## 1espea2023001 — SPAIN: Selected IMF Staff Report Excerpts ## Source details **Canonical URL:** [1espea2023001 — SPAIN: Selected IMF Staff Report Excerpts](https://www.imf.org/-/media/files/publications/cr/2023/english/1espea2023001.pdf) ## Other formats - [Markdown version](/-/media/files/publications/cr/2023/english/1espea2023001.pdf.md) - [Structured JSON version](/-/media/files/publications/cr/2023/english/1espea2023001.pdf.json) --- ### Recent developments: inflation, energy, and activity - Headline inflation fell to 5.8 percent in December, reflecting a drop in European gas prices and the impact of energy support measures. - Core inflation remains above 6 percent (core inflation flash estimate: 6.9 percent in December) due to gradual passthrough of higher energy costs and possibly diminishing spare capacity. - Wage developments: - Increases of wages per worker: 3.3 percent in 2022:Q3. - Collective bargaining increases in 2022 up to November: 3.0 percent. - Distributional effects: - Erosion of purchasing power more pronounced for poorer households; inflation by household expenditure quintile shows larger increases for the bottom quintile than the top quintile. - Activity: - Spain’s economic activity has been resilient, supported by a rebound in tourism and services and timely policy support. - Economic activity remained 2 percent below pre-pandemic levels by mid-2022 (based on earlier staff assessment; revised data subsequently show GDP at end-3Q was 1.4 percent below pre-pandemic level). ### Outlook and risks (baseline projections and downside/upside factors) - Growth projections: - Growth projected to moderate from 5.2 percent in 2022 to 1.1 percent in 2023. - Annual output growth projected at 4.6 percent in 2022 (carryover from 2021 accounts for 3.6 percentage points of GDP growth in 2022). - Output is projected to reach its pre-pandemic level by early 2024. - Inflation projections: - Headline inflation forecast to average 8.5 percent in 2022. - Core inflation forecast to average 5 percent in 2022. - Headline and core inflation projected to moderate gradually in 2023 but remain above the 2-percent target in the near term; projected to remain above 2 percent until 2024. - Key baseline assumptions: - European gas prices to remain elevated. - One-year Euribor rates to increase to 3.5 percent in 2023. - A broadly neutral fiscal impulse for 2023. - Main downside risks: - tighter-than-expected financial conditions, - weaker global demand, - further energy price volatility. - Upside risks: - accelerated use of NGEU funds, - faster unwinding of household savings boosting domestic demand. - Adverse scenario quantification: - In an adverse scenario combining higher energy prices, tighter financial conditions, and other shocks, growth in 2023 could be 0.5 to 0.7 percentage points lower compared to the baseline. ### Executive Board assessment and macroeconomic policy guidance - Directors commended Spain’s resilience and strong labor market but highlighted significant uncertainty from Russia’s war in Ukraine, tighter financial conditions, and elevated energy prices. - Macroeconomic policy guidance: - Importance of flexible and carefully calibrated macroeconomic policies and strong implementation of structural reforms. - Commended timely policy support to households and firms; welcomed better targeting and preservation of price signals in the 2023 support package. - Continued progress to overcome fossil fuel dependency necessary in the medium term. - Fiscal guidance: - Noted improvement in public finances since the pandemic; welcomed the moderately contractionary fiscal stance envisaged in the 2023 budget. - Recommended gradual and sustained fiscal consolidation underpinned by a medium-term consolidation plan. - Highlighted the need to adopt additional measures to preserve pension sustainability and offset increases from the 2021 reform. - Financial sector guidance: - Encourage close monitoring of bank loan quality and adequate provisioning as borrowers’ repayment capacity may erode with higher rates. - Monitor the impact of the temporary banking sector levy on credit provision and cost. - Commended progress on the 2017 FSAP recommendations and strengthening of the private debt resolution framework. ### Key policy recommendations (concise) - Shift energy support toward targeted income support to the vulnerable to preserve price signals, incentivize demand and supply adjustments, and contain fiscal costs. - Continue structural measures to reduce fossil fuel dependency over the medium term. - Implement a moderate domestic fiscal consolidation in 2023 and a sustained multi-year gradual consolidation to put debt on a firm downward path; formulate credible medium-term plans early to build social consensus. - Adopt additional measures to preserve pension sustainability and offset increases from the 2021 reform. - Ensure banks maintain prudent, forward-looking provisions and be encouraged to use capital buffers if downside risks materialize; monitor temporary banking levy effects. - Establish regular, data-driven, outcome-based evaluation of reforms and improve coordination and reporting for effective NGEU fund use. - Revamp active labor market policies to improve labor matching efficiency and address skill mismatches; continue monitoring labor reform effects on contract composition. ### Energy shock measures: scope, cost, and assessment - Temporary measures adopted (selected): - Reduction of various electricity taxes; VAT reductions on electricity and gas in 2022. - Rebate on transport fuel duties. - Subsidies to natural gas bills. - Direct aid for transportation, agriculture, fishing and energy‑intensive sectors. - Support for vulnerable households (including a one-time €200 payment to some low-income households). - Temporary cap on rent increases. - New public loan guarantee line of €10 billion for firms. - Temporary cap on the price of gas used in electricity production (the “Iberian mechanism”). - Fiscal cost and targeting: - Fiscal cost of the measures amounts to about 1.5 percent of GDP in 2022 (broad package); the fiscal cost of the new energy support package (Dec. 27, 2022 measures) is estimated at about 0.8 percent of GDP by authorities. - Untargeted measures cost more and benefit higher‑income households disproportionately. - Iberian mechanism: - Lowers electricity prices without imposing a fiscal cost; estimated reduction of up to 16 percent in relevant prices compared to the counterfactual (net terms, once compensation borne by consumers is taken into account). - Estimated impacts on inflation: - Combined interventions estimated to have reduced CPI inflation by about 2¼ percentage points relative to a no‑policy counterfactual. - Distributional implications: - Poorer quintiles spend larger shares on electricity and gas; transport fuel rebates accrue disproportionately to richer households in aggregate terms. ### NGEU / Recovery, Transformation and Resilience Plan (RTRP) and reform priorities - NGEU envelope and disbursement: - Spain’s NGEU grants envelope expanded from €69.5 billion to €77.2 billion (5.3 and 5.9 percent of 2022 GDP, respectively) in June 2022. - Authorities working on RTRP amendment to tap NGEU loans of €72 billion (5.5 percent of 2022 GDP, cumulative through 2027). - The country has received 40 percent of the grants and has met about a quarter of the plan’s milestones and targets. - Implementation issues: - Acceleration in RTRP investment implementation suggested by tender and transfer data, but lack of systematic comprehensive execution information hampers assessment of real‑economy reach. - Policy priorities for NGEU use and reforms: - Education and vocational training, active labor market policies, telecommunications, audiovisual communications, cybersecurity, science and innovation, firm growth, insolvency, housing, and pensions. - Emphasize regular, data‑driven, outcome‑based evaluation of reforms, improved coordination across government levels and with the private sector, and enhanced reporting on execution. ### Fiscal position, debt dynamics, and consolidation scenarios - Fiscal and debt context: - Public debt: 118 percent of GDP by end‑2021 (preliminary figures vary across tables); public sector gross debt described as high at about 115 percent of GDP in Annex analysis. - Expected reduction in the 2022 headline fiscal deficit driven by strong revenues and withdrawal of COVID measures, more than offsetting energy support costs. - Long-term spending pressures from population aging; pension reform impacts notable. - Recommended consolidation trajectory: - Moderate reduction in next year’s primary structural fiscal deficit—by one quarter to one half percentage point of GDP—is recommended for 2023. - Draft budget envisages reduction of structural deficit by 0.3 percentage points. - Suggested pace: increase consolidation effort to at least 0.6 percentage points per year starting in 2024 to set debt on a downward path and achieve close‑to‑balanced structural fiscal position within a decade. - Increased use of NGEU funds (deficit‑neutral) could offset negative growth impact of consolidation. - Revenue measures planned by authorities: - Temporary raise in taxes on wealth and personal and corporate income yielding about 0.2 percent of GDP over the next two years (targeting net assets above €3 million and large firms). - Sectoral temporary levies (proposal details): - 1.2 percent rate on turnover of large energy companies (turnover > €1,000 million in 2019). - 4.8 percent rate on net interest and commission income of large banks (income from interest and commissions > €800 million in 2019). - Levies correspond to domestic operations in 2022 and 2023, payable in following year; penalties for passing levy to customers. - Authorities foresee annual revenue collection of €3.5 billion (0.25 percent of GDP). - Staff caution: levies applied on revenues instead of profits may affect credit availability, costs, banks’ resilience and energy investment incentives; should remain temporary and not substitute medium‑term tax reform. ### Pension reform impacts and mitigation options - 2021 pension reform effects: - Permanently indexed pensions to CPI and repeal of sustainability factor expected to raise annual pension outlays by at least 3¼ percent of GDP by 2050 compared to full implementation of previous legislation. - Offsetting/reform options and quantitative impacts: - Extending computation period for pension base from 25 to 35 years would reduce pension spending to GDP by 0.6 percentage points by 2050. - Complete elimination of ceiling on contributions could yield additional resources between 0.4 and 0.8 percent of GDP. - Estimates for increase in public pension spending to GDP ratio by 2050 include: - Full Implementation of 2011&13 reforms: 10.7 - Elimination of sustainability factor: 0.9 / 0.8 (two estimates) - CPI indexation instead of IRP: 2.3 / 2.7 (two estimates) - Increase in effective retirement age to 67*: up to -1.6 - Policy linking retirement age to life expectancy: -1.1 - Extending period for computing base from 25 to 35 years: up to -0.6 - Note: *Compared to 62.1 in 2019, and 64.1 projected from 2027 onwards under the central scenario. ### Financial sector resilience, risks, and supervisory guidance - Banking sector and lending: - ECB raised interest rates (200bps cumulative by end‑October); net purchases under PEPP and PSPP ended in March and July 2022. - Nominal yields on 10‑year Spanish government bonds increased by 270 bps since end‑2021 (by November). - Bank lending remained stable through first half of 2022; higher money market rates started to pass through to borrower rates. - Lending surveys indicate tightening lending standards and slower credit demand in H2 2022. - Asset quality and exposures: - Direct exposures to Russia, Ukraine and Belarus negligible (< 0.1 percent of total assets), but indirect exposure via energy and trading partners matters. - Stage 2 loans decreased but remain above pre‑pandemic levels; pandemic state‑guaranteed loans with grace periods mostly ending in 2022:Q2. - Interest‑rate exposure: - About 75 percent of outstanding mortgages are variable‑rate, making households highly exposed to rising rates; majority of new mortgages recently have been fixed‑rate. - Baseline assumption: one‑year Euribor at about 350bps in 2023 yields projected household debt service ratios at highest in last nine years but below GFC/euro‑area crisis levels. - September Euribor stood 250 basis points above previous year level. - Supervisory recommendations: - Ensure forward‑looking loss recognition and appropriate provisioning. - Banks should take macroeconomic risks into account in capital planning and use profit windfalls from higher rates to strengthen resilience; use of capital buffers encouraged if needed. - Monitor impact of temporary banking levy on credit provision and costs. - Nonbank sector: - Non‑bank share modest and dominated by investment funds; funds’ risk profile increased with higher exposure to near‑investment‑grade securities. - Debt resolution and insolvency reforms: - Insolvency Law reform (Law 16/2022) entered into force September 26, 2022, transposing the EU Directive; includes early warning system, microenterprise streamlined system (effective 2023), and expanded discharge possibilities. ### Housing market and rental affordability - Housing price developments: - Housing price inflation peaked at 8.5 percent y‑o‑y in 2022:Q1 and receded to 8 percent in 2022:Q2 (3 percent if deflated by core CPI). - No evidence of significant price misalignment so far; residential market dynamic in H1 2022 with high transactions and mortgage lending growth. - Further moderation expected given tightening financial conditions. - Rental affordability: - Rental affordability remains a challenge, particularly for low‑income tenants. - Government introduced a temporary cap of 2 percent on rent increases in March 2022 (lasting until end‑2022); temporary cap extended to end‑2023 in later policy package. - Housing law under discussion envisages additional temporary measures in stressed areas, targeted rent support for young and low‑income people, taxes on empty properties, and expansion of social housing stock. - Policy recommendations: - Prefer targeted support to vulnerable tenants rather than broad rent caps to avoid inefficiencies. - Simplify land use regulations and accelerate regional licensing to expand housing supply. - Monitor housing law impacts closely where temporary rent caps apply. ### External sector assessment and NIIP - External position: - External position in 2022 broadly in line with medium‑term fundamentals and desirable policies. - NIIP expected to improve from -71.5 percent (end‑2021) to -63.5 percent (end‑2022). - Baseline projection: CA balance projected to recover to 1.3 percent of GDP in the medium term. - Key 2022 (% GDP) figures (Annex I): - NIIP: −63.5 - Gross Assets: 206.2 - Debt Assets: 97.5 - Gross Liab.: 269.7 - Debt Liab.: 159.4 - Current account assessment: - CA: 1.2 (2022) - Cycl. Adj. CA: 2.0 (2022) - EBA Norm: 0.2 (2022) - EBA Gap: 1.8 (2022) - Staff Gap: 0.7 (midpoint) - REER assessment: - CPI‑based REER appreciated by 0.8 percent (Jan–Oct 2022); ULC‑based REER appreciated by 0.6 percent. - IMF staff REER gap midpoint: -2.3 percent (range -4.9 to 0.4 percent) based on CA gap elasticity 0.3. ### Debt sustainability, stress tests, and scenario outcomes - Baseline and stress tests summary: - Baseline: public debt ratio projected to decline through 2025 driven by nominal GDP growth, winding down of support measures, and