## cr1723 ## Source details **Canonical URL:** [cr1723](https://www.imf.org/-/media/files/publications/cr/2017/cr1723.pdf) ## Other formats - [Markdown version](/-/media/files/publications/cr/2017/cr1723.pdf.md) - [Structured JSON version](/-/media/files/publications/cr/2017/cr1723.pdf.json) --- ### Recovery and recent economic developments - Real GDP growth: 3.2 percent in 2015; 3.2 percent expected for 2016; 3.3 percent year-on-year in first three quarters of 2016 (text). - Growth drivers: - Rebound in private consumption, exports, and investment aided by past reforms. - European Central Bank’s accommodative monetary policy, low oil prices, and fiscal relaxation. - Employment and unemployment: - Almost 1.1 million jobs were created over the past two years. - Employment growth: 3.0 percent in 2015; 2.9 percent in 2016 (table). - Temporary contracts account for about 53 percent of new jobs; share of permanent hires showing some pickup. - Unemployment rate: 22.1 percent in 2015; 19.4 percent in 2016; just under 19 percent noted in text; projected 17.9 percent in 2017 and 17.0 percent in 2018 (table). - About half of the unemployed have been jobless for more than a year; long-term unemployed are largely low-skilled and many formerly in construction. - Inflation and prices: - Headline inflation jumped to 0.7 percent in October and November 2016 (y-o-y). - HICP (average): -0.6 percent in 2015; -0.4 percent in 2016; 1.2 percent in 2017; 1.3 percent in 2018 (table). - External and balance-sheet indicators: - Current account projected to record a fourth consecutive annual surplus. - Private sector balance sheets have further strengthened. - Public debt: general government debt about 100 percent of GDP; 100.4 percent in 2014; 99.8 percent in 2015; 99.2 percent in 2016 and 2017; 98.7 percent in 2018 (table). - Net international investment position: -97.5 percent in 2014; -89.9 percent in 2015; -83.9 percent in 2016; -78.7 percent in 2017; -73.7 percent in 2018 (table). ### Vulnerabilities and structural challenges - Labor market and productivity: - Persisting high unemployment, especially long-term and youth joblessness. - Labor market duality and widespread temporary work. - Labor productivity (output per worker): 0.3 percent in 2014; 0.2 percent in 2015; 0.2 percent in 2016; 0.3 percent in 2017; 1.0 percent in 2018 (table). - Output gap and potential: - Potential output growth: 0.3 percent in 2014; 0.7 percent in 2015; 1.0 percent in 2016; 1.2 percent in 2017; 1.4 percent in 2018 (table). - Output gap (percent of potential): -6.8 in 2014; -4.5 in 2015; -2.4 in 2016; -1.3 in 2017; -0.6 in 2018 (table). - Financial sector: - Banking sector balance sheets have strengthened, but further resilience needed. - NPL ratio for business: 9.5 percent at end-June 2016 (4.2 percentage points below 2013 peak). - Regulatory capital ratio: 14.6 percent by end-June 2016. - December 2016 ECJ ruling on floor clauses may require additional reserves of up to €4.2 billion, potentially reducing return on assets by about 0.1 percentage points. ### Outlook and projections - Real GDP growth projections: 2.3 percent in 2017; 2.1 percent in 2018 (table). - Selected forecast figures: - Private consumption: 2.9 percent in 2015; 3.0 percent in 2016; 2.4 percent in 2017; 2.1 percent in 2018. - Gross fixed investment: 6.0 percent in 2015; 3.6 percent in 2016; 3.2 percent in 2017; 2.7 percent in 2018. - Exports of goods and services: 4.9 percent in 2015; 4.2 percent in 2016; 4.2 percent in 2017 and 2018. - Imports of goods and services: 5.6 percent in 2015; 3.2 percent in 2016; 4.2 percent in 2017; 4.1 percent in 2018. - Current account balance: 1.4 percent of GDP in 2015; 2.0 percent in 2016; 1.8 percent in 2017 and 2018. - Risks and scenarios: - Brexit estimated to lower Spain’s real GDP by about 0.3 percentage point through 2018. - Credit growth projected to turn positive but remain subdued. - Inflation likely to pick up gradually to an estimated 1.2 percent in 2017. - Medium-term potential growth around 1½ percent. - Structural reforms to date estimated to lift GDP by about a cumulative 2½ percent over five years. - Downside risks include weak external demand, protracted Brexit negotiations, rising protectionism, and tighter global financial conditions. ### Fiscal assessment, debt dynamics, and DSA findings - Recent fiscal performance: - Headline fiscal deficits: 5.1 percent of GDP in 2015; projected 4.5 percent of GDP in 2016. - Structural primary terms: fiscal stance loosened by about 0.8 percent of GDP annually. - 2015 overall deficit exceeded EDP target of 4.2 percent of GDP; regional governments underperformed by 1 percent of GDP; social security underperformed by 0.7 percent of GDP. - Public debt outlook and stress tests: - Public debt: 100.4 percent of GDP in 2014; 99.8 percent in 2015; baseline projected to decline slowly to 95.6 percent of GDP in 2021. - Under current policies, gross and net debt ratios projected to remain elevated at around 95½ percent and 80 percent of GDP, respectively. - Gross funding needs: about 18 percent of GDP in 2017; projected 16½ percent of GDP in 2021. - Growth shock (two consecutive years of recession) would push debt near 110 percent of GDP (11 percentage points higher than baseline) and raise annual gross financing needs above 22 percent of GDP in 2018. - Contingent liability shock (banking sector shock equivalent to 10 percent of banking assets) could raise debt to about 116.5 percent of GDP in 2018 and gross financing needs to 28.7 percent of GDP in 2017. - Debt sustainability inference: an annual structural adjustment of about 0.5 percent of GDP beyond 2017 would lower the debt-to-GDP ratio by 4 percentage points in 2021 compared to the baseline; bringing debt to around 91.6 percent of GDP by 2021 per DSA illustrations. - DSA assumptions (selected): - Growth projected at 3.2 percent in 2016 and moderating to 2.3 percent in 2017; medium-term growth converging to about 1½ percent. - Inflation (GDP deflator) rising from 0.5 percent in 2015 to 1½ percent in 2021. - Long-term sovereign spreads assumed to increase from 1.2 percent in 2015 to 1.5 percent in the medium term. ### Policy priorities and IMF recommendations - Fiscal policy: - Resume gradual but credible fiscal consolidation to put debt on a downward path. - Recommended pace: annual adjustment of structural primary balance of about 0.5 percent of GDP beyond 2017. - Composition: focus on higher revenues—raise VAT collections, tackle tax system inefficiencies, increase environmental levies/excises—and advance expenditure rationalization without undermining targeted incentives for employment creation and productivity growth. - Improve VAT efficiency: lowering the VAT policy gap to the EU average while maintaining VAT compliance at pre-crisis level (2004–07) could raise VAT revenues by over 2 percent of GDP. - Address remaining tax inefficiencies could yield ¼–½ percent of GDP. - Regional fiscal framework: - Reform regional financing to improve incentives and capacities to comply with fiscal targets, strengthen oversight and enforcement, harmonize conditions for regional liquidity access, and consider rainy-day funds. - Strengthen governance: enforce existing fiscal framework, provide timely information to fiscal council, require ‘comply and explain’ disclosures, and reinforce conditionality for non-compliant regions. - Labor market policies: - Implement more effective active labor market policies (ALMPs) to lower long-term and youth unemployment; consolidate hiring subsidies into better-targeted schemes for low-skilled and long-term unemployed. - Fully address labor market duality: simplify contract menus, consider a single open-ended contract with tenure-based severance accrual or the Austrian ‘backpack’ model, reduce dismissal-cost gaps, and mitigate legal uncertainty around annulled dismissals. - Improve coordination of ALMP with regional governments; modernize training, apprenticeship, and education programs. - Structural reforms to boost productivity and SME growth: - Implement the Market Unity Law faster; advance liberalization of professional services; revisit size-contingent regulations; enhance R&D investment; improve access to non-bank financing for frontier innovation. - Consider performance-based transfers to regions to accelerate Market Unity Law implementation. - Financial sector: - Continue ensuring adequate provisioning, increase efficiency (including possible mergers), boost non-interest income, and further increase high-quality capital. - Encourage fuller use of insolvency “fresh start” regime, consider cram-down mechanisms, and expand market-based financing (alternative exchanges, venture capital, securitization). - Prepare for regulatory requirements (MREL, NSFR) and complete pending reforms including divestment of public ownership in Bankia/BFA and BMN, SAREB asset liquidation, and savings banks/banking foundations framework. - Upcoming 2017 FSAP anticipated to review financial stability architecture and guide reforms. - Institutional recommendation: - Spain should remain on the standard 12-month Article IV consultation cycle. ### Key statistics (selected exact figures from tables) - GDP growth (percent): -2.9 (2012); -1.7 (2013); 1.4 (2014); 3.2 (2015); 3.2 (2016); 2.3 (2017); 2.1 (2018). - Unemployment rate (percent): 24.8 (2012); 26.1 (2013); 24.4 (2014); 22.1 (2015); 19.4 (2016); 17.9 (2017); 17.0 (2018). - General government balance (percent of GDP): -6.8 (2012); -6.7 (2013); -5.9 (2014); -5.1 (2015); -4.3 (2016); -3.2 (2017); -2.7 (2018). - General government debt (percent of GDP): 85.7 (2012); 95.4 (2013); 100.4 (2014); 99.8 (2015); 99.2 (2016); 99.2 (2017); 98.7 (2018). - Private sector debt (percent of GDP): 266.7 (2012); 254.4 (2013); 240.7 (2014); 228.5 (2015); 220.3 (2016); 215.4 (2017); 210.7 (2018). - Household saving rate (percent of gross disposable income): 8.5 (2012); 9.6 (2013); 9.0 (2014); 8.2 (2015); 9.8 (2016); 9.9 (2017); 10.0 (2018). _International Monetary Fund. Staff report for the 2016 Article IV consultation (Spain)._ ### 3.2 percent in 2015 with the same growth rate expected for 2016, despite a prolonged period of ### cr1723 - 3.2 percent in 2015 with the same growth rate expected for 2016, despite a prolonged period of ### Recovery and recent economic developments - Real GDP growth: 3.2 percent in 2015; 3.2 percent expected for 2016 (text also reports 3.3 percent year-on-year in first three quarters of 2016). - Drivers of growth: - Rebound in private consumption, exports, and investment aided by past reforms. - European Central Bank’s accommodative monetary policy, low oil prices, and fiscal relaxation. - Employment: - Almost 1.1 million jobs were created over the past two years. - Employment growth: 3.0 percent in 2015; 2.9 percent in 2016 (table). - Temporary contracts account for about 53 percent of new jobs; share of permanent hires showing some pickup. - Unemployment: - Unemployment rate: 22.1 percent in 2015; 19.4 percent in 2016; just under 19 percent noted in text; projected 17.9 percent in 2017 and 17.0 percent in 2018 (table). - About half of the unemployed have been jobless for more than a year; long-term unemployed are largely low-skilled and many formerly in construction. - Inflation and prices: - Headline inflation jumped to 0.7 percent in October and November 2016 (y-o-y). - HICP (average): -0.6 percent in 2015; -0.4 percent in 2016; 1.2 percent in 2017; 1.3 percent in 2018 (table). - External and balance-sheet indicators: - Current account