IMF staff estimates

1/ New GDP data for 2014-16 were received following the circulation of the staff report and are not yet incorporated.

2/ Output per worker.

3/ The headline balance for Spain includes financial sector support measures equal to 3.7 percent of GDP for 2012, 0.3 percent of GDP for 2013, 0.1 percent of GDP for 2014, 0.05 percent of GDP for 2015, 0.2 percent of GDP for 2016, and 0.1 percent of GDP for 2017.





[1] Under Article IV of the IMF's Articles of Agreement, the IMF holds bilateral discussions with members, usually every year. A staff team visits the country, collects economic and financial information, and discusses with officials the country's economic developments and policies. On return to headquarters, the staff prepares a report, which forms the basis for discussion by the Executive Board.

[2] Under the FSAP, the IMF assesses the stability of the financial system, and not that of individual institutions. The FSAP assists in identifying key sources of systemic risk and suggests policies to help enhance resilience to shocks and contagion. In member countries with financial sectors deemed by the IMF to be systemically important, it is a mandatory part of Article IV surveillance, and supposed to take place every five years.

[3] At the conclusion of the discussion, the Managing Director, as Chairman of the Board, summarizes the views of Executive Directors, and this summary is transmitted to the country's authorities. An explanation of any qualifiers used in summings up can be found here: http://www.imf.org/external/np/sec/misc/qualifiers.htm .

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