temporary taxes; absent sustained consolidation, debt will resume rising from 2025. - Baseline gross financing needs: close to 20 percent of GDP over forecast horizon. - Scenario outcomes (selected exact figures preserved): - Primary balance shock: deterioration of 1.5 percent of GDP per year (2023–24) → debt‑to‑GDP about 114 percent by 2027 (114 percent). - Interest rate shock: increase by 465 bps from 2023 onwards → effective interest rate 4.6 percent by 2027 (4.6 percent) vs baseline 2.6 percent in 2027 (2.6 percent); debt‑to‑GDP about 116 percent in 2027 (116 percent). - Combined shock: simultaneous combination of shocks → debt‑to‑GDP about 136 percent in 2027 (136 percent); gross financing needs above 25 percent of GDP by end of forecast horizon (above 25 percent). - Contingent liability shock: one‑time increase in non‑interest public expenditures in 2023 equivalent to 6 percent of banking sector assets (6 percent) → primary deficit about 13 percent of GDP in 2023 (13 percent); debt‑to‑GDP rises to 127 percent in 2023 (127 percent); gross financing needs close to 30 percent of GDP (30 percent). - Policy recommendation: - Steady, growth‑friendly fiscal consolidation needed to rebuild buffers while preserving space for public investment and education; early formulation of medium‑term plans recommended. ### Key statistics (selected values preserved exactly as presented) - GDP growth: 2.0 (2019), -11.3 (2020), 5.5 (2021), 5.2 (2022), 1.1 (2023), 2.4 (2024), 2.2 (2025) - Private consumption: 1.1 (2019), -12.2 (2020), 6.0 (2021), 2.7 (2022), 1.7 (2023), 2.2 (2024), 2.5 (2025) - Gross fixed investment: 4.5 (2019), -9.7 (2020), 0.9 (2021), 5.3 (2022), 4.4 (2023), 4.2 (2024), 2.3 (2025) - Headline CPI (average): 0.7 (2019), -0.3 (2020), 3.1 (2021), 8.5 (2022), 3.7 (2023), 2.7 (2024), 2.1 (2025) - Headline CPI (end of period): 0.8 (2019), -0.5 (2020), 6.5 (2021), 5.8 (2022), 3.8 (2023), 2.4 (2024), 2.0 (2025) - Core inflation (average): 0.9 (2019), 0.7 (2020), 0.8 (2021), 5.1 (2022), 4.6 (2023), 3.4 (2024), 2.5 (2025) - Unemployment rate (percent): 14.1 (2019), 15.5 (2020), 14.8 (2021), 12.8 (2022), 12.8 (2023), 12.5 (2024), 12.3 (2025) - General government balance (percent of GDP): -3.1 (2019), -10.3 (2020), -6.9 (2021), -4.5 (2022), -4.6 (2023), -3.5 (2024), -3.7 (2025) - General government debt: 98.2 (2019), 120.4 (2020), 118.4 (2021), 112.8 (2022), 112.1 (2023), 110.0 (2024), 109.0 (2025) - Net international investment position: -73.7 (2019), -85.7 (2020), -71.5 (2021), -62.7 / -63.5 (end‑2022 values appear as -62.7 and -63.5 in different tables), -57.6 / -58.6 (2023 figures differ across tables) *International Monetary Fund staff report: SPAIN — STAFF REPORT FOR THE 2022 ARTICLE IV CONSULTATION (December 16, 2022).* ### 5.8 percent in December, reflecting a drop in European gas prices and the impact of energy ### 1espea2023001 - 5.8 percent in December, reflecting a drop in European gas prices and the impact of energy ### Recent developments: inflation, energy, and activity - Headline inflation fell to 5.8 percent in December, reflecting a drop in European gas prices and the impact of energy support measures. - Core inflation remains above 6 percent due to a gradual passthrough of higher energy costs to broader prices and, possibly, diminishing spare capacity in the economy. - Wage pressures have been contained so far; increases of wages per worker were 3.3 percent in 2022:Q3 and those agreed in collective bargaining in 2022 were 3.0 percent up to November. - The erosion of purchasing power has been more pronounced for poorer households; inflation by household expenditure quintile shows larger increases for the bottom quintile than the top quintile. - Spain’s economic activity: activity has been resilient so far, supported by a strong rebound in tourism and other services and timely policy support measures, but economic activity remained 2 percent below pre-pandemic levels by mid-2022. ### Outlook and risks - Growth is projected to moderate from 5.2 percent in 2022 to 1.1 percent in 2023, reflecting the effects of high energy and food prices, tighter financial conditions, and weaker external demand. - Output is projected to reach its pre-pandemic level by early 2024. - Headline inflation is expected to continue to moderate gradually in 2023 reflecting a high base in 2022, the reduction of supply bottlenecks, and some normalization of global fossil fuel prices. - Nevertheless, both headline and core inflation are likely to remain above the 2-percent target in the near term. - Uncertainty around the outlook is significant. Downside risks include: - tighter-than-expected financial conditions, - weaker global demand, - further energy price volatility. - Upside risks include accelerated use of NGEU funds and faster unwinding of household savings, which could boost domestic demand. ### Executive Board assessment and policy guidance - Directors commended Spain’s economic resilience and strong labor market performance amid successive shocks, while noting significant uncertainty due to spillovers from Russia’s war in Ukraine, weaker global demand, tighter financial conditions, and elevated energy prices. - Macroeconomic policy guidance: - Underscored the importance of flexible and carefully calibrated macroeconomic policies and strong implementation of the structural reform agenda to support sustainable, inclusive growth. - Commended timely policy support to help households and firms deal with surging energy prices; welcomed steps toward better targeting and greater preservation of price signals in the support package approved for 2023. - Considered continued progress to overcome fossil fuel dependency necessary in the medium term. - Fiscal policy guidance: - Noted improvement in public finances since the pandemic and welcomed the moderately contractionary fiscal stance envisaged in the 2023 budget. - Emphasized that a gradual and sustained fiscal consolidation, underpinned by a medium-term consolidation plan, will be needed in coming years to create space for responding to future shocks. - Highlighted the importance of adopting additional measures to preserve the sustainability of the pension system and offset the increase in pension spending resulting from the 2021 reform. - Financial sector guidance: - Observed that the financial sector has weathered the pandemic and the fallout from the war in Ukraine well so far, and encouraged close monitoring to ensure it remains sound and resilient. - Noted that the deterioration of the macroeconomic outlook and the rise in interest rates will likely erode borrowers’ repayment capacity; called for banks to continue to be forward-looking in their assessment of loan quality and to maintain adequate levels of provisions. - Stressed the need to closely monitor the impact of the new temporary banking sector levy on the provision and cost of credit. - Commended progress in addressing the 2017 FSAP recommendations and steps taken to strengthen the private debt resolution framework. - NGEU and reforms: - Welcomed progress on the Recovery, Transformation and Resilience Plan and acceleration of NGEU funds execution, which should reduce barriers to productivity growth. - Stressed the need for a system of regular, data-driven, outcome-based evaluation of reforms, improved coordination at all government levels and with the private sector, and enhanced collection and reporting of data on execution. - Labor market: - Acknowledged positive initial results from recent labor reforms, with a significant share of workers shifting from temporary to permanent contracts. - Noted the importance of continued monitoring to evaluate reform effectiveness and the need to revamp active labor market policies to improve labor matching efficiency and address skill mismatches. ### Key statistics (from "Spain: Selected Economic Indicators") - Gross domestic product: 2.0 (2019), -11.3 (2020), 5.5 (2021), 5.2 (2022), 1.1 (2023), 2.4 (2024), 2.2 (2025) - Private consumption: 1.1 (2019), -12.2 (2020), 6.0 (2021), 2.7 (2022), 1.7 (2023), 2.2 (2024), 2.5 (2025) - Public consumption: 1.9 (2019), 3.5 (2020), 2.9 (2021), -1.4 (2022), 0.8 (2023), 0.7 (2024), 0.4 (2025) - Gross fixed investment: 4.5 (2019), -9.7 (2020), 0.9 (2021), 5.3 (2022), 4.4 (2023), 4.2 (2024), 2.3 (2025) - Total domestic demand: 1.7 (2019), -9.4 (2020), 5.3 (2021), 2.0 (2022), 2.1 (2023), 2.3 (2024), 2.0 (2025) - Net exports (contribution to growth): 0.4 (2019), -2.2 (2020), 0.3 (2021), 3.2 (2022), -0.9 (2023), 0.1 (2024), 0.2 (2025) - Exports of goods and services: 2.2 (2019), -19.9 (2020), 14.4 (2021), 18.6 (2022), 5.1 (2023), 3.8 (2024), 3.8 (2025) - Imports of goods and services: 1.3 (2019), -14.9 (2020), 13.9 (2021), 9.7 (2022), 7.6 (2023), 3.6 (2024), 3.4 (2025) - Potential output growth: 1.5 (2019), -3.2 (2020), 1.4 (2021), 1.2 (2022), 1.1 (2023), 1.8 (2024), 2.3 (2025) - Output gap (percent of potential): 0.4 (2019), -8.0 (2020), -4.2 (2021), -0.5 (2022), -0.5 (2023), 0.0 (2024), 0.0 (2025) - GDP deflator: 1.5 (2019), 1.2 (2020), 2.3 (2021), 3.9 (2022), 3.8 (2023), 2.7 (2024), 2.2 (2025) - Headline CPI (average): 0.7 (2019), -0.3 (2020), 3.1 (2021), 8.4 (2022), 3.7 (2023), 2.7 (2024), 2.1 (2025) - Headline CPI (end of period): 0.8 (2019), -0.5 (2020), 6.5 (2021), 5.8 (2022), 3.8 (2023), 2.4 (2024), 2.0 (2025) - Core inflation (average): 0.9 (2019), 0.7 (2020), 0.8 (2021), 5.1 (2022), 4.6 (2023), 3.4 (2024), 2.5 (2025) - Core inflation (end of period): 1.0 (2019), 0.1 (2020), 2.1 (2021), 6.9 (2022), 3.9 (2023), 2.9 (2024), 2.5 (2025) - Unemployment rate (percent): 14.1 (2019), 15.5 (2020), 14.8 (2021), 12.8 (2022), 12.8 (2023), 12.5 (2024), 12.3 (2025) - Labor costs, private sector: 2.2 (2019), 4.0 (2020), 0.0 (2021), 3.4 (2022), 4.5 (2023), 2.5 (2024), 2.1 (2025) - Employment growth: 2.3 (2019), -2.9 (2020), 3.0 (2021), 3.1 (2022), 0.5 (2023), 0.8 (2024), 0.6 (2025) - Current account balance (percent of GDP): 2.1 (2019), 0.6 (2020), 1.0 (2021), 1.6 (2022), 0.5 (2023), 0.3 (2024), 0.4 (2025) - Net international investment position: -73.7 (2019), -85.7 (2020), -71.5 (2021), -62.7 (2022), -57.6 (2023), -53.1 (2024), -49.5 (2025) - General government balance (percent of GDP): -3.1 (2019), -10.3 (2020), -6.9 (2021), -4.5 (2022), -4.6 (2023), -3.5 (2024), -3.7 (2025) - Structural balance: -3.0 (2019), -5.4 (2020), -4.2 (2021), -4.2 (2022), -4.3 (2023), -3.5 (2024), -3.7 (2025) - Primary structural balance: -0.8 (2019), -3.1 (2020), -2.1 (2021), -2.0 (2022), -1.9 (2023), -1.0 (2024), -1.1 (2025) - General government debt: 98.2 (2019), 120.4 (2020), 118.4 (2021), 112.8 (2022), 112.1 (2023), 110.0 (2024), 109.0 (2025) ### Key policy recommendations (concise) - Shift energy support toward more targeted income support to the vulnerable to preserve price signals, incentivize demand and supply adjustments, and contain fiscal costs. - Continue progress on structural solutions to reduce fossil fuel dependency over the medium term. - Implement a moderate domestic fiscal consolidation in 2023 and a sustained multi-year gradual consolidation to put debt on a firm downward path; formulate credible medium-term plans early to build social consensus. - Adopt additional measures to preserve pension sustainability and offset increases in pension spending from the 2021 reform. - Ensure banks maintain prudent, forward-looking provisions and be encouraged to use capital buffers if downside risks materialize; monitor the temporary banking sector levy’s effect on credit provision and cost. - Establish a system of regular, data-driven, outcome-based evaluation of reforms and improve coordination and reporting to ensure effective use of Next Generation EU funds. - Revamp active labor market policies to improve labor matching efficiency and address skill mismatches; continue monitoring the effects of labor reforms on contract composition. *International Monetary Fund staff report: SPAIN — STAFF REPORT FOR THE 2022 ARTICLE IV CONSULTATION (December 16, 2022).* ### 5. The authorities have adopted a wide range of measures to protect consumers and ### 1espea2023001 - 5. The authorities have adopted a wide range of measures to protect consumers and ### Emergency measures to protect consumers and firms (energy shock) - Temporary measures adopted: - Reduction of various electricity taxes. - A rebate on transport fuel duties. - Subsidies to natural gas bills. - Direct aid for transportation, agriculture, fishing and energy-intensive sectors. - Support for vulnerable households. - A temporary cap on rent increases. - A new public loan guarantee line of €10 billion for firms. - A six-month extension of the interest-only periods on COVID guarantees for the most affected corporations. - A temporary cap on the price of gas used in electricity production (the “Iberian mechanism”) introduced by Spain and Portugal in mid-June, with the cost paid by consumers as a surcharge on their bills. - Fiscal cost and targeting: - The fiscal cost of the measures amounts to about 1.5 percent of GDP in 2022. - Untargeted measures cost more than targeted ones; untargeted measures have benefits that accrue disproportionately to higher-income households. - Operational note: - The Iberian mechanism lowers electricity prices without imposing a fiscal cost. ### Labor market recovery and labor market indicators - Labor market strength (2022): - Labor force participation is back to pre-pandemic levels. - Employment-population ratio reached a record high. - Total hours worked by employees surpassed 2019 levels in 2022:Q2 after ERTE expiration at end-March. - Registered unemployment rate reached 12.4 percent in November (lowest since 2008). - Labor shortages and vacancies: - More firms report labor shortages as a constraint. - Job vacancy rate has increased, but less than in the rest of Europe. - Labor market tightness (job finding rate and vacancy-to-unemployment ratio) at highest level in the past decade. ### Financial conditions and monetary policy developments - ECB actions and market effects: - The ECB raised interest rates for the first time in more than a decade (200bps cumulative by end-October). - Net purchases under PEPP and PSPP ended in March and July 2022, respectively. - Between June and July, the ECB redirected €17 billion of PEPP reinvestments into Italian, Spanish and Greek debt. - In November, nominal yields on 10-year Spanish government bonds increased by 270 bps since end-2021. - The ECB introduced the Transmission Protection Instrument (July 2022) and committed to use flexibility in PEPP reinvestments to guard against disorderly market dynamics. - The ECB has not used PEPP reinvestments to increase holdings of Spanish sovereign bonds in more recent months. - Foreign investor demand for Spanish bonds has remained broadly stable so far. - Banking sector and lending: - Bank lending remained stable through the first half of 2022. - Higher money market rates have started to pass through to borrower rates. - Lending surveys point to continued tightening in lending standards and slower credit demand in the second half of the year. ### Recovery, Transformation and Resilience Plan (RTRP) and NGEU funds - NGEU envelope and disbursement: - Spain’s NGEU grants envelope expanded from €69.5 billion to €77.2 billion (5.3 and 5.9 percent of 2022 GDP, respectively) in June 2022. - Authorities working on RTRP amendment to tap NGEU loans of €72 billion (5.5 percent of 2022 GDP, cumulative through 2027). - The country has already received 40 percent of the grants and has met about a quarter of the plan’s milestones and targets. - Implementation issues: - Data on tenders and