projected to record a fourth consecutive annual surplus. - Private sector balance sheets have further strengthened. - Public debt remains high at about 100 percent of GDP; general government debt: 100.4 percent in 2014; 99.8 percent in 2015; 99.2 percent in 2016 and 2017; 98.7 percent in 2018 (table). - Net international investment position: -97.5 percent in 2014; -89.9 percent in 2015; -83.9 percent in 2016; -78.7 percent in 2017; -73.7 percent in 2018 (table). ### Vulnerabilities and structural challenges - Persisting weaknesses: - High unemployment, especially long-term and youth joblessness. - Labor market duality and widespread temporary work. - Relatively weak productivity growth: labor productivity (output per worker) 0.3 percent in 2014; 0.2 percent in 2015; 0.2 percent in 2016; 0.3 percent in 2017; 1.0 percent in 2018 (table). - Elevated public debt and pockets of private sector over-indebtedness. - Large negative net international investment position. - Output gap and potential: - Potential output growth: 0.3 percent in 2014; 0.7 percent in 2015; 1.0 percent in 2016; 1.2 percent in 2017; 1.4 percent in 2018 (table). - Output gap (percent of potential): -6.8 in 2014; -4.5 in 2015; -2.4 in 2016; -1.3 in 2017; -0.6 in 2018 (table). - Financial sector: - Banking sector balance sheets have strengthened, but further resilience needed given remaining vulnerabilities. ### Outlook and projections - Real GDP growth projected to moderate to 2.3 percent in 2017 and 2.1 percent in 2018 (table). - Key forecast figures (selected): - Private consumption: 2.9 percent in 2015; 3.0 percent in 2016; 2.4 percent in 2017; 2.1 percent in 2018. - Gross fixed investment: 6.0 percent in 2015; 3.6 percent in 2016; 3.2 percent in 2017; 2.7 percent in 2018. - Exports of goods and services: 4.9 percent in 2015; 4.2 percent in 2016; 4.2 percent in 2017 and 2018. - Imports of goods and services: 5.6 percent in 2015; 3.2 percent in 2016; 4.2 percent in 2017; 4.1 percent in 2018. - Current account balance: 1.4 percent of GDP in 2015; 2.0 percent in 2016; 1.8 percent in 2017 and 2018. ### Executive Board assessment and policy priorities - Overall assessment: - Directors welcomed Spain’s impressive economic recovery, strong job creation, and rapid decline in imbalances, while noting incomplete adjustments and persistent structural weaknesses. - Fiscal policy recommendations: - Resume gradual but credible fiscal consolidation to put debt on a downward path. - A growth- and job-friendly adjustment should rely more on indirect taxes while shielding vulnerable groups. - Authorities commended for revenue-enhancing measures adopted for 2017. - Advance expenditure rationalization without undermining targeted incentives for employment creation and productivity growth. - Reform the regional fiscal framework to improve regions’ incentives and capacities to comply with fiscal targets. - Labor market recommendations: - Implement more effective active labor market policies to lower long-term and youth unemployment. - Consolidate hiring subsidies into better-targeted schemes, particularly for low-skilled and long-term unemployed. - Fully address long-standing labor market duality. - Improve coordination of ALMP with regional governments. - Structural reform recommendations: - Strengthen conditions for small and medium-sized enterprises to grow and raise productivity by: - Implementing faster the Market Unity Law. - Advancing liberalization of professional services. - Enhancing R&D investment. - Improving access to non-bank financing for frontier innovation. - Revisiting size-contingent regulations. - Banking sector recommendations: - Continue efforts to ensure adequate provisioning, increase efficiency (including possible mergers), boost non-interest income, and further increase high-quality capital. - Anticipation of the 2017 FSAP to review financial stability architecture and provide guidance. ### Key statistics (selected exact figures from tables) - GDP growth (percent): -2.9 (2012); -1.7 (2013); 1.4 (2014); 3.2 (2015); 3.2 (2016); 2.3 (2017); 2.1 (2018). - Unemployment rate (percent): 24.8 (2012); 26.1 (2013); 24.4 (2014); 22.1 (2015); 19.4 (2016); 17.9 (2017); 17.0 (2018). - General government balance (percent of GDP): -6.8 (2012); -6.7 (2013); -5.9 (2014); -5.1 (2015); -4.3 (2016); -3.2 (2017); -2.7 (2018). - General government debt (percent of GDP): 85.7 (2012); 95.4 (2013); 100.4 (2014); 99.8 (2015); 99.2 (2016); 99.2 (2017); 98.7 (2018). - Private sector debt (percent of GDP): 266.7 (2012); 254.4 (2013); 240.7 (2014); 228.5 (2015); 220.3 (2016); 215.4 (2017); 210.7 (2018). - Household saving rate (percent of gross disposable income): 8.5 (2012); 9.6 (2013); 9.0 (2014); 8.2 (2015); 9.8 (2016); 9.9 (2017); 10.0 (2018). _International Monetary Fund. Staff report for the 2016 Article IV consultation (Spain)._ ### 2013. The ongoing positive labor market dynamics have been critical in starting to recoup some of ### cr1723 - 2013. The ongoing positive labor market dynamics have been critical in starting to recoup some of ### Labor market, living standards, and inequality - Ongoing positive labor market dynamics have been critical in starting to recoup some of the fall in living standards and reverse the rise in inequality caused by the crisis (Box 2). - Income inequality and risk of poverty and social exclusion tracked via Gini coefficient and percent of total population (income reference period is the previous year). - 2016Q3 noted in charts for unemployment and real GDP growth comparisons across selected EU countries and Spain. ### Private sector deleveraging and credit conditions - Private debt-to-GDP is about 65 percentage points below its 2007 peak level. - New bank lending has picked up, particularly consumer credit, lending to agriculture, manufacturing, and non-real-estate services, but total credit growth is still negative. - Demand for loans remains weak even as credit supply—underpinned by a stronger banking system—is broadly supportive of the economic recovery; financial conditions have eased further. - Improving profit margins have allowed corporates to finance new investment with retained earnings and more debt financing by large corporates. - Households have been reducing bank debt and rebuilding net wealth positions. ### Banking sector: asset quality, capital, and profitability - NPL ratio for business in Spain stood at 9.5 percent at end-June 2016, which is 4.2 percentage points below its peak in 2013, despite contraction of overall lending. - Regulatory capital ratio raised to 14.6 percent by end-June 2016. - Spanish banks’ CET1 still lags European peers, but Spanish banks are generally less leveraged than European peers due to higher risk weight intensity. - Reduced profitability over the four quarters (2015:Q3–2016:Q2) reflects more challenging operating conditions amid low interest rates, legacy assets, continued deleveraging, and stiffened pricing competition for new loans. - December 2016 European Court of Justice ruling on full retroactivity of nullity of floor clauses may require additional reserves of up to €4.2 billion, potentially reducing the return on assets by about 0.1 percentage points. - Spain’s two largest banks have benefited from globally-diversified earnings, but difficult conditions in Latin America, Turkey, and the U.K. risk lowering group-wide profits and capital contributions. ### Fiscal stance and public finances - Headline fiscal deficits: 5.1 percent of GDP in 2015 and a projected 4.5 percent of GDP in 2016. - The 1½ percentage point reduction over two years reflects a strong cyclical recovery and lower interest costs. - Structural primary terms: fiscal stance loosened by about 0.8 percent of GDP annually, mainly from reductions in personal and corporate income taxes and overrun of non-entitlement expenditures. - 2015 overall deficit exceeded the EDP target of 4.2 percent of GDP. - Regional governments underperformed by 1 percent of GDP. - Social security underperformed by 0.7 percent of GDP. - Reclassification of regional public private partnerships accounted for 0.2 percent of GDP. - For 2016, staff projects the fiscal deficit to decline to 4.5 percent of GDP, close to the new EDP deficit target of 4.6 percent of GDP. - Projected 2016 deficit is nearly 1 percentage point higher than budgeted in Spain’s April 2016 Stability Program (3.6 percent of GDP). - Public debt remained high, at just under 100 percent of GDP. - Council of EU Finance Ministers extended Spain’s deadline to exit the EDP by two years, with new deficit targets of 3.1 and 2.2 percent of GDP in 2017 and 2018, respectively, calling for an annual structural adjustment of 0.5 percent of GDP. - Fiscal measures for 2017 (tightening CIT credit and deductions for large companies, raising excises for tobacco and alcohol, tax on sugar-based drinks) expected to yield 0.4 percent of GDP additional revenue (mostly from CIT). - Government plans to improve VAT collection; if part of the expected revenue impact (0.2 percent of GDP) materializes, the EDP deficit target for 2017 is in reach. - Government projects structural deficit to fall to about 1¼ percent of GDP by 2019; staff estimates structural deficit to remain at around 2¼ percent of GDP over the medium term. - Regional liquidity mechanisms lowered regions’ interest payments by 0.3 percent of GDP in 2015. - Risks to fiscal targets are considerable at the regional level due to poor compliance track record and weak enforcement. ### External sector, NIIP, and competitiveness - Current account surplus: increased by ½ percentage point to 1.4 percent of GDP in 2015 and expected to be around 2 percent of GDP in 2016. - Improved external surplus driven by lower oil prices and interest rates, and regained competitiveness from price and wage moderation and firms’ internationalization. - Spain’s NIIP was negative 87 percent of GDP at end-June 2016, still among the largest in the world. - Private sector deleveraging has driven most NIIP adjustment while external general government liabilities increased. - Cyclically adjusted current account remains by some metrics up to 1 percent of GDP weaker than consistent with medium-term fundamentals and desirable policy settings. - Staff assesses the REER is still about 5–10 percent overvalued. ### Outlook and risks - Real GDP projected to expand by 3.2 and 2.3 percent in 2016 and 2017, respectively, with domestic demand as the main driver. - Brexit estimated to lower Spain’s real GDP by about 0.3 percentage point through 2018 via confidence and trade channels. - Credit growth projected to turn positive but remain subdued. - Current account surplus projected to stabilize at around 2 percent of GDP, enabling gradual NIIP reduction. - Inflation likely to pick up gradually to an estimated 1.2 percent in 2017. - Medium-term potential growth around 1½ percent. - Structural reforms undertaken so far are estimated to lift the level of GDP by about a cumulative 2½ percent over a five-year horizon. - Risks tilted to the downside, including: - Weak growth in key advanced and emerging economies. - Protracted post-Brexit negotiations. - Erosion of support for European institutions and increased protectionist sentiment. - Slower external demand and weaker macroeconomic conditions in Latin America affecting Spanish banks. - Sharply tighter or more volatile global financial conditions could renew sovereign and financial sector stress, though ECB policies mitigate against excessive volatility. - Domestic reversal of past reforms or