transfers suggest acceleration of RTRP investment implementation. - Lack of systematic and comprehensive information on execution, including national accounting terms, makes it difficult to assess the extent to which resources are reaching the real economy. - Ongoing reforms (areas specified): - Education and vocational training, active labor market policies, telecommunications, audiovisual communications, cybersecurity, science and innovation, firm growth, insolvency, housing, and pensions. ### External sector, trade, and NIIP - Trade and services: - Services exports recovered strongly; 2022 tourism spending close to pre-COVID levels. - Sharply higher nominal imports due to energy prices weighed on the trade balance. - Net international investment position (NIIP): - NIIP expected to improve from -71.5 percent (end-2021) to -63.5 percent (end-2022), partially reflecting the positive current account balance. - Preliminary assessment: 2022 projected external position broadly in line with level implied by medium-term fundamentals and desirable policies. ### Outlook and staff projections - Key baseline assumptions: - European gas prices to remain elevated. - One-year Euribor rates to increase to 3.5 percent in 2023. - A broadly neutral fiscal impulse for 2023. - Growth projections: - Annual output growth projected at 4.6 percent in 2022. - Growth projected to slow to 1.1 percent in 2023. - Carryover growth from 2021 accounts for 3.6 percentage points of GDP growth in 2022. - Output expected to attain its pre-pandemic level only by early 2024. - Inflation projections: - Headline inflation forecast to average 8.5 percent in 2022. - Core inflation forecast to average 5 percent in 2022. - Headline and core inflation projected to moderate gradually in 2023 but remain above the 2-percent target until 2024. - Current account and trade outlook: - Current account projected to worsen in the near term and gradually recover over time. - Exports growth will slow with deterioration of trading partners’ growth prospects. - High (albeit declining) energy prices and sustained non-energy imports associated with NGEU investments likely to keep the trade balance subdued through 2024. ### Risks, scenarios, and upside factors - Main downside risks: - Possible further increases in energy prices; risk of gas shortages is relatively low but a cold winter could exacerbate volatility. - Sharper tightening of financial conditions due to larger-than-anticipated monetary policy rate increases or euro-area fragmentation. - A more abrupt slowdown in trading partners, particularly in Europe. - Deepening geo-economic fragmentation accelerating deglobalization and lowering potential growth. - Adverse scenario: - In an adverse scenario combining higher energy prices, tighter financial conditions, and other shocks, growth in 2023 could be 0.5 to 0.7 percentage points lower compared to the baseline. - Upside factors: - Faster unwinding of households’ accumulated savings could boost consumption. - The pace of absorption and effective use of NGEU funds and success of reforms will shape potential growth. ### Staff and authorities’ assessment - Authorities’ views: - Broad agreement with staff’s assessment of the outlook and risks. - Emphasized resilience of the Spanish economy: strong labor market and tax revenues. - Noted support measures critical in cushioning pandemic and war-in-Ukraine impacts; NGEU funds already have a positive impact. - Authorities projected slightly higher 2023 output growth in the draft budget but acknowledged large uncertainty. - Authorities agreed that deployment of NGEU funds will be main driver of growth next year. - Authorities agree there are no notable signs of second-round effects from high headline inflation so far and highlighted energy policies’ role in containing inflationary pressures. - Authorities highlighted need for unions and business associations to agree to share real income losses (pacto de rentas) to reduce cost-price spiral risk. - Staff policy recommendation summary: - Discretionary fiscal consolidation should start in 2023 while providing targeted relief to those most affected by the cost-of-living crisis. - Sustained and decisive efforts needed to tackle long-standing structural challenges: reduce structural unemployment, boost productive capacity, and rebuild fiscal buffers over time. ### Policy guidance on energy support (detailed recommendations) - Assessment of past measures: - Quick rollout of support softened economic impact. - Some measures appropriately targeted; many measures were untargeted and weaken price signals. - Direct fiscal cost has been relatively high (about 1.5 percent of 2022 GDP); further extensions would increase costs. - Recommended shift in policy emphasis: - Allow price signals to operate more freely and provide targeted income relief to the vulnerable. - Prefer direct transfers (e.g., lump-sum vouchers linked to income and household size) over price-suppressing measures. - Alternatives that preserve price signals: - Block tariffs (subsidized price for basic energy consumption; market prices for higher consumption). - Social tariffs (discounts for vulnerable households, such as the Spanish bono social). - Make such measures more progressive by recouping support from higher-income households through the tax system. - Keep corporate support measures temporary and targeted. _Italic: International Monetary Fund staff summary of the specified content unit._ ### 17. Over the medium term, continued efforts to overcome fossil fuel dependency would ### 1espea2023001 - 17. Over the medium term, continued efforts to overcome fossil fuel dependency would ### Energy transition and renewables - The share of electricity generation from renewable sources in Spain has increased to about 40 percent of the total, above the EU average, up from 15 percent fifteen years ago. - Government targets: - 74 percent of electricity production by 2030. - 100 percent by 2050. - Structural solutions needed: - Promoting investments in low carbon alternatives, storage, and interconnections. - Developing smart grids and renewable electricity storage to manage the decentralized and intermittent nature of solar and wind. - Increasing the coverage and interconnection of electrical grids. - Interconnection status: - At 6.5 percent, Spain has not met the EU target of 10 percent cross-country electricity interconnectivity by 2020 (15 percent by 2030). - Funding and administrative measures: - Spain has allocated about 40 percent of NGEU funds to support green investment projects, prioritizing clean energy, sustainable mobility and building efficiency renovations. - Steps taken to simplify and shorten the administrative process for installation of new renewable electricity generation capacity. - Legal basis: - Renewable electricity target trajectory is established in Spain’s Law on Climate Change and Energy Transition enacted in 2021. ### Authorities’ views on energy measures - Authorities highlighted the effectiveness of adopted measures in containing inflation and supporting households and firms. - The Iberian mechanism is viewed as particularly successful, reducing inflation without imposing fiscal costs. - Authorities do not believe the mechanism impeded demand adjustment; domestic electricity use in Spain declined in line with other European countries through October. - Authorities agree with staff that moving to more targeted measures going forward would be desirable. - Authorities are strong advocates of a structural reform to decouple European wholesale electricity markets from natural gas prices and stressed commitment to the green transition and renewable electricity generation goals. ### Fiscal policy overview and recent developments - Public debt amounted to 118 percent of GDP by end-2021. - Expected reduction in the 2022 headline fiscal deficit is driven by strong revenues and the withdrawal of COVID measures, which more than offset the cost of measures adopted in response to high energy prices. - Revenue performance supported by: - Recovery in activity, high inflation, a buoyant labor market, and a relatively high elasticity of revenue to output. - Timing and persistence: - Impact of inflation on several expenditure items, such as pension payments, will not materialize until 2023. - Most energy support measures have sunset clauses at the end of 2022, but it is likely that the need for support would extend into the new year. - Financial conditions: - Long average maturity of sovereign debt is about 8 years. - Under the baseline, deficit and debt ratios improve in the near term driven by economic conditions, new temporary taxes, and the wind-down in emergency measures. - In the absence of sustained discretionary consolidation, the structural deficit will stabilize above pre-crisis levels and debt to GDP will start increasing from 2025. - Long-term spending pressures related to population aging will pose a significant challenge to public finances. - Projected debt trajectory is susceptible to various shocks, especially a negative real GDP growth shock. ### Fiscal policy recommendations and measures - Recommended consolidation: - A moderate reduction in next year’s primary structural fiscal deficit—by one quarter to one half percentage point of GDP—is recommended to help ease price pressures and reinforce commitment to fiscal discipline. - The draft budgetary plan released in October envisages a reduction of the structural deficit by 0.3 percentage points. - Suggested pace: an increase in the consolidation effort to at least 0.6 percentage points per year starting in 2024 would set debt on a downward path and achieve a close-to-balanced structural fiscal position within a decade. - Role of NGEU: - Increased use of NGEU funds, which is deficit-neutral, could offset the negative impact of consolidation on growth. - Flexibility guidance: - Fiscal policy should remain flexible and adapt to evolving circumstances: more aggressive consolidation if adverse supply shocks lead to higher inflation or tighter financial conditions; more accommodative stance if negative demand shocks materialize. - Revenue measures planned: - Authorities plan to temporarily raise taxes on wealth and personal and corporate income for a total yield of about 0.2 percent of GDP in the next two years. The measures will affect mostly richer households (with net assets above €3 million) and large firms. The measures are still to be legislated. - Temporary levies: - New levies on large companies in the energy and banking sectors require close monitoring because they are applied on revenues instead of profits and do not take costs into account. - Concerns: potential impacts on credit availability, credit costs, banks’ resilience, and incentives of energy companies to invest. - These measures should remain temporary and not substitute for necessary medium-term tax reform. ### Details on proposed sectoral levies (as described in the proposal submitted to Congress) - (i) A 1.2 percent rate would be applied on the turnover of large energy companies (principal operators with turnover larger than €1,000 million in 2019). - (ii) A 4.8 percent rate would be applied on the net interest and commission income of large banks (those with income from interest and commissions larger than €800 million in 2019). - (iii) The levy corresponds to domestic operations in 2022 and 2023, would be payable in the following year. - (iv) Penalties are stipulated for those firms that translate the levy to their customers. - Authorities foresee an annual revenue collection of €3.5 billion (0.25 percent of GDP). ### Medium-term fiscal reform priorities - Early formulation of credible medium-term fiscal consolidation plans (contingent on the state of the economy) could help build social consensus and anchor expectations. - Structural revenue reform should: - Broaden tax bases (e.g., reducing tax expenditures related to VAT). - Strengthen environmental taxes. - Protecting equity: - Measures that may have a disproportional effect on the low-income population, such as expanding VAT collection, should be accompanied with effective targeted spending to protect the most vulnerable. - Use opportunity to strengthen carbon pricing as global fossil fuel prices decline. - Spending efficiency: - Spain spends relatively less than EU peers on public investment and education and more on social protection such as pensions and unemployment benefits. - Spending efficiency improvements should be guided by spending reviews done by the recently established permanent division within the fiscal responsibility authority. ### Pension spending and reforms - The 2021 pension reform: - Permanently indexed pension payments to CPI inflation and repealed the sustainability factor. - These measures are expected to raise annual pension outlays by at least 3¼ percent of GDP by 2050, compared to full implementation of previous legislation. - Offsetting measures: - Only part of the increase would be offset by other measures adopted in the first phase (e.g., incentives to increase the effective retirement age and a temporary increase in social security contributions). - Further reform options include mechanisms for expenditure restraint (e.g., further extending work lives) and raising revenues. - Measures introduced in 2022: - Reform of the contribution system for the self-employed. - Commitment to additional reforms by end-2022, including extending the computation period for the calculation of the retirement pension and raising maximum earnings subject to contributions. - These measures could have a positive financial effect; whether they are sufficient depends on specific design details. - Quantitative impacts cited: - Extending the period for computing the pension base from 25 to 35 years would reduce pension spending to GDP by 0.6 percentage points by 2050. - The complete elimination of the ceiling on contributions could yield additional resources ranging between 0.4 and 0.8 percent of GDP. - Increase in public pension spending to GDP ratio by 2050 estimates include: - Full Implementation of 2011&13 reforms: 10.7 - Elimination of sustainability factor: 0.9 / 0.8 (two estimates) - CPI indexation instead of IRP: 2.3 / 2.7 (two estimates) - Increase in effective retirement age to 67*: up to -1.6 - Policy linking retirement age to life expectancy: -1.1 - Extending period for computing base from 25 to 35 years: up to -0.6 - Note: *Compared to 62.1 in 2019, and 64.1 projected from 2027 onwards under the central scenario. ### Authorities’ views on fiscal stance and reforms - Authorities reiterated commitment to fiscal discipline and prompt revisions to the European fiscal framework. - They note improvement in public finances since 2020 and attribute strong revenue performance in large part to structural improvements (e.g., more digital payments and formalization of the economy). - SPU (Stability Program Update) foresees gradual and steady deficit reduction, targeting around 3 percent of GDP in 2024. - On temporary levies: - Authorities argue taxing income instead of profits makes collection proportional to market share and optimizes revenue collection given banks’ significant tax credits. - Ministry of Finance believes there will be no negative effects on investment or banks’ resilience given the temporary nature and relatively low level of the levy. - On staff’s proposed pace of consolidation (0.6 percentage points on average from 2024 until 2030), authorities consider it too ambitious and warn of negative impacts on growth and social cohesion. - Authorities plan to comply with the new EU fiscal framework once adopted and welcome the European Commission’s recent rules proposal. - On pension reform: authorities note prior suspension of previous legislation due to social acceptability concerns; elements of the 2021 reform (such as CPI indexation) have broad consensus. They expect additional measures to be agreed by end-2022 and foresee complementary measures beyond 2032 if needed under the intergenerational equity mechanism. ### Financial sector policies and balance sheets - Private sector balance sheets have continued to strengthen in line with the recovery in economic activity, but pockets of vulnerability remain. - Household sector: - Household leverage is back at pre-pandemic levels, significantly below the GFC levels. - Net financial assets remain elevated, driven by higher savings accumulated during the pandemic. - Heterogeneity: poorer households accumulated less savings and are more affected (in proportion to their income) by the increase in energy prices. - Corporate sector: - Aggregate corporate profitability improved starting in 2021, but recovery uneven across sectors. - Corporate leverage remains above pre-crisis levels in sectors most affected by COVID. - Credit risks have increased for firms affected by the energy crisis. _International Monetary Fund — Staff Report excerpt (Spain) — Content unit: 1espea2023001_ ### 29. Housing prices have accelerated, but there is no evidence of significant misalignment. ### 29. Housing prices have accelerated, but there is no evidence of significant misalignment. ### Housing market developments and assessment - Housing price inflation peaked at 8.5 percent y-o-y in 2022:Q1 and receded to 8 percent in 2022:Q2 (3 percent if deflated by core CPI). - The residential real estate market remained dynamic in the first half of 2022, with a high level of transactions and growth in mortgage lending. - So far, there is no evidence of significant misalignment in prices nor of a deterioration in lending standards. - Further moderation in the sector is expected, in line with the recent tightening in financial conditions. - The activation of sectoral macroprudential tools is not deemed necessary at this point, but continued close vigilance is warranted. - If risks become more pronounced, the Bank of Spain has tools to address sector-specific pressure points, including a sectoral countercyclical capital buffer. ### Financial sector exposures and asset quality - Direct financial sector exposures to Russia, Ukraine and Belarus are negligible (less than 0.1 percent of total assets), but the system is exposed via indirect effects. - Aggregate borrower stress indicators remain low, but there are signs of asset quality deterioration in specific segments (e.g., consumer credit and the hostelry sector), and for loans subject to expired moratoria and public guarantees. - Key asset quality risks: - Evolution of stage 2 loans (which have decreased but remain above pre-pandemic levels). - Pandemic state-guaranteed loans with grace periods mostly ending in 2022:Q2. - Available data until June is positive, but continued monitoring is needed as signs of credit quality deterioration may come with a lag. ### Household and firm interest-rate exposure and projections - Spanish households are highly exposed to rising interest rates due to the high concentration of variable-rate mortgages (about 75 percent of total outstanding). - Majority of new mortgages in recent years were extended at fixed rates (mitigating factor). - Baseline assumption (reflecting an increase in one-year Euribor rates to about 350bps in 2023) yields a projected increase in household debt service ratios to the highest level in the last nine years, but still materially below levels observed during the GFC and the euro area crisis. - Bank of Spain analysis suggests the impact would be most significant for households in the second and third income quintiles. - Model prediction details: - Based on a linear regression of household debt service ratio (DSR) on lagged household debt to disposable income (DTDI) and its product with 12m Euribor (lagged 2 quarters). - Last data point for DSR and DTDI is 2022:Q1. - Prediction assumes DTDI constant at last available observation, and Euribor at 300bp in 2022:Q4 and 350bp from 2023:Q1 onwards. - The cumulative tightening in Euribor over the projected period amounts to 400bps relative to the 2022:Q1 average. - In September, Euribor stood 250 basis point above its value in the previous year. - Firms: - Higher interest rates will increase firms’ financial burden; initial impact depends on share of liabilities refinanced in the near term. - Simulations suggest the share of debt of vulnerable firms (interest coverage ratio below one) could reach levels last seen in 2013 once loans with longer maturity reprice fully. - SMEs likely to experience more severe deteriorations in financial health. - Corporate leverage ratios are materially lower now, and the bulk of pandemic public-guaranteed loans are at fixed rates. ### Banking sector resilience and supervisory recommendations - Banks frontloaded provisioning during the pandemic in anticipation of higher expected losses; while losses have not materialized, new macroeconomic headwinds exist. - Supervisory recommendations: - Continue ensuring that bank loss recognition is sufficiently forward-looking and that provisioning levels are appropriate. - Banks should continue taking into account macroeconomic risks in their capital planning. - Banks can use the positive near-term impact of higher interest rates on profitability to further strengthen resilience if needed. - If risk scenarios materialize, banks should be encouraged to use capital buffers and be allowed to restore them only gradually. - Capitalization and leverage: - Spanish banks’ capitalization is below peers on a risk-weighted basis, but the leverage ratio is in line with peers. - Stress tests by the Bank of Spain and the IMF suggest banks will continue to meet minimum prudential requirements in a scenario of a negative growth shock and tighter financial conditions. - Non-banks: - The share of non-banks in the financial system is modest and dominated by investment funds. - Funds’ risk profile has increased, with higher exposure to securities holdings on the cusp of investment grade. - The average maturity of fixed-income portfolios of funds is lower than that of funds in the euro area as a whole, which could mitigate sensitivity to changes in interest rates. ### Debt resolution and legal framework reforms - Recent amendments to the private debt resolution framework (incorporating the EU Directive on restructuring and insolvency into national law) include: - Introduction of an early warning system to help companies identify signs of debt distress. - Creation of a new streamlined system for restructuring and liquidation of microenterprises (enters into effect in 2023). - Facilitation of reaching debt restructuring agreements pre-insolvency. - Expansion of possibilities for discharging debts of individuals and entrepreneurs; a limited discharge for public claims is permitted. - The reform is comprehensive and places Spain among vanguard countries adopting special procedures for microenterprises. - Strong implementation is critical, including ensuring sufficient resources for the judicial system. ### Progress on past recommendations and institutional developments - Significant progress on addressing the 2017 Financial Sector Assessment Program (FSAP) recommendations: - Set up of the Spanish Macroprudential Authority (AMCESFI), broadening the macroprudential toolkit, and reform of the Insolvency Law. - Continued banking sector consolidation through mergers and branch reductions. - Banking system has become more concentrated (market share of the top five banks) than the EU average. - The next FSAP is scheduled to take place in 2023–2024. ### Authorities’ views and agreed assessments - Authorities broadly agreed with staff's risk assessment and recommendations. - Key authority observations: - Banking sector starts new macroeconomic headwinds from a position of strength, with lower non-performing loans, and higher profitability and capitalization levels than prior to the pandemic. - Financial risks have increased with the deterioration of the outlook and tightening in financial conditions. - Unemployment evolution is a key variable; not expected to deteriorate materially despite the slowdown. - Significant deleveraging in the private sector since the GFC is a source of strength. - Agreement reached in November with the banking sector to provide mortgage relief to the most vulnerable households, which should contain default rates. - Bank of Spain assessed provisioning, credit risk identification, and solvency buffers as adequate, and agreed close monitoring is warranted. - No evidence of a significant misalignment between residential real estate prices and fundamentals; authorities will continue to closely follow developments. *Source: IMF staff report excerpt (content unit 1espea2023001).* ### 42. Rental affordability remains a challenge, particularly among low-income tenants. In ### 1espea2023001 - 42. Rental affordability remains a challenge, particularly among low-income tenants. In ### Rental affordability: findings - Rental affordability remains a challenge, particularly among low-income tenants. - The government introduced a temporary cap of 2 percent on rent increases in March 2022, lasting until the end of the year. - The housing law currently discussed in Parliament envisages additional temporary measures to limit rent increases in stressed areas, including rent caps for large landlords. - The housing law and the national housing plan include measures to address rental affordability: - targeted rent support programs for young and low-income people; - an increase in taxes on empty properties; - an expansion of the social housing stock. - The housing supply could be further expanded by simplifying land use regulations and accelerating licensing processes at the regional government level. ### Policy options and recommendations - Alternative to rent caps: - Provide targeted support to the most vulnerable households to protect tenants while avoiding inefficiencies associated with rent caps. - Implementation and monitoring: - Closely monitor housing law impacts, particularly where temporary rent caps would be applied to specific stressed areas. - Simplify land use regulations and accelerate regional licensing to expand housing supply. - Fiscal targeting: - Focus subsidies and support measures on the most vulnerable to preserve price signals and limit distortions. ### Context in broader macroeconomic assessment (Staff appraisal highlights) - Growth and inflation: - Growth in 2023 is projected to slow to 1.1 percent of GDP reflecting weaker activity in Spain’s trading partners and tighter financial conditions. - Both core and headline inflation are projected to remain above the 2-percent target until 2024. - Risks and outlook: - Uncertainty around the outlook remains high; risks include further increases in energy prices, a more abrupt global slowdown, or tighter financial conditions. - Upside possibilities include a faster unwinding of households’ accumulated savings and/or acceleration of the deployment of NGEU funds. - Fiscal stance: - A moderate consolidation is called for in 2023 to help monetary policy fight inflation. - From 2024 onwards, the consolidation effort should increase to set debt on a firm downward path and achieve a close-to -balanced structural fiscal position by the end of the decade. - Fiscal consolidation should rely on mobilizing additional revenues and enhancing spending efficiency, including broadening tax bases and strengthening environmental taxes as global fuel prices decline. - Financial sector and housing market vigilance: - Banks should continue to maintain prudent levels of forward-looking provisions; stress testing suggests bank solvency buffers are broadly adequate. - Rising housing prices warrant close vigilance; banks should be encouraged to use their buffers if downside risks materialize. - Structural reforms: - Continued progress on structural reforms and acceleration of NGEU fund execution are important to reduce barriers to productivity growth. - Establishing a system of regular, data-driven, outcome-based evaluation for reforms and investments is crucial. ### Relevant quantitative program allocations and indicators (as presented) - Allocation of RTRP Investments in Digitalization (shares shown): - Digital Infrastructures and Connectivity Plan: 11% - Strategy for the Promotion of 5G Technology: 8% - National Cybersecurity Plan: 5% - National Artificial Intelligence Strategy: 3% - Plan for the Digitalization of Spain's Public Administration: 17% - SME Digitalization Plan: 27% - Spain Audiovisual Hub of Europe: 9% - National Plan for Digital Skills: 19% - Temporary policy measure: - Rent increase cap introduced in March 2022: 2 percent (lasting until end of 2022). *International Monetary Fund — selected content from the staff report excerpt* ### 52. It is recommended that Spain remains on the standard 12-month Article IV cycle. ### 1espea2023001 - 52. It is recommended that Spain remains on the standard 12-month Article IV cycle. ### Real sector and inflation - GDP growth moderated in Q3 (0.2 percent q-o-q). - Spain is continuing to recover from the pandemic, but growth is set to slow down in 2023. - PMIs and confidence indicators continued to decline, suggesting weak growth in the coming quarters. - Capacity utilization is reaching closer to pre-pandemic levels. - Headline inflation has started to decline, while core inflation remains elevated. - Real GDP Growth (annualized q-o-q percent change) and contributions to growth show: - Private consumption, Public consumption, Gross fixed cap. form., Inventories, Exports, Imports contributions (charts referenced in source). ### Energy sector - Among the EU countries that import oil from Russia, Spain is the one with the lowest dependency on Russia (Share of Oil Imports from Russia, 2021; Spain low in chart). - The share of natural gas imports from Russia is larger than for oil but lower than in other EU countries (Share of Natural Gas Imports from Russia, 2021). - Reliance on natural gas for electricity production is above the European average (Average Electricity Production with Natural Gas, percent of total; average 2017-19). - Gas consumption has remained elevated despite the growth in energy prices (Energy Retail Prices and Gas Consumption, Jan/May 22 vs 21). - Gas storage reached 90 percent of maximum capacity by end-October, above historical averages (Gas Storage, end-Oct). - Spain has the largest LNG infrastructure in Europe by existing & operational LNG terminals: Annual Capacity (billions of cubic meters; as of April 2022). ### Labor market - Employment growth has been strong as the economy recovers, supported mostly by services (Contributions to Employment Growth, yoy percent). - Hours worked have already reached pre-pandemic levels, including due to the expiration of the COVID ERTEs (Hours Worked, Index: 2019=100). - Unemployment rate and broader labor market slack continued to decline and reached the lowest level in more than a decade (Measures of Labor Market Slack, Percent; 2022Q3). - The recently approved labor reform led to an increase in permanent employment and a decline in temporary employment (Total Employment by Type of Contract, Index, Dec 2019=100). - Market tightness increased (Vacancies-to-Unemployment Ratio, Seasonally Adjusted). - Wage inflation