weak fiscal implementation could hurt confidence and medium-term growth. ### Policy agenda and priorities - Maintain sustained recovery momentum while making the economy more inclusive and robust to shocks through: - A return to gradual, credible, and growth-friendly fiscal consolidation. - Enhanced labor market performance, particularly assistance for the long-term unemployed and young. - Improved productivity, including removing barriers to competition and obstacles for small firms to grow. - Continued strengthening of the financial sector’s position and capacity to support growth. - Emphasis that undoing past reforms could create uncertainty and weigh on medium-term prospects. ### Fiscal policy priorities and implementation challenges - Fiscal stance set to tighten in 2017 with Council targets and planned revenue measures. - Credible medium-term consolidation path remains to be specified; under current policies staff projects structural deficit around 2¼ percent of GDP over the medium term, still far from structural balance. - Significant execution and compliance risks at regional level persist. *INTERNATIONAL MONETARY FUND* ### 19. Fiscal space is limited and remaining fiscal vulnerabilities demand gradual but steady ### 19. Fiscal space is limited and remaining fiscal vulnerabilities demand gradual but steady ### Fiscal outlook and risks - Under current policies, both gross and net debt ratios are projected to remain elevated over the medium term at around 95½ percent and 80 percent of GDP, respectively. - Favorable interest-growth differential notwithstanding, limited fiscal space constrains cyclical policy responses to shocks. - Gross funding needs are still high at about 18 percent of GDP in 2017. - The fiscal outlook faces risks from policy implementation shortfalls, potential negative growth shocks, and realization of contingent liabilities. - In a growth shock scenario with two consecutive years of recession: - Debt levels would be pushed near 110 percent of GDP (11 percentage points higher than in the baseline projection). - Annual gross financing needs would be above 22 percent of GDP in 2018. - Staff baseline projections ("current policies") include 0.4 percent structural revenue measures in 2017 and assume an unchanged structural primary balance from 2018. ### Recommended pace and effect of fiscal consolidation - Returning to gradual but sustained fiscal consolidation would put debt on a downward path. - An annual adjustment of the structural primary balance of about 0.5 percent of GDP beyond 2017, and a multiplier of 0.6 (assuming revenue-based measures), would lower the debt-to-GDP ratio by 4 percentage points in 2021 compared to the baseline. - Such an adjustment pace is described as striking a balance between preserving growth and ensuring public debt sustainability, while lowering the sovereign-bank nexus. - This pace would be consistent with the latest EC recommendation and with reaching structural balanced budget in five years, close to the target date set for meeting national rules. ### Composition of medium-term adjustment and priorities - Most of the medium-term adjustment will need to come from higher revenues and should create space to support greater inclusiveness and employment creation. - Public primary spending-to-GDP ratio is already relatively low compared to EU peers. - So far, nearly two-thirds of the adjustment (5½ percent of potential GDP) has come from spending measures. - Under current policies, the expenditure-to-GDP ratio is expected to decline by another 2½ percentage points over the medium term as expenditure is envisaged to rise only in line with the GDP deflator. - Total medium-term adjustment needs of 2¼ percent of GDP for structural balanced budget by 2021. - Priority should be given to the least distortive revenue measures that: - raise VAT collections, - tackle remaining inefficiencies in the tax system, - increase environmental levies or excises. - Revenue measures are noted to have low multipliers, thus limiting negative short-term impact on economic activity. - Advancing expenditure rationalization could contribute to fiscal adjustment, but should not come at the expense of targeted incentives for employment creation and productivity growth. ### Improving VAT efficiency - VAT collection is about 3 percentage points of final consumption lower than the EU average, mirroring Spain’s large VAT gap. - Only about 60 percent of the consumption basket pays VAT at the standard rate in Spain, compared to 70 and 80 percent in France and Germany, respectively. - VAT preferential treatments via lower rates and exemptions explain most of the VAT gap; compliance recovered most of the deterioration during the global financial crisis. - Lowering the VAT policy gap to the EU average, while maintaining VAT compliance at the pre-crisis level (2004-07), would raise Spain’s VAT revenues by over 2 percent of GDP. - This could be achieved by gradually raising the lower VAT rates in line with medium-term fiscal adjustment needs. ### Addressing tax system inefficiencies and environmental levies - Despite the 2014 tax reform, the tax system still has a large number of deductions, exemptions, and fiscal incentives, reducing tax bases even with high marginal rates. - Addressing remaining inefficiencies, as recommended by the government-appointed committee of experts in 2014, could yield additional revenue of ¼–½ percent of GDP. - Continuing efforts against informality and tax evasion can improve revenue collection efficiency. - Harmonizing and enhancing environmental taxes could raise about ¼–½ percent of GDP in a relatively non-distortionary way, noting environmental taxes remain significantly below the EU average with reduced effective rates especially on energy. ### Expenditure rationalization and efficiency - Government’s across-the-board spending cuts in 2016 could be replaced by thorough expenditure reviews focused on quality and efficiency via better targeting, and elimination of unfunded mandates at the regional level. - Priority reviews: health and education to assess expenditure needs and minimum provision standards against available financing at all government levels, including social security. - Suggested measures: - Improve procurement procedures, particularly for pharmaceutical products (for which spending rose by 9½ percent in 2015). - Introduce copayments for public health services, with exemptions or compensation for the most vulnerable. - Better-target hiring subsidies and streamline hiring incentives to lower the tax wedge for the young and low-income earners and support job creation. ### Supporting job creation and inclusiveness - Active labor market programs (ALMPs) and R&D fiscal incentives are reported as ineffective and require better coordination and targeting. - Fiscal measures should create space to provide better protection for vulnerable groups. - Consider fiscal incentive schemes, in the context of regional financing system reform, to encourage regional governments to accelerate implementation of structural reform measures (e.g., Market Unity Law and active labor market policies). ### Regional financing framework and fiscal governance risks - Without bold reforms, the regional financing framework remains a risk for achieving fiscal targets. - The 2012 Budget Stability Law reform was tested in the last electoral cycle and exposed weaknesses in sub-national fiscal regime compliance and enforcement. - Two-pronged approach recommended: - Strengthening governance (short- and medium-term): - Enforce existing fiscal framework. - Strengthen oversight institutions and procedures (e.g., provide the fiscal council timely and appropriate information as mandated by law). - Ensure public entities observe the ‘comply and explain’ principle by publishing explanations for non-compliance. - Reinforce conditionality and step up monitoring under regional liquidity mechanisms for non-compliant regions. - Allow regions’ fiscal targets to temporarily differ to account for structural differences in adjustment needs and fiscal capacity. - Medium-term measures: (i) enforce more automatically sub-national fiscal rules, starting with preventive actions and escalating to corrective and coercive mechanisms; (ii) harmonize conditions, monitoring, and transparency for regions accessing regional liquidity mechanism with those under Economic and Financial Plans; (iii) improve public financial management systems for comprehensive and frequent evaluation of compliance with fiscal rules and targets. - Reforming the system of regional finances: - Increase transparency and effectiveness of fiscal equalization to ensure public service provision standards without undermining regions’ broader spending mandates. - Enhance regions’ revenue-raising capacity to better match expenditure decentralization and raise accountability. - Enhance intergovernmental transfer settlement system by reducing size discrepancies and time lags between advance payments and legal entitlements. - Phase out use of regional liquidity mechanisms for non-emergency purposes and consider introducing rainy-day funds to improve fiscal resilience in normal times. ### Authorities’ views (fiscal) - Authorities committed to achieving the 2017 deficit target and agreed on the need to improve regional public finances. - They considered adopted measures will deliver at least ½ percent of GDP structural adjustment, enough to reach the 3.1 percent of GDP deficit target. - Authorities agreed on the need to reduce deficit and debt in the medium term to strengthen resilience, but stressed that pace and composition of adjustment should not weaken growth and job creation. - Draft Budgetary Plan for 2017 expected to allow progressive reduction in structural deficit through improved fiscal compliance and application of the spending rule, avoiding need for future tax hikes. - On regional public finances, authorities noted fundamental reforms were necessary but complexity requires strong political commitment; suggested stricter enforcement of corrective measures introduced in the 2012 Budget Stability Law had started to improve fiscal compliance of some regions and mitigated moral hazard risks. ### Labor market: tackling long-term unemployment and rigidities - Immediate priority: promote job creation for the long-term unemployed and low-skilled youth. - Impact of ALMPs, especially for long-term unemployed and low-skilled youth, has been limited, contributing to social exclusion. - Policy recommendations: - Improve coordination with regional governments. - Review effectiveness of ALMP toolkit (e.g., as part of OECD peer review) to reallocate resources to most promising programs. - Strengthen profiling of job seekers to provide personalized assistance. - Improve cooperation between public employment service and private job-placement agencies. - Modernize training, apprenticeship, and education programs to better align with labor market needs, reduce skill mismatches, and address high share of early school leavers. - Make effective use of, and potentially enhance, EU’s Youth Guarantee schemes. - Strengthen ties between active and passive policies by strictly enforcing verification of active job search and participation in activation programs to receive unemployment benefits. - Consolidate hiring subsidies (including lower social security contributions for new contracts) to create effective and better-targeted schemes for low-skilled and long-term unemployed. ### Reducing labor market duality and enhancing