remains modest relative to inflation (Growth of Wages and Salaries, percent yoy; Inflation rate (HICP) comparison). ### External sector - Goods imports growth accelerated driven largely by higher goods import prices (Real Goods Imports; Nominal Goods Imports Growth Decomposition charts). - Current account deterioration in 2020 persisted into 2022Q1 but reversed in 2022Q2. - Strong growth of services exports, particularly tourism, offset some goods import effects (Tourist Arrivals and Spending; Services exports growth). - In 2022, portfolio investment net inflows were offset by net outflows in other investment (excluding Bank of Spain); direct investment had limited impact (Financial Account Components). - Net International Investment Position (NIIP) gradually improved, largely due to a shrinking liability position in portfolio investment (Net IIP chart). - The ULC-based REER depreciated further in 2022, fully reversing the appreciation during 1999-2008 (Real Effective Exchange, ULC based, 2010=100). ### Credit developments and financial cycle - Household leverage remained subdued through the pandemic (Households Balance Sheet: Debt to Disposable Income; Net Assets to GDP). - Corporate leverage is improving and remains materially lower than during the GFC (Non-Financial Corporates Balance Sheet: Debt to GDP and Debt service ratio). - Bank lending remained strong in the first half of 2022 (Bank Lending to Private Sector, yoy percent change). - Market rates tightening is expected to continue to pass through to households and corporates (Euribor 12m; New Mortgage Lending avg rate; New Corporate Lending avg rate). - Credit demand appears to be moderating while lending standards are tightening (Change in Credit Demand and Change in Lending Standards diffusion indices). ### Non-financial corporate sector - Corporate sector turnover continued to increase in 2022H1 (Corporate Sector Turnover, year-on-year percent change). - Profitability surpassed the 2019 level (Return on Assets, percent; 2022H1). - Profit margins show sizable heterogeneity across sectors (Corporate Profit Margin by sector, 2022Q2). - Total debt-to-asset ratio increased but remains low compared to the GFC (Debt-to-Asset Ratio, percent). - Corporate debt financing cost remains relatively low (Debt Financing Cost, percent). - Liquidity ratios declined but are above pre-pandemic levels except in trade and hospitality (Liquidity Ratio by Sector, 2022H1). ### Real estate - Residential transactions surged after the pandemic (Residential Transactions Index 2015Q1=100). - Residential price growth accelerated in nominal terms but less so in real terms (Residential Prices yoy growth; nominal and deflated by headline/core CPI). - Price growth in Spain has been less pronounced than in most other EU countries (Residential Price Increases, percent; 2021Q1). - IMF RESMF estimates do not point to significant price misalignments (House Price Misalignment, 2021Q4). - Proportion of riskier mortgages steady by loan-to-value ratios and loan-to-price ratios (LTV and LTP charts). ### Banking sector performance - Non-performing loans increased in specific sectors but remained subdued in aggregate (Non-Performing Loans and Advances, percent). - Stage 2 loans diminished from pandemic highs but remain above precrisis levels (Loans in Stage 2 and 3, percent of total loans). - Bank profitability recovered from 2020; net income components show improvement (Profitability of Banks in Spain). - Cost of risk declined (Cost of Risk series: BEESFRITPT). - Bank capitalization is below peers on a risk-weighted basis (CET1 ratio comparison) but in line on leverage ratio (Leverage ratio 22Q2). - Bank liquidity ratios remain strong (LCR and Loan to deposit ratio, 2022Q2). ### Public finances - Public debt increased significantly, with a large share accumulated in the central bank’s balance sheet (General Government Debt by Holder; Jun-22). - Fiscal deficit improving but remains large (Government Fiscal Balance, percent of GDP; 2022 vs 2020). - General government spending is lower than EU14 peers overall, with higher spending on interest and social protection (GG Spending: Difference with EU14 average, percentage points of GDP; 2019). - Fiscal revenues are lower compared to EU14 countries (Fiscal Revenues, percent of GDP; 2019 vs 2021). - Over time, improving revenue performance and bringing environmental taxation more in line with peer economies are emphasized (VAT Revenue Ratio, Environmental Taxes share of revenues). Key fiscal projections and figures (from tables): - General government balance projections: -4.6 (2022), -4.6 (2023), -3.6 (2024), -3.9 (2025), -4.1 (2026), -4.1 (2027) (percent of GDP). - General government debt (Maastricht): 98.2 (2019), 120.4 (2020), 118.4 (2021), 113.5 (2022), 112.8 (2023), 111.1 (2024), 110.3 (2025), 110.3 (2026), 110.5 (2027) (percent of GDP). - Revenue (billions of euro): 472.1 (2018), 488.5 (2019), 465.5 (2020), 527.0 (2021), 574.3 (2022), 615.5 (2023), 634.2 (2024), 647.1 (2025), 650.8 (2026), 674.9 (2027). - Expenditure (billions of euro): 503.3 (2018), 526.6 (2019), 580.7 (2020), 609.8 (2021), 634.1 (2022), 679.2 (2023), 685.8 (2024), 705.5 (2025), 715.6 (2026), 742.2 (2027). ### Social indicators and demographics - Income inequality in 2021 remained broadly stable relative to 2019 and is still one of the highest in the region (Gini Index, 2019 vs 2021). - The share of workers at risk of poverty remains above the regional average despite improvements, particularly among the young (In-Work At-Risk-Of-Poverty Rate, 2019 vs 2021; breakdown: Total, 18-24, Low-skilled, Temporary workers). - The share of young people neither working nor studying spiked in 2020 and has declined to the lowest level in a decade but remains among the highest in the euro area (NEET, Percent of 15-24 population). - Spain has the highest share of early leavers from education and training in the euro area (Early Leavers 18-24 population, 2021). - Significant gender gaps persist in economic and political empowerment despite progress (Gender Gap Scores by Dimension, 2006 / 2013 / 2021). - Over the next 30 years, Spain's population is projected to age more quickly than the rest of the euro area (Projected Change in the Old-Age Dependency Ratio, 2022-2050). ### Main economic indicators (selected from Table 1) - GDP growth: 2.0 (2019), -11.3 (2020), 5.5 (2021), 4.6 (2022), 1.1 (2023), 2.3 (2024), 2.1 (2025), 1.9 (2026), 1.8 (2027) (percent change). - Headline inflation (average): 0.7 (2019), -0.3 (2020), 3.1 (2021), 8.5 (2022), 3.7 (2023), 2.3 (2024), 1.9 (2025), 1.7 (2026), 1.7 (2027) (percent). - Core inflation (average): 0.9 (2019), 0.7 (2020), 0.8 (2021), 5.0 (2022), 4.4 (2023), 2.8 (2024), 2.2 (2025), 1.8 (2026), 1.7 (2027) (percent). - Unemployment rate: 14.1 (2019), 15.5 (2020), 14.8 (2021), 12.9 (2022), 12.9 (2023), 12.5 (2024), 12.4 (2025), 12.4 (2026), 12.4 (2027) (percent of total labor force). - Current account balance (percent of GDP): 2.1 (2019), 0.6 (2020), 1.0 (2021), 1.2 (2022), 0.3 (2023), 0.3 (2024), 0.5 (2025), 0.9 (2026), 1.3 (2027). - Net international investment position: -73.7 (2019), -85.7 (2020), -71.5 (2021), -63.5 (2022), -58.6 (2023), -54.3 (2024), -50.5 (2025), -47.5 (2026), -44.3 (2027) (percent of GDP). *International Monetary Fund staff summary based on the Spain country chapter (figures and tables as presented).* ### Annex I. External Sector Assessment ### Annex I. External Sector Assessment ### Overall Assessment - The external position in 2022 is broadly in line with the level implied by medium-term fundamentals and desirable policies. - IMF staff assesses Spain’s current account (CA) norm to be relatively high due to external sustainability risks from a still large negative NIIP. - NIIP continued to improve in 2022; strengthening it further will require sustaining a relatively high CA surplus in coming years. - Baseline projection: the CA balance is projected to recover to 1.3 percent of GDP in the medium term, supported by a full resumption of foreign tourism flows and the resolution of global supply bottlenecks. - Assessment is preliminary given absence of full-year data for 2022 and significant downside risks from the war in Ukraine on trading partners’ growth and energy prices. - An updated analysis will be provided in the 2023 External Sector Report. - Potential policy responses: - Sustained fiscal consolidation efforts. - Higher private savings (relative to the pre-COVID average) in the medium term. - Achieve higher private savings through productivity gains, requiring: - Continued wage flexibility. - Addressing labor market duality. - Actions to enhance education outcomes and encourage innovation. - Reduction in energy dependence from abroad. - The RTRP foresees investments and reforms in these areas and measures to diversify and improve the quality of tourism services; adequate implementation and ex-post evaluation remain critical. ### Foreign Asset and Liability Position and Trajectory - Background: - NIIP continued to improve in 2022 and is expected to reach -63.5 percent of GDP by the end of the year. - Trajectory reflects a larger decrease in gross liabilities than in assets (as percent of GDP). - Gross liabilities—of which nearly 70 percent correspond to external debt—are projected to decline to 269.7 percent of GDP by end-2022. - The negative NIIP is largely attributed to the general government and the central bank, with TARGET2 liabilities amounting to 35 .8 percent of GDP by October 2022. - Assessment: - Despite projected decline, the large negative NIIP carries external vulnerabilities from large gross financing needs and potentially adverse valuation effects, sensitive to tightening global financial conditions and policy responses. - Mitigating factors: - Favorable maturity structure of outstanding sovereign debt (averaging almost eight years). - Limited share of debt denominated in foreign currency (10.7 percent of total external debt). - Key 2022 (% GDP) figures: - NIIP: −63.5 - Gross Assets: 206.2 - Debt Assets: 97.5 - Gross Liab.: 269.7 - Debt Liab.: 159.4 ### Current Account - Background: - CA surplus projected to improve from 1.0 percent of GDP in 2021 to 1.2 percent of GDP in 2022. - Surge in energy import prices expected to partially offset strong recovery in services trade, notably tourism. - Higher public savings expected to counterbalance rise in public investment and drawdown of excess private savings generated during the pandemic. - Near-term pressures: slowdown of export growth due to deterioration of trading partners’ growth prospects, still high (albeit declining) energy prices, and sustained non-energy imports associated with NGEU investments likely keep trade balance subdued through 2024. - Medium-term: CA projected to gradually recover with full resumption of foreign tourism flows and resolution of global supply bottlenecks. - Assessment: - 2022 cyclically adjusted CA balance is 2.0 percent of GDP. - COVID adjustors are estimated to be 0.0 for transport and 0.0 for travel services due to strong recovery of tourism receipts in 2022. - When incorporating adjustments, 2022 cyclically adjusted CA balance is 2.0 percent of GDP, larger than the norm suggested by the EBA CA model. - Given external sustainability considerations and potentially adverse NIIP valuation effects, IMF staff assesses the CA norm to be 1.3 percent of GDP, with a range of 0.5 to 2.1 percent of GDP. - This yields a CA gap range of -0.1 to 1.5 percent of GDP, with a midpoint of 0.7 percent of GDP. - Key 2022 (% GDP) figures: - CA: 1.2 - Cycl. Adj. CA: 2.0 - EBA Norm: 0.2 - EBA Gap: 1.8 - COVID-19 Adj.: 0.0 - Other Adj.: –1.1 - Staff Gap: 0.7 ### Real Exchange Rate - Background: - January-October 2022: CPI-based REER appreciated by 0.8 percent; ULC-based REER appreciated by 0.6 percent. - These movements have not significantly affected the depreciation trend of the past decade, which almost fully reversed the large appreciation from euro entry in 1999–2008. - Assessment: - EBA REER models estimate an overvaluation of 9.3 percent (index) to 27.3 percent (level) for 2022. - Based on the IMF staff CA gap range and using an elasticity of 0.3, IMF staff assesses the REER gap range to be -4.9 to 0.4 percent, with a midpoint of -2.3 percent. - Note: The REER gap midpoint is obtained from the IMF staff–assessed CA gap and an estimated semi-elasticity of the CA to the REER of 0.3. The range of the REER gap is ±2.7 percent, obtained from Spain’s estimated standard error of the EBA CA norm (0.8 percent of GDP) and the aforementioned CA-to-REER semi-elasticity. ### Capital and Financial Accounts: Flows and Policy Measures - Background: - Financial account balance improved slightly to 1.3 percent of GDP in January-September 2022 from 1.1 percent of GDP during same period in 2021. - Net inflows in portfolio investment were offset by net outflows in other investment (excluding Bank of Spain), with limited impact from direct investment. - Behavior of other investment largely driven by one-off repo operations by banks. - Capital account surplus remained high due to flows associated with Next Generation EU funds. - Assessment: - Large external financing needs leave Spain vulnerable to sustained market volatility, especially in a context of tighter global financial conditions. ### FX Intervention and Reserves Level - Background: The euro has the status of a global reserve currency. - Assessment: Reserves held by the euro area are typically low relative to standard metrics, but the currency is free floating. ### Source of Risks, Likelihood, Impact, and Policy Responses (selected) - Intensifying spillovers from Russia’s war in Ukraine - Relative Likelihood: High - Impact if Realized: High - Notes: Spain has limited direct trade and financial linkages to Russia and Ukraine but is indirectly exposed via higher energy prices and trading partners’ growth. - Policy Response: - Provide further targeted support to vulnerable households and firms to mitigate high energy prices. - If inflation became substantially higher and/or more protracted, greater tightening of macroeconomic policies might be needed. - Further promote public investment and accelerate structural reforms to improve competitiveness and energy efficiency and facilitate labor reallocation. - Commodity price shocks - Relative Likelihood: High - Impact if Realized: High - Notes: Spain is a net energy importer, with imported products accounting for about 75 percent of total energy needs. - Policy Response: See responses under intensifying spillovers from Russia’s war in Ukraine. - Deepening geo-economic fragmentation and geopolitical tensions - Relative Likelihood: High - Impact if Realized: Medium - Notes: External demand is a key driver of Spain’s GDP growth since the GFC; fragmentation could impede global trade and capital flows and lower Spain’s growth, but Spain could integrate more into European value chains. - Policy Response: Further promote investment and accelerate structural reforms to improve competitiveness and energy efficiency and facilitate labor reallocation. - De-anchoring of inflation expectations and stagflation - Relative Likelihood: Medium - Impact if Realized: Medium - Policy Response: - If inflation became substantially higher and/or more protracted, greater tightening of macroeconomic policies might be needed. - Formulate a credible medium-term consolidation path to support investor confidence. - Continue monitoring real estate price developments to re-assess need for macroprudential tightening. - Abrupt global slowdown or recession - Relative Likelihood: Medium/High - Impact if Realized: Medium - Policy Response: - Let automatic stabilizers work if output gap widens and provide targeted support to cushion external shocks and facilitate structural transformation. - Further promote public investment and accelerate reforms to improve competitiveness and facilitate reallocation. - Implementation of EU-funded projects (NGEU) - Relative Likelihood: Medium - Impact if Realized: High - Notes: Pace at which NGEU resources reach the real economy and effectiveness of investment projects in expanding productive capacity are uncertain. - Policy Response: Redouble efforts to ensure efficient coordination, implementation, and oversight of the RTRP. - Weak implementation of fiscal commitments and structural reforms or reversal of past policy achievements - Relative Likelihood: Medium - Impact if Realized: High - Notes: Political fragmentation could delay approval of some reforms; a credible medium-term fiscal plan has yet to be announced. - Policy Response: - Continue to advance structural reforms. - Return to gradual, steady, and growth-friendly fiscal consolidation. - Reform the regional financing framework to reduce fiscal risks. ### Debt Sustainability and Stress Tests - Overview: - Public sector gross debt is high at about 115 percent of GDP. - In a no-policy change baseline, debt dynamics do not stabilize by the end of the forecast horizon. - Fiscal consolidation will need to play a role in the medium term to put the debt ratio on a sustained downward path and rebuild buffers. - Projected debt trajectory is susceptible to shocks (especially a negative real GDP growth shock and the materialization of contingent liabilities). - Background and recent developments: - Definitions and Coverage: Public debt comprises EDP debt in the hands of the General Government (Central Government, Regional Governments, Local Governments, and Social Security Funds); includes only public enterprises defined as part of General Government under ESA. - Public debt developments: - Pre-pandemic: public debt declining from peak of 105.1 percent in 2014 to 98.2 percent of GDP at end-2019. - 2020: public debt increased to 120 percent of GDP due to output loss and fiscal response to pandemic. - 2021 and 2022: debt ratio declined driven by recovery in economic activity, strong revenue performance, and withdrawal of COVID support measures. - Financing conditions: - Gross financing needs peaked at 23 percent of GDP in 2012; have declined since due to maturity extension and nominal deficit reduction. - Benchmark 10-year bond yield fell from average about 6 percent in 2012 to average of 0.7 percent in 2019. - Interest payments on public debt fell to 2.3 percent of GDP in 2019. - Financial conditions tightened significantly in 2022 with monetary policy normalization: nominal yields on Spanish government bonds increased by 270bps since end-2021 and spread over German bunds widened by about 45bps by July 2022; spread about 20bp wider in November 2022 compared to end-2021. - ECB policy: flexibility in reinvestments under PEPP and introduction of Transmission Protection Instrument (July 2022). - Other factors: - Amortization profile tilted to long term (about 85 percent of total debt, on a residual maturity basis). - Average maturity of outstanding debt increased from 6.3 years to 7½ years in 2019. - Average cost of outstanding debt fell to about 1.9 percent in 2021. - Share of total debt held by the ECB increased from about 20 percent pre-pandemic to close to 30 percent by mid-2022. - Holdings by resident financial sector about 30 percent of total; resident banking system holdings of sovereign debt amount to about 13 percent of total assets, with additional contingent exposure of about 2.5 percent of total assets via government guarantees issued since 2020. - Baseline and assumptions: - Public debt ratio projected to decline through 2025, driven by nominal GDP growth, winding down of support measures, and revenues from temporary taxes introduced in the 2023 draft budget. - Absent sustained discretionary consolidation, deficit would stabilize above pre-crisis levels and debt-to-GDP ratio will resume rising beyond 2025. - Gross financing needs expected to be about 20 percent of GDP in 2022 and projected to remain above 18 percent over the forecast horizon. - Baseline assumes disbursements under EU Recovery and Resilience Facility in 2021–25, expiration of energy support measures in 2023 (one percent of GDP), and expiration of some temporary taxes by 2025. - Long-term sovereign yields assumed to increase from 2.2 percent in 2022 to about 3.5 percent in 2027. - Realism of projections: - Median forecast error for real GDP growth during 2013–21 was 0.62 percent (suggesting downward bias in staff projections). - Median forecast error: -0.83 percent for the primary balance and -0.34 percent for inflation (some degree of upward bias). - Comparison with high debt country experience suggests projected levels of the cyclically adjusted primary balance (CAPB) in Spain are below thresholds that would question feasibility of adjustment. - Stress test: Growth shock (adverse scenario) - Assumptions: - Real GDP growth rates lower than baseline by one standard deviation (computed from 2010 to 2019) for two consecutive years, in 2023–24. - Implies real GDP would contract by an average of 0.7 percent per year in 2023–24, compared to an annual average growth of 1.7 percent under the baseline. - Inflation lower by an average of 0.6 percentage points per year and primary balance weaker by about 2.1 percent of GDP per year in shock years. - For 2025–27, scenario assumes moderate fiscal tightening as primary expenditure grows only in line with the new lower GDP level. - Outcomes: - Debt-to-GDP ratio would rise to about 120 percent of GDP in the medium term (almost 11 percentage points higher than the baseline). - Gross financing needs would stay above the 20 percent benchmark through the forecast horizon. - If scenario assumes no fiscal tightening and primary expenditure remains at same nominal level as in baseline, higher fiscal deficits in 2025–27 would push public debt to about 130 percent of GDP by end of forecast horizon. *Source: Annex I. External Sector Assessment (1espea2023001) — IMF staff assessment and related annex content.* ### 9. Primary balance shock. This scenario assumes a relaxation of fiscal policy in 2023–24, with ### 9. Primary balance shock. This scenario assumes a relaxation of fiscal policy in 2023–24, with ### Scenario outcomes and projections - Primary balance shock - Assumes an average deterioration of the primary balance of 1.5 percent of GDP per year (in 2023–24), capturing larger and for longer energy support measures. - Public debt-to-GDP ratio would reach about 114 percent of GDP by 2027 (about 3 percentage points higher than in the baseline). - Gross financing requirements would be more sizable than in the baseline. - Interest rate shock - Assumes interest rates increasing by 465 bps from 2023 onwards. - Effective interest rate would increase to 4.6 percent by 2027 compared to 2.6 percent in the baseline. - Debt-to-GDP ratio would rise to about 116 percent in 2027, about 6 percentage points higher than under the baseline. - A sizeable and sustained increase in interest rates would reduce the (already limited) fiscal space. - Combined shock - A simultaneous combination of the previous three shocks would be particularly adverse for public debt dynamics, mostly due to the impact of lower growth. - Public debt-to-GDP ratio would increase to about 136 percent in 2027 (about 26 percentage points higher than under the baseline). - Gross financing needs would reach above 25 percent of GDP by the end of the forecast horizon. - Contingent liability shock - Negative financial sector shock scenario assumes a one-time increase in non-interest public expenditures in 2023 equivalent to 6 percent of banking sector assets, combined with lower growth and lower inflation in 2023–24 (i.e., growth is reduced by 1 standard deviation estimated over 2010–2019). - Shock is described as close to the average public support during the past banking crisis. - Materialization of such contingency liabilities would raise the primary deficit to about 13 percent of GDP in 2023, bringing gross financing needs close to 30 percent of GDP. - Debt-to-GDP ratio would rise sharply to 127 percent in 2023 and stay at around that level in the medium term (around 16 percentage points higher than the baseline). ### Risk assessment and debt profile - Benchmark and 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 would remain close to 20 percent of GDP over the forecast horizon, and in most cases under the shock scenarios. - Debt-profile risks stem from the high level of external financing needs and—from a lesser extent—the share of public debt held by non-residents. - Vulnerabilities - Public indebtedness is relatively high and the projected debt trajectory is susceptible to various shocks, particularly: - a negative real GDP growth shock, and - the materialization of contingent liabilities. - Debt maturities imply higher interest rates would have a backloaded impact; sustained rate increases would further reduce limited fiscal space. ### Policy recommendations - Steady fiscal consolidation will be needed in the medium term to create space for responding to fiscal shocks. - Fiscal adjustment should be growth-friendly; specifically: - preserve space for public investment and education spending, and - accompany consolidation with growth-enhancing structural reforms. - Early formulation of specific plans to rebuild fiscal buffers would reinforce investor confidence and reduce the risk of sharp increases in financing costs. ### Key statistics and projected indicators (selected values preserved exactly) - Primary balance shock deterioration: 1.5 percent of GDP per year (2023–24). - Interest rate shock: increase by 465 bps from 2023 onwards. - Effective interest rate: 4.6 percent by 2027 (4.6 percent) vs baseline 2.6 percent in 2027 (2.6 percent). - Debt-to-GDP under scenarios: - Primary balance shock: about 114 percent of GDP by 2027 (114 percent). - Interest rate shock: about 116 percent in 2027 (116 percent). - Combined shock: about 136 percent in 2027 (136 percent). - Contingent liability shock: rise sharply to 127 percent in 2023 (127 percent) and remain around that level in the medium term. - Contingent liability assumed size: one-time increase in non-interest public expenditures in 2023 equivalent to 6 percent of banking sector assets (6 percent). - Contingent liability impact on primary deficit: about 13 percent of GDP in 2023 (13 percent). - Contingent liability impact on gross financing needs: close to 30 percent of GDP (30 percent). - Gross financing needs under combined shock: above 25 percent of GDP by end of forecast horizon (above 25 percent). - Baseline gross financing needs: close to 20 percent of GDP over the forecast horizon (close to 20 percent). - Debt benchmark breached: 85 percent of GDP (85 percent). *Source: IMF staff.* ### Annex IV. Implementation Status FSAP Recommendations ### Annex IV. Implementation Status FSAP Recommendations ### To address crisis legacy issues and mitigate other risks to financial stability - Recommendation 1: Enforce implementation of the ECB guidance on NPLs, including promoting banks’ disclosure of targets and progress (SSM, BdE) - Since 2016, the SSM requires "high NPL banks" to submit annual NPL reduction strategies and specific quarterly NPL reporting; Joint Supervisory Teams (JSTs) assess plans twice a year. - Q2 2022 average NPL ratio for Spanish significant institutions (SIs) is 3,4% (versus 2,35% for all SSM banks). - NPL stock in all Spanish SIs fell from 134 bn€ in December 2016 to 79 bn€ in June 2022. - Foreclosed assets (FAs) fell by 74% in Spain since December 2016, from 76 bn€ to 20 bn€ in June 2022. - Wholesale disposals Dec 2016–June 2022 totalled 129 bn€ (66 bn€ NPLs; 63 bn€ FA) in gross book value. - Enhanced disclosure requirements on asset quality and NPLs mandated since end-2018; EBA implemented additional disclosure items on non-performing exposures, forbearance and foreclosed assets. - Regulation (EU) No 575/2013 established minimum loss coverage requirements for non-performing exposures originated after 26th April 2019; ECB set supervisory expectations for pre-26 April 2019 NPEs. - April 2022 EBA peer review: jurisdictions with higher NPE levels, like Spain, implemented more sophisticated supervisory processes; EBA Guidelines on management of non-performing and forborne exposures largely implemented. - Recommendation 2: Improve recovery of viable businesses by enabling the stay and involvement of public creditors in all pre-insolvency processes and enhancing the OCAP process for SMEs; strengthen commercial courts by resourcing them better (MoE, MoJ) - Insolvency Law reform (Law 16/2022) entered into force on September 26, 2022, transposing the Insolvency EU Directive. - Reform replaces two pre-insolvency procedures with: a special procedure for microenterprises and restructuring plans for non-microenterprises. - Both procedures: available at earlier stage (likelihood of insolvency), allow cross-class cram-down, can affect public credit (deferrals in restructuring plans), can impose stay on public credit enforcement actions. - Special procedure for microenterprises simplified; insolvency practitioner required only in specific cases; liquidation via electronic platform otherwise. - Restructuring plans designed with minimum procedural regulation. - Second chance procedure enhancements: - Reduces effective exoneration period from five to three years. - Allows exoneration without prior liquidation of production assets or main residence. - Increases credits that can be exonerated; public credit can be exonerated up to a maximum of 20,000€. - Recommendation 3: Evaluate the scope for further banking consolidation through mergers, branch reduction, and business model adjustments (SSM, BdE) - ECB and BdE prioritized profitability and sustainability amid low interest rates; branch reduction continued and consolidation undertaken. - CaixaBank absorbed Bankia in March 2021; technological integration completed November 2021. - Main shareholders CriteriaCaixa (40% of Caixabank) and FROB (62% of Bankia) remain main shareholders of merged entity with 30% and 16%, respectively. - Resulting entity market shares of over 25% in assets, loans and deposits. - Restructuring envisaged -10% FTEs and -28% number of branches; cost synergies estimated at 900 m€ per year, 80% achieved; additional revenue synergies around 300 m€ per year expected. - Unicaja Banco merged with Liberbank on 30 July 2021. - Targets: reduction in branch network and headcount (26% and 29% until 2024); by June 2022 reached 72% and 31% of these targets. - Business model remains retail-focused on mortgages and SMEs in Spain. - Abanca pursued inorganic growth: acquisitions in 2019 and integrations in 2021. - Cooperative sector consolidation: creation in March 2018 of an IPS grouping 30 credit cooperatives and Banco Cooperativo Español; only 4 cooperatives remain independent. - ECB guide on supervisory approach to consolidation published early 2021; ECB will use supervisory tools to facilitate sustainable consolidation projects meeting governance and risk standards. - Recommendation 4: Monitor rigorously interest rate and government bond market risks; ensure appropriate capital requirements to mitigate such risks (SSM, BdE) - IRRBB monitored regularly (quarterly and in annual SREP); on-site inspections