contract attractiveness - High labor market duality (particularly among youth) exacerbates employment volatility, lowers human capital investment and productivity, and increases inequality. - Remaining significant gap between costs for permanent and temporary workers disincentivizes open-ended hires. - Policy options: - Simplify menu of contracts; effectively reduce employment protection gap. - Introduce a single open-ended contract with no ex-ante time limit and severance payments that increase gradually with tenure, coexisting with sector-specific contracts for training and seasonal employment. - Alternatively, gradually introduce the Austrian ‘backpack’ model (entitlements to severance payments acquired in one job carried to subsequent jobs). - Address legal and administrative uncertainties that hamper open-ended employment effectiveness: - Simplify list of causes for nullifying a dismissal. - Differentiate corrective actions between annulments based on procedural versus substantial grounds to mitigate legal uncertainties and high cost of annulled dismissals. ### Enhancing wage-setting flexibility, especially for SMEs - Enhanced flexibility to set working conditions is critical to reflect firm- and sector-specific conditions, promote resource reallocation, boost productivity and income, and reduce structural unemployment. - Reforms took steps: prioritizing firm-level agreements over higher-level ones; easing 'opt-out' for firms in difficulties; limiting ultra-activity. - Outcomes and remaining issues: - Reform has not substantially changed structure of collective bargaining; incidence of firm-level agreements has not increased significantly. - Firm-level agreements remain unusual for SMEs; 'opting-out' is often the only wage adjustment option but requires agreements with workers’ representatives and conflict resolution procedures remain excessively demanding. - Suggested actions: - Enhance flexibility at the firm rather than sectoral-regional level by eliminating automatic extension of negotiated working conditions to all firms in corresponding sector. - Strictly verify thresholds of unions and employers’ representativeness. *International Monetary Fund staff summary of Chapter 19 of the IMF Country Report.* ### 25. The authorities emphasized the importance of continued job creation and the need ### 25. The authorities emphasized the importance of continued job creation and the need ### Labor market and employment priorities - Continued job creation and non-reversal of the 2012 labor market reforms, while allowing scope for some fine-tuning. - Policy priority: lowering unemployment, especially for the long-term unemployed and low-skilled youth. - Broad political consensus on enhancing the effectiveness of ALMPs (active labor market policies); ongoing efforts include improving incentive alignment with regional governments and private sector partners. - Tackling pervasive labor market duality is a longer-term goal requiring consensus among social partners; an expert group will first develop policy options before engaging in a new dialogue. - Collective bargaining: labor reforms have given firms greater flexibility; easier opting out acts as a disciplining tool despite muted uptake. Medium-term exploration of greater representativeness to conclude collective agreements with general effects could be considered. - Immediate focus: preserving reform achievements, notably in light of the recent Court of Justice of the European Union decision on temporary replacement workers. ### Structural reforms: boosting firm productivity and growth Findings - Spain’s weak productivity is a core medium-term challenge. - A large part of the recent improvement in total factor productivity (TFP) growth resulted from drastic labor shedding and exit of low-productivity firms during the crisis. - The 2012 reform agenda is likely to keep TFP growth at slightly above ½ percent over the next five years, implying potential growth will rise gradually but not surpass 1½ percent without further reform efforts. - Spain’s corporate landscape (many small firms that are less productive, innovative, and export-oriented than European peers) and significant within-sector heterogeneity point to inefficient resource allocation. - Product market regulation, uneven regional regulatory practices, size-dependent rules (including past tax incentives to SMEs), and relatively high debt-to-asset ratios have weighed on firm productivity and growth. - SMEs face constrained access to finance and investment compared to larger firms. Policy directions (three key areas) - Fostering competition: - Implementation of the Market Unity Law has been delayed; firms face three layers of administration (central, regional, and local). - Time and costs to open a business are "one and a half times the OECD average"; opening an industrial SME takes "eight times as long and costs twice as much as of opening a normal business." - Consider introducing performance-based transfers to regions to accelerate Market Unity Law implementation. - Delayed liberalization of professional services should be advanced to level the playing field, increase transparency and accountability of professional bodies, open up unjustified reserved activities and safeguard market unity in professional services. - Revisiting size-based regulations: - Review reporting, auditing, labor regulation and CIT incentives to address disincentive effects that can create a "small business trap." - Recent CIT reform eliminated the lower tax rate for small firms and replaced it with targeted support for startups. - Removing barriers to competition will ensure efficient market selection of new entrants. - Enhancing innovation capacity: - Limited by low private R&D spending and weak public R&D spending efficiency. - Addressable by improving coordination across government layers, strengthening public-private cooperation, and enhancing internationalization and financing. Authorities’ views on structural reforms - Broad agreement with identified obstacles and proposed policy options. - Emphasis on faster implementation of the Market Unity Law and the benefits of liberalizing professional services (noting the importance of progress at the EU level). - Enhancing innovation requires reforms beyond R&D spending, including education system changes. ### Financial sector: continue strengthening capacity to support growth Findings - Continued promotion of banks’ and borrowers’ resilience is critical to the economic recovery. - Improved asset quality, stronger capital and funding positions, and reduced debt overhangs mean the system is closer to leaving crisis legacies behind. - Borrowers have reduced debt overhangs amid improving labor market conditions. - Access to non-bank funding, particularly for frontier innovation, remains limited. - NPL reduction has proceeded well but at different speeds across banks; adequate provisioning and fuller use of the enhanced insolvency regime should be encouraged. - Use of the insolvency "fresh start" regime has been relatively limited. - Further deleveraging could be aided by addressing special treatment for public creditors and introducing a "cram-down" mechanism (allowing disregard of the dissent of several voting classes of creditors as long as they receive a fair value under the restructuring plan), and by removing uncertainties around the "fresh start" regime. - Banks should be encouraged to increase high-quality capital through retained earnings; additional capital would help ensure credit provision as credit demand picks up. - Banks may need to adjust liability structures to fulfill new regulatory requirements such as Minimum Requirements for Own Funds and Eligible Liabilities (MREL) and Net Stable Funding Ratio (NFSR). - Profitability pressures: return on equity is lower than the cost of capital; profitability stable recently as reduced net interest and other income were offset by falling impairment costs. Low interest rates and larger branch networks than peers pressure cost structures and business models. - Access to non-bank (equity) financing for frontier innovation is low relative to European peers; need to increase market-based financing (alternative exchanges, venture capital, securitization). - ICO (Instituto de Crédito Oficial) program remains highly relevant, with lending at more favorable conditions now more concentrated in tenures beyond three years. - Three pending financial-sector reform items: - Divestment of public ownership in two banks (Bankia/BFA and BMN) has stalled due to market conditions and political uncertainties; sale deadlines extended by two years; FROB exploring merger option. - Liquidation of real estate assets owned by SAREB: SAREB reduced its portfolio by 15 percent or about €8 billion in the first three years, slower than planned; SAREB registered a loss in 2015 after adoption of a new accounting rule, resulting in conversion of subordinated debt into equity with minimal impact on exposed banks given provisions already made. - Framework for savings banks and banking foundations is now fully in place, requiring divestment or reserve funds. - Macroprudential framework: - Bank of Spain has set amounts of countercyclical capital buffers (at zero) and capital surcharges for systemic banks, but the national macroprudential authority has not been established. - No imminent systemic cyclical risks, but framework development is needed to mitigate systemic risk buildup given return to positive credit growth and rising housing prices. - Banking union progress: - In February 2016, Bank of Spain completed transposition of CRR/CRD IV. - Bank of Spain plans to amend regulations to align national discretions of the CRR with recent ECB regulation. - Under the Single Supervisory Mechanism, supervision is more forward-looking and focuses on business models and risk management. - Preparation for resolution plans is work in progress; banks favor multiple points of entry for subsidiaries outside the euro area. - Upcoming FSAP will review financial stability architecture and advise on enhancing resilience. Authorities’ views on the financial sector - Broad agreement with staff’s assessment of progress and remaining challenges. - Positive trends seen as outcomes of decisive financial sector reform, including recapitalization and balance sheet cleansing. - Authorities view NPL reduction pace as appropriate and have ensured adequate provisioning and corrective measures for weak banks. - Low profitability is seen as the main future challenge for banks. - Authorities consider banks well-positioned to handle forthcoming regulatory changes and support finalization and implementation of pending financial reforms. - Authorities are committed to developing the macroprudential framework. *IMF staff appraisal (excerpted from the chapter).