and horizontal exercises conducted. - Regular monitoring of sovereign portfolio market risks, including scenario analysis based on credit spread volatilities experienced during the last sovereign debt crisis. - LSIs monitored via ICAAP/ILAAP Guideline with a rule for capital allocation. - Recommendation 5: Improve liquidity monitoring, including by closing reporting gaps; critically review funding structures and policies of banks with excessive reliance on ECB’s liquidity support; overall, place a premium on effective liquidity risk management by banks (SSM, BdE) - Individualized liquidity and funding risk assessments for Spanish SIs via SREP methodology, supplemented with horizontal analysis of key indicators. - Monitoring includes LCR (with stress test simulations) and NSFR metrics; assessment of institutions’ capacity to address immediate cancellation of TLTRO and impact on LCR under different scenarios. - JSTs analyze specific funding plans and actions. - 2019 ECB Liquidity Stress Test (LiST): all Spanish SIs participated; results fed into SREP. - LSIs monitored via a trigger system based on key risk indicators. - EU-level "maturity ladder" financial statement for banks introduced March 2018 (BdE was already collecting this information). - Recommendation 6: Initiate supervisory and prudential steps to reduce the mismatching of assets/liabilities in insurer balance sheets (DGSyFP) - DGSFP performs ongoing monitoring of durations and returns on assets and liabilities through off-site quantitative reporting and on-site activities. - Recommendation 7: Foster development of market-based financing and supply of nonbank financial services for corporates and households (MoE, BdE, CNMV, DGSyFP) - CNMV measures to promote market-based finance: BME Growth and MARF for small-cap firms, venture capital, and crowdfunding development. - CNMV participates in informative sessions and maintains a contact point for firms intending to go public. - Innovation Hub and Spanish regulatory sandbox analyze viability of new business models and digital technologies in financial markets. - European framework for simple, transparent and standardized securitization implemented to foster market-based financing. - Recommendation 8: Enhance capacity to monitor and analyze macro financial linkages, intra-system connectedness, and cross-border spillovers; close data gaps (BdE with CNMV and DGSyFP) - Since 2019 BdE increased coverage of interconnectedness in its half-yearly Financial Stability Report. - CNMV regularly analyses direct connectedness between banks and OFIs in its annual NBFI Report; 2020 working paper on connectedness and systemic risk for non-alternative CIS published. - DGSFP analyzes macro financial interlinkages related to investments and business models. - AMCESFI (created March 2019) set up a Subcommittee on Interconnectedness; evaluations published in AMCESFI’s Annual Reports. - Recommendation 9: Review, as a priority, SAREB’s medium-term financial outlook based on adverse scenarios; set up a tripartite committee (BdE, MoE, and FROB) to work out any needed mid-course corrections (MoE, BdE, FROB) - December 2020: SAREB reclassified as part of Public Administrations sector; SAREB debt computed as State debt. - January 2022 RDL 1/2022: allowed FROB to obtain majority of SAREB capital; April 2022 FROB stake increased to 50.14%. - SAREB Monitoring Commission disappeared after public control takeover; FROB now monitors company activity via control bodies. - SAREB not expected to have additional financing needs medium term; negative equity since December 2021 but comfortable liquidity and no obligation to repay debt except for cash portion generated. - Statutory duration expires end of 2027 when State must assume payment of pending debt as guarantor. ### To strengthen systemic and prudential oversight - Recommendation 10: Set up a ‘Systemic Risk Council’ for inter-agency coordination on systemic risk factors, surveillance, and system wide financial sector policies (MoE with BdE, CNMV, DGSyFP) - Royal Decree 102/2019 created AMCESFI in March 2019 as the national macroprudential authority. - AMCESFI’s mandate includes identification and surveillance of systemic risk factors and coordination of sectoral macroprudential policies. - Functions discharged by Council and Financial Stability Technical Committee (high-ranking officials from MoE, BdE, CNMV and DGSyFP). - Recommendation 11: Expand the macroprudential toolkit to include borrower-based tools (All authorities) - Royal Decree-law 18/2018 (14 December) and BdE Circular 5/2021 (22 December) developed macroprudential tools for banking sector complementing EU legislation, including: - (i) Limits and conditions on lending (borrower-based instruments); - (ii) limits to sectoral concentration of credit; - (iii) sectoral countercyclical capital buffer. - European Commission review under article 513 of Regulation (EU) 575/2013 assessing sufficiency of macroprudential rules, focusing on: flexibility in CCyB use, widening macroprudential space via new tools/mechanisms, O-SII calibration, and harmonized borrower-based measures. - No legislative proposal foreseen short term; Commission expected to issue a report and potential targeted changes in CRR/CRD implementing Basel III standards may include amendments. - Recommendation 12: Increase supervisory focus on corporate governance practices across all credit intermediaries, and the nonbank sector (SSM, BdE, DGSyFP, CNMV) - Internal governance and risk management designated ECB supervisory priorities in recent years. - 2015 SSM thematic review on governance and risk management in SIs led to supervisory actions and inclusion in annual SREP. - Horizontal reviews and ad-hoc on-site inspections conducted for SIs and LSIs; weaknesses followed up. - Governance and risk control assessments integrated into annual SREP; continuous revision of board minutes and communication frameworks with entities at multiple levels. - Reinforcement of lines of defense with greater independence and board involvement; improved technical and human resources. - Fit and Proper process reinforced with transparent, harmonized selection criteria and in-depth candidate analysis. - CNMV supervisory focus: audit committees, oversight of financial reporting and internal control, compliance of independent board director criteria. - DGSFPS supervisory priorities (2018–2022) on corporate governance in insurance: review of key function policies, AMSB involvement, outsourcing (IT/cyber-risks), AMSB member selection, and remuneration policies. - Recommendation 13: Assign the BdE full regulatory powers in matters not harmonized at the European level including authorizing mergers (BdE, MoE) - No specific action taken domestically. - Draft European Commission CRD Directive VI (October 2021) aims to harmonize acquisitions and mergers at EU level; if approved, authorization powers for mergers would be given to the supervisor (no opposition), thereby superseding FSAP recommendation. - Final proposal not expected before end-2023. ### To bolster crisis management, resolution, and safety nets - Recommendation 14: Develop a credible resolution strategy for credit cooperatives and other Less Significant Institutions (LSIs); prepare recovery and resolution plans for significant insurance companies (BdE, FROB, DGSyFP) - BdE drafted and adopted resolution plans for all LSIs, including credit cooperatives. - 48 entities subjected to simplified obligations (SOs) and 6 entities with full obligations; Resolution Planning Cycle 2022 will update plans for 31 LSIs (25 SOs and 6 full obligations). - Default preferred resolution tool for these entities is sale-of-business. - BdE conducts annual risk assessment as part of SREP to keep recovery plans updated. - 2018 platform to mutualize losses among 30 credit cooperatives and a bank (Banco Cooperativo Español) created to facilitate future resolution. - Pending legislative initiatives: - Amendment safeguarding NCWO in resolution vis-a-vis liquidation. - Bank of Spain proposal (not formalized) to amend Cooperatives legal framework to require Banco Cooperativo Español to set up a central body accountable for solvency, liquidity and resolution requirements. - For insurance: national regulation on recovery being prepared; EU-level Directive on recovery and resolution for insurance sector under discussion. - Recommendation 15: Strengthen and upgrade the deposit guarantee scheme; create a protection scheme for insurance policyholders (FGD, MoE, DGSyFP) - June 2022 Eurogroup invited the Commission to table legislative proposals regarding crisis management and deposit insurance (CMDI) framework; Commission expected to promote use of DGS funds to facilitate resolution for small/medium sized banks with large deposit bases. - No specific action expected soon on creation of a common European deposit insurance (EDIS). - In insurance sector, guarantee scheme for victims of road traffic accidents is being strengthened. *Source: Annex IV. Implementation Status FSAP Recommendations (1espea2023001).* ### Annex V. Support Policies for High Energy Prices ### Annex V. Support Policies for High Energy Prices ### Context and exposure - Global fossil fuel prices surged in early 2022 after Russia's invasion of Ukraine. Russia accounted for about 20, 10, and 5 percent of global exports of natural gas, crude oil, and coal, respectively. - Russia's integration into Europe: in 2020, Russia supplied 35, 25, and 45 percent of the natural gas, crude oil, and coal imports of the EU and the U.K. combined. - Spain’s direct energy dependence (2021): about 10 percent of total gas imports and about 5 percent of total oil imports. Spain is also exposed indirectly via higher international energy prices. - Wholesale electricity price passthrough to retail prices in Spain has been relatively fast due to high prevalence of dynamic pricing. ### Measures implemented (tax, spending, regulatory) - Fiscal and tax measures implemented/extended through end-2022 include: - Reduction in VAT rate on electricity (from 21% to 10% until Jun, to 5% in Jul-Dec): 1955 (EUR mn) - Reduction in electricity consumption tax (from 5.11% to 0.5%): 1944 (EUR mn) - Suspension of tax on electricity production: 1300 (EUR mn) - Reduction in VAT rate on gas (from 21% to 5% during Oct-Dec): 151 (EUR mn) - Transport fuel rebate: 5107 (EUR mn) - Targeted household support: 2693 (EUR mn) - Targeted corporate support (transport, agriculture, fishing, gas and electro intensive firm): 3522 (EUR mn) - Subsidies in natural gas bill: 3000 (EUR mn) - Total above the line: 19672 (EUR mn) - Below-the-line measure: - Credit public guarantees (envelope): 10000 (EUR mn) - Note: Costing of transport fuel rebate includes 584M€ that would impact fiscal acounts in 2023. The fiscal cost of the suspension of the tax on electricity production is computed based on the transfer to the National Markets and Competition Commission. - Additional 2022 measures: rebate of transport fuel duties, temporary cut of the VAT rate on natural gas, targeted direct aid to firms (transportation, agriculture, fishing, energy-intensive sectors), a state-backed credit line for corporate liquidity, increase of the minimum vital income (MVI), expansion of electricity aid scheme, one-time payment of €200 to low-income households not covered by MVI nor receiving a pension, and direct compensation to promote public transportation. - Regulatory measures: - Cap on uprating to the regulated tariff of natural gas ("last resort tariff") for customers with annual consumption of less than 50 MWh and not in the liberalized market; gas companies to recover the difference over time. Starting in October 2022, the difference between costs and the uprated tariffs will be covered from the central budget. The cap was extended to multiple-owner buildings with natural gas central heating. - The last resort tariff covers about 1.5 million consumers, compared to 6 million in the free market. - Temporary cap on wholesale natural gas prices used in electricity production for Spain and Portugal (the Iberian mechanism), introduced starting in June 2022 and approved by the European Commission in May. The cap: - set initially at €40/MWh for the first six months and then increases by €5 each month until reaching €75/MWh in May 2023. - operates as a subsidy on the gas price for power stations: energy producers reliant on natural gas are compensated by consumers for the difference between the market price and the cap. ### Estimated impacts on prices and inflation - Combined interventions estimated to have reduced CPI inflation by about 2¼ percentage points relative to a no policy counterfactual. (Analysis compares observed HICP subindexes with a counterfactual from regression analysis; not comprehensive—excludes some measures such as VAT reduction for natural gas, support for public transportation, and the cap on the uprating for the natural gas last resort tariff.) - Electricity market measures implemented in 2021: estimated to have kept retail prices about 22 percent below the counterfactual (computed prior to the introduction of the cap and the further VAT reduction to 5 percent starting in July 2022). - Cap on gas for electricity production: estimated reduction of about 16 percent in the relevant prices. - Rebate on transport fuels: - No-rebate counterfactual constructed from EC Weekly Oil Bulletin series (which do not reflect the rebate). - Evidence that fuel stations increased base prices (excluding rebate) by 0.7–3.7 cents for petrol and 3.5–6 cents for gas suggests the simple counterfactual may overstate impact. - Taking that into account, estimates suggest the rebate leads to a reduction in retail prices relative to the counterfactual ranging between 8 and 13 percent. - Table of estimated reductions in retail prices (relative to counterfactual; HICP weight in parentheses): - Electricity measures implemented in 2021: Reduction in Retail Prices -1.64; Weight in HICP 4.06 (%) - Cap on gas for electricity production: Reduction in Retail Prices -16.24; Weight in HICP 4.06 (%) - Rebate on gasoline: Reduction in Retail Prices -7.7 to -13.3; Weight in HICP 2.46 (%) - Rebate on diesel: Reduction in Retail Prices -7.7 to -13.4; Weight in HICP 3.08 (%) ### Distributional implications - Consumption patterns differ across income quintiles: - Poorer quintiles spend a larger share of total consumption on electricity and gas than richer households. - Spending on transport fuels as a share of household consumption is relatively flat across consumption quintiles. - Implications: - Broad-based tax reductions on electricity benefit relatively more lower income households. - Transport fuel rebates accrue disproportionately to richer households in aggregate terms. - Additional considerations: - Within-quintile heterogeneity: low-income households that own a car can face a large share of consumption spent on fuel. - Spatial dimension: rural households generally spend a higher share of consumption on transport fuels. ### Other considerations and policy notes - The Iberian cap: - Reduces consumer prices without direct fiscal cost and without distorting dispatch ordering in energy production. - Downsides: untargeted, partially reduces price signals, could hamper investment in renewables, and has been associated with increased exports to France since its introduction. - Some measures (e.g., VAT reduction for natural gas, support for public transport, cap on last-resort tariff uprating) were not included in some quantitative impact estimates. - Data and transparency: - The analysis and policy assessment rely on multiple data sources (e.g., Bloomberg L.P., Haver Analytics, OMIE) and IMF staff calculations. - The note on costing and execution highlights interactions with fiscal accounting (e.g., 584M€ of the transport rebate impacting 2023 fiscal accounts). *Source: IMF staff calculations and Annex V. Support Policies for High Energy Prices (selected figures and findings).