* ### 39. The Spanish economy has continued its impressive recovery and strong job creation. ### The Spanish economy has continued its impressive recovery and strong job creation. ### Macroeconomic rebound and labor market - Real GDP and employment growth have outpaced the euro area average despite a prolonged period of domestic political uncertainty. - The current account is projected to record its fourth consecutive annual surplus. - Private sector balance sheets have further strengthened. - Challenge: Lowering structural unemployment and raising medium-term potential growth above the estimated annual 1.5 percent remain key challenges. ### Drivers of the recovery (Box 1) - Combination of temporary tailwinds and structural reforms drove the strong recovery beginning in mid-2013. - 2015 outturns: - Real GDP growth was 3.2 percent in 2015, exceeding staff’s (and consensus) projection in the 2014 October WEO by 1.5 p.p. - The decline in oil price and interest rates explains about two thirds of the better growth outturn, each contributing about ½ p.p. (oil prices dropped by some 34 percent and long-term interest rates by about 100 bps compared to the October 2014 WEO projection). - A looser-than-projected fiscal stance (structural primary impulse of about 0.8 percent of GDP) provided an additional boost of about 0.4 p.p. - The remaining part of the growth surprise (about 0.2 p.p.) is attributed to other factors, such as stronger confidence effects of structural reforms. - 2016: growth will likely exceed earlier staff projections by 0.6 p.p., of which two thirds can be attributed to a looser than expected fiscal stance and most of the rest to stronger foreign demand. - Estimated impact of structural reforms on potential output: - Structural measures adopted so far could boost potential output by about 2½ percent over five years. - Structural reforms are estimated to add annually about ½ percent to potential growth over a five-year horizon. - Labor market reforms explain close to half of the total growth impact from structural reforms: estimated boost to potential output of 1.1 percent over five years. - Product market reforms: 0.4 percent (The market unity law (Dec 2013): 0.2; The retail reform (2012): 0.2). - Labor market reforms breakdown: The 2012 reform of unemployment benefits: 0.3; The EPL reduction: 0.3; The labor tax wedge reduction: 0.5. - The 2013 pension reform: 0.2. - The reduction of the share of direct taxation: 0.7. - Total GDP Impact (Impact on the level of potential GDP after 5 years, percent): 2.4. ### Structural problems and social outcomes (Box 2) - Despite progress, adjustment is incomplete and structural problems persist: - Far too many Spaniards are still without employment and many have been jobless for years. - Labor market duality remains pervasive, raising social exclusion, inhibiting human capital investment, and dragging on productivity. - High public debt, pockets of over-indebtedness in the private sector, and the still large negative net international investment position leave the economy vulnerable to shocks. - Inequality and poverty after the crisis: - The number of people at risk of poverty or social exclusion increased by more than 23 percent between 2007 and 2015 in Spain. - The Gini coefficient rose by 2¾ points during this period. - Spain exhibits the third highest income quintile share ratio in the EU, with the top 20 percent earning almost 7½ times as much income as the bottom 20 percent. - Employment fell by almost 20 percent between 2008 and mid-2013, disproportionately affecting low-educated/low-wage workers, youth, and immigrants. - Policy priority: measures to address duality and increase employability of long-term and young unemployed to reduce risks of social exclusion. ### Policy guidance: preserve reforms and advance structural agenda - Preserve earlier reforms and confidence-enhancing measures; reversing policy achievements could hurt market confidence and weigh on medium-term growth prospects. - Immediate priority areas with broad agreement on objectives (though not necessarily on tools): - Enhance ALMP to lower long-term and youth unemployment. - Reform regional public finances to safeguard public finances. - Strengthen innovation and education policies to lift productivity. - Additional labor and product market reforms should complement the medium-term strategy. ### Fiscal consolidation strategy - Recommendation: Resumption of gradual fiscal consolidation to put debt on a firm downward path. - Suggested pace: An annual adjustment of the structural primary balance of about 0.5 percent of GDP would bring the structural fiscal deficit into balance in five years and markedly lower the debt ratio. - Rationale: The pace strikes a balance between preserving the economic recovery and mitigating fiscal risks. - Growth- and job-friendly adjustment options: - Revenue side: Gradually reduce VAT exemptions and raise excise duties and environmental levies to align revenue collection with European peers. - Expenditure side: Conduct thorough expenditure reviews—particularly in health and education—to gauge further efficiency gains. - Protection and efficiency: Properly shield vulnerable groups and enhance efficiency of programs that support employment and growth, such as ALMP and public research and development spending. ### Regional financing and fiscal risks - The regional financing framework is a risk for public finances without reforms. - Reform objectives: - Improve regions’ incentives to comply with fiscal targets while accounting for different economic capacities. - Introduce more automatic and stricter enforcement of targets. - Provide regions with greater power to mobilize their own revenues. - Consider performance-based transfers to strengthen incentives to implement critical reforms (e.g., Market Unity Law and ALMP). ### Labor market policies and ALMP - Reducing unemployment—especially long-term and youth joblessness—remains a key challenge. - ALMP effectiveness is limited; urgent improvements needed, particularly better coordination with regional governments. - Hiring subsidies should be consolidated into better-targeted schemes, especially for the low-skilled and long-term unemployed. - Addressing labor market duality and allowing firms more control and flexibility over working conditions are critical to enhance labor market functioning. ### Productivity, SMEs, and product market reform - The cyclical recovery is an opportune time to raise productivity among many SMEs through: - Implementing the Market Unity Law. - Advancing delayed liberalization of professional services. - Lowering the cost of doing business to promote competition. - Enhancing private R&D investment, increasing efficiency of public R&D spending, and improving access to non-bank financing for frontier innovation. - Revisiting size-contingent regulations to overcome the small business trap. ### Banking sector outlook and recommendations - Banking system has gained further strength due to better asset quality, stronger capital and funding positions, and reduced debt overhangs. - Remaining challenges: - Banks have progressed at different speeds; NPLs and foreclosed assets remain sizeable. - Low profitability environment and new regulatory initiatives pose challenges. - Recommended actions: - Continue to ensure adequate provisioning. - Further improve efficiency—possibly through mergers. - Boost non-interest income. - Increase high-quality capital to enhance resilience and facilitate sufficient credit provision as credit demand picks up. ### Institutional recommendation - It is recommended that Spain remain on the standard 12-month Article IV consultation cycle. *Source: IMF staff assessment as presented in the specified IMF country report chapter.* ### Box 3. Spain: Spillovers from Latin America ### Box 3. Spain: Spillovers from Latin America ### Spillover channels and their relative importance - Trade exposure of Spain to Latin America is small though growing: exports of goods and services to this region represent "1¼ percent" and "½ percent" of Spanish GDP, respectively (average 2013–14), suggesting limited implications from growth deceleration in the region. - Direct financial ties are potentially more relevant than the trade channel for spillovers. ### FDI exposures and corporate presence - Latin America accounted for over a third of the outward FDI by Spanish firms (reported as "17 percent of outward FDI flows") in 2014. - Spain’s largest and publicly listed firms have a significant presence in the region, especially in Brazil and Mexico, which account for about "one quarter" of their total sales revenues. - FDI flows from Latin America to Spain have grown rapidly in recent years, but remain low in terms of FDI stocks ("less than 5 percent" of total FDI). ### Banking sector exposures to Latin America - As of March 2016, Spain’s two largest and global banks had about "one-fifth" of credit exposures to Latin America, resulting in total claims of Spanish banks to the region of about "12 percent" of total banking sector claims — a much higher share than other advanced economies’ banking systems. - Spanish subsidiaries in Latin America operate with a subsidiary model primarily based on decentralized management and funded locally in domestic-currency. ### Profitability, asset quality, and capital implications - In 2015, operations in Latin America accounted for "43" and "80 percent" of group-wide profits (excluding centralized corporate operations) for the two Spanish global banks, respectively, contributing a higher return on assets than domestic-oriented banks. - Spanish subsidiaries appear to be in a solid position to deal with rising credit risk: - Their pre-impairment net income could potentially absorb about "up to twice the current NPL level." - However, lower profits would weaken contributions to the parents’ capital buffers. - An illustrative shock: a "25 percent" increase in the impairment of financial assets by subsidiaries could reduce the contribution of profits to group-wide capital by about "25 percent." - So far, adverse macroeconomic conditions and asset quality deterioration in Argentina, Brazil and Venezuela have not yet significantly marked down profitability, although NPLs typically worsen with some lag. ### Key implications and risk factors - Prolonged recessions and weak local currencies in Latin America could harm profitability and stock market valuations of Spanish multinational firms with large regional footprints. - A sizeable increase in asset impairments in Latin American subsidiaries could have a material impact on group-wide profitability and capital contributions, despite subsidiaries’ current capacity to absorb additional losses. *Box 3. Spain: Spillovers from Latin America — IMF staff summary* ### Annex I. Taking Stock of the 2012 Labor Market Reforms ### Annex I. Taking Stock of the 2012 Labor Market Reforms ### Overview - The 2012 labor market reforms aimed to address Spain’s structural problems: very high structural unemployment, employment volatility, wage rigidity, high shares of temporary employment, and low labor productivity. - Reform objectives included: enhancing market efficiency and reducing duality; fostering firms’ internal flexibility to avoid employment destruction; and enhancing the employability and fungibility of workers. - Overall assessment: reforms have helped improve functioning of the Spanish labor market—supporting wage moderation, job creation, and competitiveness recovery—while important rigidities remain, including high unemployment, pervasive duality, and low micro‑flexibility. ### A. Wages and Employment - General findings: - Empirical analysis suggests the reforms contributed to significant wage moderation (Bank of Spain 2013, OECD 2014, Garcia‑Perez 2016). - OECD (2014) estimates a reduction in unit labor costs of 1.2–1.9 percent associated with the reforms (that is, half of the actual adjustment in the year following the reform). - IMF (2015) analysis finds increased macro‑flexibility of wages since the reform, with employment contractions no longer associated with higher wage growth; however, there is no evidence of increased micro‑flexibility. - Wage moderation contributed to a recovery in headline employment growth and made the labor market more resilient to shocks. - Distributional effects and inequality: - Real wages of workers in the first and second lowest deciles fell by 25 percent and 15 percent, respectively, between 2008 and mid‑2013. - Real wages of the highest deciles increased slightly (10 percent in the top decile). - Movers (especially temporary-contract holders, youth, and low‑skilled workers) suffered the largest losses, leading to a surge in wage inequality. - Hiring and contracts: - Reforms supported hiring, particularly under permanent contracts, by increasing transitions from unemployment to permanent employment and reducing dismissals for temporary workers (Garcia‑Perez, 2016). - OECD (2014) suggests about 25,000 new permanent contracts per month can be explained by the reforms (in the first 18 months), with impact concentrated in SMEs. - De Cea and Dolado (2013) estimate the output growth rate threshold necessary for net job creation declined after the reform to 0.3–1.3 percent. - Dismissals and litigation: - OECD (2014) finds the impact on separation rates in the first 1½ years since the reform was negligible. - Court rulings nullifying collective dismissals increased, creating legal uncertainty (Jansen, 2015; OECD, 2014). For example, Palomo Balda (2013) notes litigation affected about 5 percent of collective dismissals between March 2012 and March 2013, with courts ruling 40 percent of these collective dismissals null due to administrative reasons even when 85 percent had valid grounds. - Quantitative counterfactual estimates (Doménech and others, 2016): - In absence of wage adjustment facilitated by the reform, an additional 900,000 jobs would have been lost—basically offsetting overall net job creation observed in 2014–15. - The loss of 2 million long‑term jobs and an increase of about 8 percentage points in the unemployment rate could have been prevented had the post‑reform wage flexibility prevailed in 2008–12. ### B. Duality - Summary assessment: reforms helped reduce duality statistically significantly, but economic significance is small and duality remains pervasive. - Key findings: - A large share of new jobs (53 percent) relies on temporary contracts; the share of temporary jobs in overall employment has remained about 25 percent since 2008. - Compared with pre‑crisis levels, the share of temporary jobs declined by around 6 percentage points, largely due to destruction of temporary jobs (2008–12) rather than substitution to permanent contracts. - The share of permanent contracts in the flow of new monthly contracts has remained fairly stable at around 8–10 percent with no apparent change since the reform. - OECD (2014) indicates the reform may have increased the share of permanent employment in new hires by 3 percentage points, but duality remained very high. - IMF (2015) finds some evidence that the share of new hires with temporary contracts started to decrease due to the reform, yet reliance on temporary workers remains strong. - Garcia‑Perez (2016) estimates the reform raised the transition probability from unemployment to permanent employment by about 50 percent, increasing it from 1.7 percent to 2.6 percent on average in the first 12 months of unemployment. - However, transition to temporary employment remains the most likely option at 12 percent in the first year of unemployment; exit to temporary jobs is five times higher than to permanent jobs (12 percent versus 2.6 percent), making the short‑term impact on the stock of permanent employment marginal. ### C. Collective Negotiation - Main conclusions: - The 2012 reforms did not have a major impact on the structure of collective negotiation; agreements continue to be mostly negotiated at the sector‑province level with few firms ‘opting‑out’. - Wage dynamics still do not reflect firm‑specific business conditions adequately. - Firm‑level agreements increased in number but affect only a small number of workers, mostly in large firms; firm‑level agreements remain unusual for SMEs. - ‘Opt‑outs’ are a limited mechanism for SMEs and require agreements with workers’ representatives; procedures for resolving conflicts associated with ‘opt‑outs’ remain excessively demanding. - Coverage of collective negotiation has not declined as feared: although the number of workers affected by collective agreements has declined since the reform, the number of private sector workers fell even more, so the coverage rate has actually increased moderately. ### D. Structural Unemployment - Evidence on structural unemployment: - OECD (2014) finds the reform appears to have reduced the duration of unemployment spells, which could help reduce structural unemployment. - IMF staff estimates indicate that between 2012 and 2015 the estimated structural unemployment declined by around 3 percentage points. - Nevertheless, structural unemployment remains very high at about 16 percent, reflecting long‑standing problems and crisis impacts, including pervasive labor market duality and its effects on workers’ skill levels. *Prepared by Sebastian Sosa; Annex I text as provided in the source document.* ### 2009. Credit growth to the non-financial private sector has remained negative owing to the weak ### cr1723 - 2009. Credit growth to the non-financial private sector has remained negative owing to the weak ### Credit growth, household deleveraging, and loan demand - Credit growth to the non-financial private sector has remained negative owing to weak demand for new loans in 2009. - While demand for new loans has picked up in line with the economic recovery, amortization has continued to outpace new bank lending. - Main drivers of weak demand for new credit: - Depressed consumption and investment levels. - High unemployment. - Weak disposable incomes. - Low house prices. - Corporates and households strengthening financial positions. - Household sector vulnerabilities and balance-sheet dynamics: - Household debt (both relative to GDP and disposable income) has been brought to a level comparable to other major EU countries; household indebtedness in EU countries has been on the rise and is generally considered to be a vulnerability. - Financial wealth of Spanish households is far below that of EU peers. - Housing wealth is well below pre-crisis levels, even though it is high in international comparison. - Household deleveraging is linked in large part to positive valuation changes, accounting for about 10 percent of GDP, slightly less than half of their total net asset increase. ### Banks, sovereign exposure, and the Public Sector Purchase Program (PSPP) - The domestic banking system has reduced its sovereign exposure facilitated by the PSPP since 2015. - ECB QE purchases of government-issued securities are largely carried out by domestic central banks and kept on their balance sheets, while increasing their liabilities against the ECB (i.e., the rest of the world). - Nine percent is done directly by the ECB and kept in its balance sheet. - Mechanism and balance-sheet effects: - Banks receive liquidity in exchange for reducing exposure to the general government. - In the context of private sector deleveraging, Spanish banks used liquidity to reduce liabilities with the rest of the world by selling assets (government securities) and paying back liabilities with the Eurosystem. - On the BdE’s (Bank of Spain) balance sheet (mirror image), assets (government debt) and liabilities increased, reflected in an increase in Target2 balances. - Despite reductions, Spanish banks still hold a large proportion of sovereign debt compared to peers; their remaining domestic exposure is a source of vulnerabilities. - Valuation changes significantly contributed to balance sheet changes. ### Valuation changes and cross-sectoral effects (2013:Q1–2016:Q2) - Between 2013:Q1 and 2016:Q2: - The rest of the world received positive valuation gains equivalent to about 11 percent of GDP as Spanish-issued assets regained value. - Household deleveraging linked to positive valuation changes accounted for about 10 percent of GDP. - Net debtor sectors experienced valuation losses: - General government experienced sizable negative valuation effects equivalent to about 9 percent of GDP. - Monetary financial institutions (including BdE) experienced sizable negative valuation effects equivalent to about 9 percent of GDP. - Valuation loss for non-financial corporates was about 2 percent of GDP. ### External position, current account, and real exchange rate - Net international investment position (NIIP) and external debt: - NIIP dropped from -35 percent of GDP in 2000 to -98 percent of GDP in 2009, driven mostly by substantial current account deficits and valuation effects. - NIIP remains elevated at -88.5 percent at 2016Q2, which is 9 percentage point lower than in end-2014. - Gross external debt is still high, around 171 percent of GDP. - Overall assessment (2016): - The external position in 2016 is estimated to be substantially weaker than that consistent with medium-term fundamentals and desirable policy settings. - The current account (CA) continued to improve in 2016, helped by lower oil prices and low interest rates. - Current account details: - Peak CA deficit in 2007 was 9.6 percent of GDP. - Exports and imports have grown strongly with the recovery, leading to CA surpluses in 2013–15. - In 2016, the CA surplus is projected to widen to 2 percent of GDP (or 1.2 percent of GDP cyclically adjusted). - EBA model-based estimate (new EBA CA regression-based approach) suggests a CA norm for 2016 of 1.6 percent of GDP; IMF staff gauges the CA norm to be around 2 percent of GDP to address the very negative NIIP. - The staff assessment implies the cyclically adjusted CA was almost 1 percent of GDP weaker than desirable in 2016. - Under staff’s current forecast, a gradually improving CA will strengthen the NIIP by about 4-5 percent of GDP annually in the medium term. - Reducing the still sizable structural fiscal deficit is a key policy requirement to lower remaining imbalances. - Real effective exchange rate (REER): - In 2016 the CPI-based REER increased by nearly 1 percent from its average 2015 level and declined by about 6 percent from its 2009 peak. - The CPI-based REER had appreciated 17 percent from euro entry in 1999 until 2009. - ULC-based REER shows the appreciation has been substantially reversed since euro entry, initially due to labor shedding and more recently wage moderation. - The two EBA REER regression model approaches estimate an overvaluation of 8.8 and 2 percent for 2016, respectively (with reference to the CPI-based REER). - Taking historical and model-based analysis into account, staff assesses a 2016 REER gap of around 5 to 10 percent above the level consistent with medium-term fundamentals and desirable policies. ### Policy recommendations and authorities’ actions - Fiscal policy: - Continue fiscal consolidation by using windfalls towards deficit reduction, planning for an adjustment of ½ percent of GDP per year, and ensuring more ambitious and better-specified measures at all government levels, while protecting the most vulnerable. - Further improve the regional fiscal framework by enhancing monitoring and enforcement of regional fiscal targets, rules, rebalancing risk sharing and discipline, and improving fiscal equalization and settlement procedures. - Financial sector policies: - Encourage banks to increase capital and reduce the cost of carrying high NPLs. - Strengthen SMEs’ access to finance by enhancing