* ### 1. The GDP growth rate for 2022 has been revised up to 5.2 percent, ### 1espea2023001 - 1. The GDP growth rate for 2022 has been revised up to 5.2 percent, ### Revisions and GDP growth - The GDP growth rate for 2022 has been revised up to 5.2 percent, reflecting revisions to historical GDP statistics published by the Spanish Statistical Office (INE) on December 23, 2022. - Year-on-year real GDP growth in the first three quarters of 2022 now averages 6.3 percent, 0.6 percentage points higher than in the previous publication. - Based on the new data, the level of GDP at the end of the third quarter was 1.4 percent below its pre-pandemic level. - Incorporating the new data, staff has revised up Spain’s GDP growth to 5.2 percent for 2022 (+0.6 percentage points relative to the staff report projections). ### Inflation and core inflation revisions - The December CPI flash estimate showed headline inflation at 5.8 percent year-on-year. - Core inflation rose to 6.9 percent (December flash estimate). - Staff revised core inflation to 4.6 percent for 2023 and 3.4 percent for 2024 (+0.2 and +0.6 percentage points compared to the staff report projections, respectively). - The CPI inflation numbers for 2022 now reflect the actual outcome (see Table 1). ### Policy measures adopted for 2023 (households and firms) - Extension through 2023 of: - Reduction of tax rates on electricity and gas. - 15-percent increase in the minimum vital income and the non-contributory pensions. - A new one-time 200-euro payment is granted to vulnerable households that are neither pensioners nor recipients of the minimum vital income support scheme. - Targeted corporate support focused on food, transportation, and energy-intensive industries. - Temporary cap of 2 percent on rent increases extended until end-2023, and a 6-month extension for rental contracts expiring before June 30. - The rebate on transport fuels adopted in 2022 has been discontinued. - Reduced VAT rates on basic food items introduced from January to June 2023 (or until core inflation falls below 5.5 percent). - Fiscal cost of the new energy support package is currently estimated at about 0.8 percent of GDP, lower than staff’s baseline assumption (about one percent of GDP). - Keeping the total fiscal cost below one percent of GDP would be consistent with a modest contractionary fiscal stance. ### Recovery, Transformation and Resilience Plan (RTRP) progress and PERTEs - Implementation of the Recovery, Transformation and Resilience Plan has continued to advance. - A new large-scale public-private strategic project (PERTE) on industry decarbonization was approved in December 2022, bringing the total number of PERTEs to nine. - Awarded tenders increased from €0.9 billion in June to €5.4 billion in December (equivalent to 3 and 15 percent of total planned PERTE investment, respectively). - By end-2022 there were €677 million (2 percent of total PERTE investment) corresponding to closed tenders under evaluation, expected to be awarded in the near term. - Status of specific PERTEs (December 2022) includes planned investment and tenders figures as reported by the authorities (table data present in source). ### Central government and autonomous community (AC) investments - Investments directly managed by the central government: - Since mid-2022, awarded tenders increased by nearly €7 billion, reaching €18.7 billion in December 2022. - Significant progress in: Trans-European Transport Network (€2.8 billion), implementation of low emission zones and transformation of urban transport (€2.6 billion), and rehabilitation of public buildings (€1.5 billion). - Investments implemented via the ACs: - Transfers to the ACs increased by €2 billion between June and November 2022, totalling €20.4 billion (€11.3 billion in 2021 and €9.1 billion in 2022). ### Macroeconomic outlook and labor market developments - Staff and authorities note Spain’s post-pandemic recovery is sustained despite shocks (Russian invasion of Ukraine, energy crisis, global slowdown, inflation, tightening financial conditions). - Authorities are confident GDP growth closed 2022 clearly above 5 percent, for the second year in a row. - Contributing factors to dynamism: - Fast, strong pandemic and European response; vaccination and exit strategies. - Labor market flexibility via revamped short-time work schemes (ERTEs) and the 2021 labor market reform. - More diversified energy mix and increase in electricity generation from renewable sources from 15 percent to more than 40 percent in 15 years. - Recovery of the tourism sector and competitiveness of Spanish companies. - Impact of the Recovery Plan and anticipated addendum bringing an additional 94.3 bn euros in transfers and loans. - Labor market indicators and outcomes: - Social Security affiliations have remained above 20 million for nine months, the highest number recorded. - 47 percent of Social Security affiliations are women. - Active population reached 23.5 million. - Unemployment rate is at its lowest since 2008. - 2.3 million new open-ended contracts were signed in 2022. - The rate of temporary employment was reduced by almost 50%, approaching the EU average. - Three quarters of young workers under 30 already have an open-ended contract. - Only 7 percent of total open-ended contracts are fixed-discontinued (fijos discontinuos). ### Short-term policy stance on energy crisis and measures design - Six legislative packages during 2022 aimed to: - Decouple gas and electricity prices (Iberian solution). - Support consumers and businesses (electric and thermal social bonds, 15 percent increase in Minimum Vital Income and non-contributory pensions, direct subsidies, VAT reductions). - Increase resilience by reducing fossil fuel demand (public transport subsidies, energy efficiency, renewables promotion). - Authorities and Staff agree measures should be temporary, targeted, and maintain incentives for demand adaptation. - Specifics of the latest package (December 27, 2022): - General fuel rebates narrowed to very specific sectors and limited to the first semester of the year, with automatic phasing out and progressive reduction from the first to the second quarter. - VAT reduction for food and essential products is progressive, reversed in June (or earlier if core inflation < 5.5 percent). - Iberian mechanism estimated to reduce electricity prices by up to 16 percent compared to the counterfactual in net terms (once compensation borne by consumers is taken into account), achieved at no fiscal cost. - A new direct monthly subsidy of 200 euros to low-income households. ### Fiscal policy and public finances - Despite fiscal impact of support measures, fiscal policy is delivering consolidation and lower debt-to-GDP ratios on the back of very strong revenue performance. - Spain met its deficit target in 2021 and 2022 due to expenditure control and increased revenues. - In the first half of last year, public revenues surpassed 20 percent of the previous year’s GDP. - Finance Ministry estimates up to three fourths of the revenue improvement is permanent and due to structural factors (labor market dynamism, uncovering informal economy, fight against tax fraud, technological improvements at tax collection agency, incentives from reforms). - Staff considers the recently passed 2023 Budget implies a structural consolidation effort (source text continues beyond excerpt). ### Key statistics from Table 1 (selected items; annual percentage change unless noted) - GDP growth: 2019 2.0; 2020 -11.3; 2021 5.5; 2022 5.2; 2023 1.1; 2024 2.4; 2025 2.2 - Private consumption: 2019 1.1; 2020 -12.2; 2021 6.0; 2022 2.7; 2023 1.7; 2024 2.2; 2025 2.5 - Headline CPI (end of period): 2019 0.8; 2020 -0.5; 2021 6.5; 2022 5.8; 2023 3.8; 2024 2.4; 2025 2.0 - Core inflation (average): 2019 0.9; 2020 0.7; 2021 0.8; 2022 5.1; 2023 4.6; 2024 3.4; 2025 2.5 - Unemployment rate (percent): 2019 14.1; 2020 15.5; 2021 14.8; 2022 12.8; 2023 12.8; 2024 12.5; 2025 12.3 - General government balance (percent of GDP): 2019 -3.1; 2020 -10.3; 2021 -6.9; 2022 -4.5; 2023 -4.6; 2024 -3.5; 2025 -3.7 - General government debt (percent of GDP): 2019 98.2; 2020 120.4; 2021 118.4; 2022 112.8; 2023 111.2; 2024 110.0; 2025 109.0 _Italic: IMF staff report content as provided in the source document._ ### 0.3 percent points of GDP, within the range of its recommendations. Spain’s commitment ### 1espea2023001 - 0.3 percent points of GDP, within the range of its recommendations. Spain’s commitment ### Fiscal stance and medium-term consolidation - Fiscal stance for 2023 is described as “broadly neutral”. - The EU Commission, in its Opinion on the Draft Budgetary Plan of Spain (November 2022), estimates Spain’s fiscal stance, as measured by the expenditure benchmark, to be one of the most contractionary in the area (around 1 percent points of GDP). - The 2023 Budget includes: - Structural improvement in revenues. - New temporary sources of revenue from sectors enjoying windfall gains (banks, energy companies). - Additional temporary revenue from wealthier households to finance temporary relief for the vulnerable. - Staff recommends a clear commitment to consolidation efforts beyond 2024. - Authorities agree on the desirability of building buffers for future shocks and remain strongly committed to fiscal responsibility. - Setting specific numerical targets is judged premature given high uncertainty about: - The duration of Russia's war and its impact on the world economy. - The impact of COVID restrictions across regions and supply-chain ripple effects. - The new EU fiscal rules and the need for realistic, tailored, and potentially more gradual adjustment paths if accompanied by ambitious reforms and investments. - Spain’s strong market access despite the Eurosystem’s tightening of financial conditions is highlighted as a signal of investor confidence in the Spanish economy and the credibility of its consolidation path. ### Resilience and responsibility of the financial sector - Spanish banking sector is in a stronger position than a decade ago: - Capital levels are higher than before the pandemic. - NPL ratios have continued to decline. - Phasing out of pandemic-related support measures has not significantly impacted banks’ balance sheets. - Aggregate borrower stress indicators have remained low in 2022, including for publicly-guaranteed pandemic loans. - Since the pandemic, banks have made significant efforts in provisioning and classification of risky assets. - Profitability, as measured by the sector’s ROA, stood above the euro area average in the first half of 2022. - Banco de España stress tests show the Spanish banking system is resilient in different macroeconomic scenarios. - Real estate market has plateaued above pre-pandemic levels; prices are broadly aligned with fundamentals and are stable. - Mortgage portfolio features that reduce market-risk sensitivity: - New mortgage loans are mainly signed under fix-rate contracts. - Loan-to-value ratios of the mortgage stock are well below 80 percent. - Residual maturity is at historically low levels. - Banks’ credit standards remain prudent. - New bank lending continued to grow at good pace during 2022; pass-through of policy rates to price of new loans was moderate until recently. - Policy and institutional advances: - Reform of the code of good practices for mortgages to facilitate debt restructuring, write-offs and payments in lieu for vulnerable debtors. - Amended framework for debt resolution modernizing and strengthening insolvency and restructuring in line with EU guidelines. - New financial inclusion measures to ensure adequate access to services by the elderly and in rural areas. - Creation of a new institution for the defense of the financial consumer as a one-stop shop for personalized assistance. - Risks and supervision: - Main risks to financial stability stem from macroeconomic deterioration and higher tightening of financial conditions. - Idiosyncratic strengths (strong labor market, healthier household and corporate balance sheets, limited bank exposure to capital markets, larger exposure to mortgages) may mitigate risks. - Supervisory authorities emphasize vigilance and require prudent provisioning and credible plans for capital, liquidity, and funding. - Next year’s Financial Sector Assessment Program for Spain is welcomed. ### The Recovery, Transformation and Resilience Plan (Recovery Plan) and implementation - The Recovery Plan is presented as a historic opportunity: - Short-term: stimulate demand without immediate budgetary impact. - Long-term: transform the productive system for a generation. - Implementation progress and activity: - Over 2 billion euros have been mobilized on average every month in 2022. - Twelve long-term strategic projects (PERTE) launched in areas such as sustainable mobility, renewable energy, green hydrogen and energy storage, the agri-food industry, healthcare and microelectronics. - More than 100 sectoral conferences have been held with the regions (Comunidades Autónomas), plus additional fora and private-sector exchanges. - Investments reached cruise speed in 2022; authorities expect the positive impact of the Plan in the real economy to peak in 2023-2025 (with and average increase of 3 percentage points of GDP in the 2021-2031 period including the addendum). - Authorities and staff agree on the importance of closely monitoring implementation and establishing an outcomes-based evaluation system. - Addendum to the Recovery Plan: - Expected to mobilize an additional 94.3 bn euros. - Of these: - Approximately 7.7 bn in transfers will support the strategic plans. - 2.6 bn euros from the new RePowerEU mechanism will be devoted to new investment projects. - Up to 84 bn will be made available in loans to provide favorable financing for investments over time. - Additional investments and reforms emphasize industrialization and strategic autonomy in energy, food, industrial, and technological sectors. - Structural reforms and legislative progress: - After 2021 reforms in the labor market, pensions system and green transition, significant 2022 progress in education and vocational training, science, and business climate. - Staff report highlights reforms: insolvency regime, law for business creation and growth (Crea y Crece), new regime for technology start-ups, laws on cybersecurity, telecommunications, audiovisual sectors, and a new Securities Markets and Investment Services Law. - Negotiations with social partners are underway for the second phase of pension reform. - Broader significance: - The Plan is described as the deepest, most far-reaching transformative roadmap in decades with likely permanent results. - Beyond fiscal and reform measures, the Plan provides a sense of direction toward a more integrated and solidary Europe and a coherent narrative for Spanish citizens. - Despite political fragmentation, many ambitious reforms in the Plan have received parliamentary support wider than the current governing coalition, contributing to their stability over time. *Source: https://www.imf.org/-/media/files/publications/cr/2023/english/1espea2023001.pdf* --- _Source: https://www.imf.org/-/media/files/publications/cr/2023/english/1espea2023001.pdf_