market-based financing, accuracy of financial reporting and transparency, by direct financing and guarantees for new firms through ICO, including European efforts. - Facilitate private deleveraging by ensuring effective implementation of the “fresh start” to encourage demand, while preserving the strong payment culture. - Structural reforms: - Labor market: keep wage growth in line with productivity and external competitiveness; ensure the use of firm-level wage bargaining and opt-out, particularly by small firms; close the gap between dismissal costs of temporary and permanent contracts; reduce legal and administrative uncertainties in collective dismissals; increase the effectiveness of active labor market policies (ALMP). - Productivity and product market reforms: support small firm growth by fostering competition through faster implementation of the Market Unity Law and liberalization of professional services; assess size-related policies and eliminate unwarranted obstacles to growth; support internationalization and innovation. - IMF staff noted progress and gaps: - Banks have significantly strengthened balance sheets and increased capital buffers, though NPLs and foreclosed assets remain sizeable. - New credit, including to SMEs, is being extended rapidly while private sector deleveraging continues. - The “fresh start” reform has been implemented but additional efforts are needed to ensure efficacy. - Wage moderation continued, but firm-level wage bargaining and opt-outs remain hampered by administrative obstacles; no action taken to close dismissal-cost gap or to liberalize professional services. - Suggested medium-term policy responses to address external imbalances: - Continue fiscal adjustment and advance structural labor and product market reforms to accelerate adjustment. - Continued monetary easing at the euro area level to lift inflation closer to the ECB’s medium-term price stability objective to help increase external demand. ### External risks, relative likelihood, impact, and policy responses (selected) - Structural weak growth in key advanced and emerging economies - Relative likelihood: High - Impact if realized: Medium — weak demand, low productivity growth, persistently low inflation; lower medium-term potential growth; higher NPLs; worse debt dynamics. - Policy response highlights: - Deepen product market and other structural reforms to raise productivity. - Enhance labor market performance and lower duality. - Let automatic stabilizers play if the output gap widens. - Continue strengthening the financial sector. - Rise in populism and nationalism in large economies - Relative likelihood: High - Impact if realized: Medium — could slow/reverse policy coordination, trade liberalization, cross-border flows; affect confidence and investment. - Policy response highlights: - Accelerate structural reforms, enhance labor market performance. - Let automatic stabilizers play if the output gap widens. - Sharp rise in risk premia with flight to safety - Relative likelihood: Medium - Impact if realized: Medium — tightening of financial conditions; re-emergence of bank-sovereign-real economy links. - Policy response highlights: - Formulate credible medium-term fiscal path to support investor confidence. - Banks to continue building capital buffers. - Further ECB policy actions could help depending on shock nature. - Protracted uncertainty associated with negotiating post-Brexit arrangements - Relative likelihood: Medium - Impact if realized: Medium — weakened confidence and investment; weaker external demand from the U.K. and euro area. - Policy response highlights: - Accelerate structural reforms and formulate credible medium-term fiscal path. - Let automatic stabilizers play if the output gap widens. *Source: IMF staff report content as provided* ### Appendix III. Risk Assessment Matrix ### Appendix III. Risk Assessment Matrix ### Domestic Risks — Weak implementation of fiscal commitments and structural reforms - Source of Risks: Weak implementation of fiscal commitments and structural reforms or reversal of past policy achievements. - Relative Likelihood: Medium - "Traction for structural reforms is low in a fragmented parliament with a minority government. Pressures to reverse earlier reforms. A credible medium-term fiscal path has yet to emerge." - Impact if Realized: High - "Lack of or reversal of reforms and fiscal consolidation could weaken confidence, investment, and employment, which would adversely impact public debt dynamics and could trigger adverse market reactions." - Policy response: - "Return to gradual, steady and growth-friendly fiscal consolidation." - "Advance ongoing structural reforms and enhance labor market performance." - "Reform the regional financing framework to reduce fiscal risks." *The Risk Assessment Matrix (RAM) shows events that could materially alter the baseline path (the scenario most likely to materialize in the view of IMF staff). The relative likelihood of risks listed is the staff’s subjective assessment of the risks surrounding the baseline (“low” is meant to indicate a probability below 10 percent, “medium” a probability between 10 and 30 percent, and “high” a probability of 30 percent or more). The RAM reflects staff views on the source of risks and overall level of concern as of the time of discussions with the authorities. Non-mutually exclusive risks may interact and materialize jointly.* *Appendix III. Risk Assessment Matrix (concluded)* --- ### Appendix IV. Debt Sustainability Analysis ### Overview — Key conclusions - "Public debt sustainability risks remain sizeable, despite the reduction of the headline fiscal deficit over the last six years." - Baseline projection: public debt projected to decline slowly from the peak of 100.4 percent of GDP in 2014. - Projected public debt: 95.6 percent of GDP in 2021 under the baseline. - Policy priority: "Returning to a gradual but steady and credible fiscal consolidation remains a priority." - Impact of structural adjustment: "An annual structural adjustment of about ½ percent of GDP over the medium term would put debt firmly on a downward path, bringing it around 91.6 percent of GDP by 2021—4 percentage points lower than under the baseline." - Gross financing needs: declined below the 20 percent of GDP early warning benchmark and projected to be 16½ percent of GDP in 2021. ### A. Public Debt Sustainability Analysis — Background and developments - Definitions and coverage: - Public debt comprises Excessive Deficit Procedure (EDP) debt in the hands of the General Government (Central Government, Regional Governments, Local Governments, and Social Security Funds). - EDP debt is a subset of General Government consolidated debt and stocks are recorded at their nominal value. - Developments: - Public debt-to-GDP ratio increased from 35.5 percent of GDP in 2007 to 99.8 percent in 2015. - Drivers: large fiscal deficits (about 7¾ percent of GDP on average during 2008–15), unfavorable growth-interest rate differential (contributed by an annual average of about 2½ percent of GDP), and support to the banking sector (added about 4½ percent of GDP). - Gross financing needs peaked at 22 percent in 2012 and have declined below 20 percent of GDP. - 10-year bond yield decline from about 6¾ percent in mid-2012 to about 1.5 percent in November 2016. - Interest payments expected to fall below 3 percent of GDP in 2016. - Other factors: - Amortization profile: 82 percent of total debt tilted to the long term (residual maturity basis). - Marginal life at issuance increased from 5 years in 2012 to over 9 years in 2015. - Average life of outstanding debt increased from 6.2 to 6.6 years over the same period. - Share held by the Spanish banking system about 42½ percent; share held by the ECB increased to 7½ percent. - Eurosystem PSPP purchases amounted to about EUR61 billion in 2015 (28 percent of the gross financing needs). - Share of public debt held by residents declined to 57½ by end-2015 (10 percentage points decline since 2012). - Stock of financial assets about 35 percent of GDP in 2015; net public debt levels amounting to 80 percent of GDP. ### A. Public DSA — Baseline assumptions and projections - Baseline projections: - Public debt: 99.2 percent of GDP in 2017, declining slowly to 95.6 percent by 2021. - Gross financing needs: remain below 20 percent, projected at 16½ percent of GDP in 2021. - Assumptions: - (i) growth projected to remain at 3.2 percent in 2016 and moderate to 2.3 percent in 2017. - (ii) over the medium term, growth set to converge toward potential rate of around 1½ percent. - (iii) structural adjustment of around ½ percent of GDP in 2017, followed by a broadly neutral fiscal stance over the medium term in structural primary terms. - (iv) inflation (GDP deflator) projected to increase gradually from 0.5 percent in 2015 to 1½ percent in 2021. - (v) long-term sovereign spreads assumed to increase slowly from 1.2 percent in 2015 to 1.5 percent in the medium term, with 10-year bond yields increasing moderately. ### A. Public DSA — Stress tests and scenario outcomes - General: "Public debt levels would either remain broadly flat or increase under a number of standard shock scenarios." - Contingent liabilities and negative growth shocks are the largest risks; debt could peak around 116½ percent of GDP (contingent liabilities scenario) or 111 percent of GDP (combined negative shocks scenario). - Growth shock: - Assumption: real GDP growth rates lower than baseline by one (10-year historical) standard deviation for two consecutive years, in 2017–18. - Implication: real GDP would decline on average by 0.5 percent per year versus annual average growth of 2.2 percent under the baseline. - Primary balance weaker by about 2 percent of GDP per year (on average). - Debt-to-GDP: 109.8 percent in 2018, declining to 106.6 percent in 2021 (11 percentage points higher than baseline). - Gross financing needs: increase to 22.1 percent in 2018 (above 20 percent benchmark). - Primary balance shock: - Assumption: relaxation of fiscal policy in 2017–18, cumulative deterioration of the primary balance of 4½ percent of GDP (shock equal to ½ the 10-year historical standard deviation). - Debt-to-GDP: peak at 103.3 percent in 2018, declining to 100.3 percent in 2021 (4.7 percentage points higher than baseline). - Gross financing needs: peak at 20.9 percent of GDP in 2018. - Interest rate shock: - Assumption: nominal interest rate shock of about 240 basis points during 2017–21. - Effective interest rate increases to 3.7 percent by 2021 compared to 2.7 percent in the baseline. - Debt-to-GDP: 98.3 percent in 2021 (broadly stable versus baseline). - Combined shock (growth + primary balance + interest rate): - Debt-to-GDP: increase to 111.1 percent in 2018, remaining at this high level through 2021 (almost 15 percentage points higher than baseline). - Gross financing needs: peak at over 22.9 percent of GDP in 2018. - Contingent liability shock (negative financial sector shock): - Assumption: one-time increase in non-interest public expenditures in 2017 equivalent to 10 percent of banking sector assets, combined with lower growth and lower inflation in 2017–18 (growth reduced by 1 standard deviation). - Primary deficit: rise to 10.9 percent of GDP in 2017. - Gross financing needs: 28.7 percent of GDP in 2017 (about 9 percentage points above standard early warning benchmark levels). - Debt-to-GDP: peak at 116.5 percent in 2018, then decline to about 113.5 percent in 2021 (17.9 percentage points higher than baseline). ### A. Public DSA — Heat Map - "Risks associated with public debt remain high as the benchmark level (85 percent of GDP) is breached under the baseline scenario as well as in each of the shock scenarios." - Gross financing needs: remain below 20 percent of GDP under the baseline, but surpass that benchmark with output and primary balance shocks and contingent liabilities. - Debt profile risks: high level of external financing needs and share of public debt held by non-residents are vulnerabilities. ### B. External Debt Sustainability Analysis — Overview and baseline - Summary: "While external debt is set to continue its gradual decline over the medium term, it will take time to reach levels that significantly lower the vulnerability to external shocks." - Mitigating factors: currently low cost of debt, favorable maturity structure, export and bank exposure diversification, and competitiveness gains since the crisis. - Baseline assumptions: - Moderation of Spanish real GDP growth recovery over medium term to estimated potential growth rate of about 1½ percent of GDP. - Trade balance and current account forecast to remain in surplus, somewhat above 2015 levels. - External debt-to-export ratio projected to sharply decline by over 132 percentage points during 2016–21. - External debt: 168 percent of GDP by end-2015, projected to decline to 142 percent of GDP by 2021. - Gross external financing needs: around 61 percent of GDP by 2021 (remain a vulnerability). ### B. External DSA — Stress scenarios and numeric outcomes - Historical shock scenario: - Assumptions: real GDP growth path of only 0.4 percent over next five years combined with a 1.2 percentage point higher nominal interest rate. - Outcome: external debt would rise by more than 30 percent of GDP by 2021; external debt-to-GDP would rise to 202 percent of GDP. - Interest rate shock: - Assumption: increase from 1.9 percent in the baseline to 2.7 percent. - Outcome: external debt would rise only slightly (3 percentage points by 2021). - Real depreciation shock: - Assumption: 30 percent real depreciation shock; transmission via valuation effects. - Outcome: increase in debt ratio would be small (2 percentage points of GDP). - Note: Spain has a low share of debt denominated in foreign currency. - Growth shock: - Assumption: real GDP growth averages 0.6 percent versus 2 percent in baseline. - Outcome: external debt would be around 11 percent of GDP higher in 2021 (153 percent of GDP). - Combined shock: - Assumption: one quarter standard deviation shocks to real interest rate, real GDP growth rate, and the current account balance. - Outcome: external debt-to-GDP would be 12 percent higher in 2021 at 154 percent of GDP. ### B. Extended External DSA — Methodology and selected shocks - Methodology: uses estimated equations for export and import demand (see second chapter of Selected Issues paper) to incorporate reduced form responses of trade balance components to shocks. - Real appreciation shock: - Assumption: 30 percent nominal appreciation of the Euro against the USD bilateral exchange resulting in about 8 percent appreciation of the real effective exchange rate. - Impact: export growth slows, trade balance reduced to about 1/2 percent of GDP in medium term; external debt would increase by 6 percent by 2021 absent revaluation effects. - With revaluation effect: resulting debt-to-GDP ratio of 149 percent by 2021. - Oil price shock: - Assumption: permanent reversion of the oil price to its 2001–15 average (US$ 66 per barrel) by 2017. - Impact: trade balance reduced to 1.4 percent of GDP in the medium term; external debt increases by 10 percentage points by 2021 relative to baseline. - Global demand slow down shock: - Assumption: Spain’s trading partners’ import demand grows permanently by 1 percentage point less every year. - Impact: lowers Spain’s export growth and reduces medium-term trade balance (text truncated in source). *Appendix IV. Debt Sustainability Analysis* *SPAIN — INTERNATIONAL MONETARY FUND* ### 1.3 percent of GDP and external debt would increase by 10 percentage points relative to the ### Spain Public DSA — Key Findings and Scenarios ### Debt Dynamics and Projections - Baseline gross nominal public debt trajectory (selected years, in percent of GDP): 2014: 57.7, 2015: 100.4, 2016: 99.8, 2017: 99.3, 2018: 99.2, 2019: 98.8, 2020: 97.8, 2021: 96.7, 95.6. - Baseline external debt (in percent of GDP): 2011: 160.3; 2012: 166.2; 2013: 159.8; 2014: 167.7; 2015: 168.5; 2016: 162.8; 2017: 158.2; 2018: 154.0; 2019: 149.8; 2020: 145.7; 2021: 141.9. - Change in external debt (selected): 2016: -5.7; 2017: -4.6; 2018: -4.2; 2019: -4.2; 2020: -4.1; 2021: -3.8 (in percent of GDP). - Gross external financing need (in billions of US dollars): 2011: 1089.4; 2012: 1123.8; 2013: 1058.0; 2014: 962.4; 2015: 968.2; 2016: 879.4; 2017: 891.3; 2018: 901.9; 2019: 909.6; 2020: 920.3; 2021: 929.9. - Gross external financing need (in percent of GDP, selected): 2011: 73.1; 2012: 84.1; 2013: 77.7; 2014: 69.8; 2015: 81.1. ### Stress Tests and Shock Scenarios - Combined shock (EUR/USD appreciation, oil price increase, external demand deceleration): external debt of 157 percent of GDP in 2021, compared to 142 percent of GDP in the baseline. - Global slowdown shock (global growth reduced by 1 percent) results: external debt under scenario shown as 142 (baseline) vs 157 (scenario) in chart annotations. - Real depreciation shock: one-time real depreciation of 30 percent occurs in 2016 in scenario setup. - Oil price shock: one-time shock that brings the oil price level to its 2001-2015 average value by 2017. - Appreciation shock: one-time 30 percent nominal appreciation (euro/usd) in 2017. - Individual shocks are permanent one-half standard deviation shocks; combined shock includes appreciation, oil, and global growth shocks. ### Drivers of External Debt Changes - Identified external debt-creating flows (aggregate of current account, residuals, etc.), 2011–2021 (selected): 2011: 1.5; 2012: 4.5; 2013: -3.8; 2014: -7.1; 2015: -5.4; 2016: -7.9; 2017: -6.2; 2018: -5.9; 2019: -5.8; 2020: -5.6; 2021: -5.2 (in percent of GDP). - Current account deficit excluding interest payments (in percent of GDP): 2011: -0.8; 2012: -4.3; 2013: -5.5; 2014: -4.6; 2015: -4.6; 2016: -4.9; 2017: -4.5; 2018: -4.5; 2019: -4.7; 2020: -4.9; 2021: -5.2. - Net non-debt creating capital inflows (negative values indicate outflows), 2011–2021 (selected): 2011: -2.2; 2012: -2.2; 2013: -4.0; 2014: -4.3; 2015: -0.6; 2016: -0.7; subsequent years: -0.8 (2017–2021) (in percent of GDP). - Automatic debt dynamics contributions (selected): contribution from nominal interest rate (2011–2021): 4.0, 4.6, 4.0, 3.5, 3.2, 2.9, 2.7, 2.7, 2.7, 2.9, 3.2 (in percent of GDP); contribution from real GDP growth (2011–2021): 1.5, 5.2, 2.8, -2.2, -6.2, -5.2, -3.6, -3.2, -3.0, -2.7, -2.4 (in percent of GDP). ### Baseline Macroeconomic Assumptions (selected) - Real GDP growth (in percent): 2014: 0.4; 2015: 0.4; 2016: 0.4; 2017: 2.8; 2018: 3.2; 2019: 2.3; 2020: 2.1; 2021: 2.0; continued projection: 1.9; 1.7 in later lines. - Inflation (GDP deflator, in percent): 2014: 0.7; 2015: 1.0; 2016: 0.5; 2017: 0.7; 2018: 1.0; 2019: 1.2; 2020: 1.4; 2021: 1.5; 1.6 noted. - Effective interest rate (in percent): 2014: 2.9; 2015: 2.8; 2016: 2.7; 2017: 2.3; 2018: 2.2; 2019: 2.2; 2020: 2.6; 2021: 2.7 (values vary across scenarios). - Public gross financing needs (in percent of GDP): 2014: 13.4; 2015: 20.8; 2016: 19.9; 2017: 19.2; 2018: 18.0; 2019: 17.5; 2020: 17.0; 2021: 16.7; later noted 16.4, 5.0, etc., across panels. ### Public Sector Fiscal Position - Primary balance (in percent of GDP): 2014: -3.5; 2015: -3.0; 2016: -2.4; 2017: -2.1; 2018: -0.9; 2019: -0.5; 2020: -0.2; 2021: -0.1; projected improvement to 0.1 in some lines. - Primary (noninterest) revenue (in percent of GDP): 2014: 37.5; 2015: 38.4; 2016: 38.3; 2017: 37.7; 2018: 37.9; 2019: 37.8; 2020: 37.7; 2021: 37.7; cumulative 22.6 noted in table. - Primary (noninterest) expenditure (in percent of GDP): 2014: 41.0; 2015: 41.4; 2016: 40.7; 2017: 39.7; 2018: 38.8; 2019: 38.4; 2020: 37.9; 2021: 37.8; cumulative 23.0 noted in table. - Change in gross public sector debt (cumulative projection): change in debt 2014–2021 totals include identified debt-creating flows and residuals, with cumulative change over 2014–2021: -4.2 (percent of GDP) in one instance. ### Realism, Forecast Track Record, and Vulnerabilities - Forecast track record (2007–2015): Spain median forecast error for Real GDP Growth: -0.48 (38% percentile rank); Primary Balance: -1.22 (30% percentile rank); Inflation (Deflator): -0.18 (19% percentile rank). - Debt profile vulnerabilities indicators shown against benchmarks include bond spread (110 bp), external financing requirement benchmarks at 17 and 25 percent of GDP, change in share of short-term debt benchmarks at 1 and 1.5 percent, and public debt held by non-residents benchmarks at 30 and 45 percent. - Public Debt Held by Non-Residents noted at 44% in one chart; other debt profile metrics by maturity and currency presented. ### Sectoral and Structural Notes - Labor market: 2012 labor market reform lowered GDP growth threshold for net employment creation from 2 percent to around 0.7 percent; net job creation in last two years exceeded 1 million; employment growth over 3 percent year-on-year since 2015; unemployment rate reduced by 8 percentage points from peak. - External sector: IMF expects a current account surplus of 2 percent in 2016; exports share of GDP nearly ten percentage points higher than before the crisis; Spain shifted from net borrower to net lender, recording fifth consecutive year with lending capacity to the rest of the world in 2016. - Financial sector: banking system strengthened with better asset quality, stronger capital and funding positions, downward-trending NPLs; challenges include low profitability and new regulatory initiatives. - Private sector deleveraging: non-consolidated private sector debt fell by 50 percentage points since 2010; household debt decreased by almost 20 percentage points. ### Policy Actions and Recommendations (as reported) - Government measures: decree to establish a mediation mechanism for variable-interest mortgage contracts with floor clauses; plan to task AIReF with conducting an expenditure review; expert commission to seek reforms for the regional financing system. - Fiscal measures for 2017 amounting to more than €7 billion, including increases in the CIT tax base, increases in excise taxes, and improvements in tax collection; European Commission estimates adjusted fiscal structural effort of 0.7 percent of GDP. - Authorities emphasize preserving prior structural reforms, continue fiscal consolidation under the Stability and Growth Pact, and implement measures to raise productivity (especially for SMEs) via Market Unity Law enforcement, reducing red tape, improving SMEs’ financing, corporate governance, and competition. - Planned institutional initiatives: expert committee on pension reform; high level working group on regional financing to propose a new regional financial framework within one year; Royal Decree Law establishing an out-of-court procedure for mortgage floor clause claims; announced reforms to the Law on Mortgages to improve consumer protection. *Source: IMF staff report sections and annexes (Spain Public DSA and informational annex, as of November 30, 2016 and January 10–27, 2017).* --- _Source: https://www.imf.org/-/media/files/publications/cr/2017/cr1723.pdf_