## _cr07175

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---

### EXECUTIVE SUMMARY AND INTRODUCTION
- 2006 performance and emerging imbalances:
  - Output growth reached 3.9 percent for the year 2006.
  - Brisk job creation absorbed further increases in female participation and immigration.
  - Inflation moderated appreciably.
  - Signs of rebalancing: away from consumption and construction and toward corporate investment and exports.
  - Private consumption dampened by higher interest rates and weaker household finances; nonhousing investment picked up on strong corporate profitability.
  - Revival in partner demand reduced the external sector’s drag on growth, but the external deficit remained large:
    - General government surplus: 1.8 percent of GDP (2006).
    - Current account deficit: 8.8 percent of GDP.
    - Private sector indebtedness reached 187 percent of GDP.
  - Revenue buoyancy lifted the public sector position; public debt reduced to below 40 percent of GDP and the social security reserve fund built up to 4 percent of GDP.

- Outlook and risks:
  - Immediate growth prospects are bright; central scenario is for a smooth landing but with appreciable downside risks.
  - Main risk: agents may adjust their balance sheets more rapidly than anticipated, and rigidities may hamper quick resource shifts to export sectors, leading to a protracted period of weak activity.
  - Staff projection: current account deficit around 9½–10 percent of GDP through the forecast horizon.
  - Staff illustrative medium-term implications:
    - Net external liability position projected to increase by about 30 percentage points of GDP over the next five years from the current 58 percent of GDP.
  - Key vulnerability drivers:
    - Weak competitiveness from poor productivity performance and resilient price and labor cost differentials.
    - High and rising nonfinancial private sector indebtedness (mainly variable-rate household debt).
    - Risk of pronounced balance-sheet retrenchment, particularly if low- and middle-income households curtail borrowing.
    - A possible pronounced correction in real estate valuations could exacerbate retrenchment; construction accounts for one percentage point of GDP growth and 14 percent of employment.

- Authorities’ view and consensus:
  - Authorities agreed on the nature of the risks but assigned a lesser probability to adverse scenarios, citing:
    - Incipient rebalancing of growth.
    - Recent manufacturing productivity gains, inflation declines, and export pick-up.
    - Structural changes that expanded supply capacity (including a 5 million increase in population).
    - Large housing wealth supporting household solvency.
    - The accumulation of imbalances reflected private saving and investment decisions.
  - Consensus: policies must address root causes of the external imbalance and ensure medium-term growth continuity: contain demand and expand supply.

- Policy recommendations (summary):
  - Three policy priorities to forestall an adverse scenario:
    - Safeguard budgetary stability while tempering demand.
    - Raise supply capacity and improve competitiveness.
    - Keep the financial sector strong.
  - Specific recommendations:
    - Strengthen institutional mechanisms for fiscal discipline at all levels of government.
    - Step up competition-enhancing efforts, backed by political commitment.
    - Proceed forthwith with worthwhile pending economic legislation.
  - Authorities generally shared staff’s recommendations but placed less urgency on them given lower assessed probability of adverse scenarios.

- Article IV consultation context and timing:
  - Discussions centered on the required policy response—containing demand and expanding supply—building on past Fund advice.
  - Electoral calendar noted as a factor in implementation pace:
    - Regional and local elections in May 2007.
    - Parliamentary elections by March 2008.

### FISCAL POLICY: PRESERVING BUDGETARY STABILITY WHILE TEMPERING DEMAND
- Revenue and expenditure developments:
  - Higher-than-budgeted revenues (notably corporate and capital gains taxes) were used to raise the surplus, reduce debt, and build the social security reserve fund.
  - Primary spending rose by about 0.4 percentage points of GDP in both 2005 and 2006, driven by investment and rising regional government spending.
  - Official forecast: general government surplus of 1 percent of GDP in 2007 (authorities expected this to be exceeded).
- Staff concern:
  - Combined effect of the 2006 tax reform, regional tax-cutting initiatives, and planned additional spending likely to result in an untimely procyclical stimulus in 2007–08 if policies remain unchanged.
- Central elements for 2008 (first year of application of the new Budget Stability Law):
  - With GDP growth projected to exceed 3 percent, the new Law requires the central and territorial governments to be in surplus.
  - The Law does not specify the level or allocation of the surplus among government levels; authorities agreed all levels, including the regions (in balance in 2006), should contribute.
  - Authorities intend to apply strictly the Law’s provisions governing possible exclusion of certain capital expenditure from the targeted balance.
  - Staff recommended setting the expenditure ceiling to keep primary spending constant in relation to GDP; authorities viewed this as useful but could not commit at the budget-preparation stage.
  - Political considerations: a minority government might face difficulty obtaining approval of a tight budget at end of term, but there was wide support for budgetary stability among parliamentarians and trade unions and no calls to “spend” the fiscal surplus.

### MECHANISMS TO ENSURE FISCAL DISCIPLINE IN A HIGHLY DECENTRALIZED SYSTEM
- Fiscal discipline, transparency, and monitoring:
  - With extensive decentralization, strengthened transparency and monitoring (in line with 2005 fiscal ROSC recommendations) remain the most effective means to secure fiscal discipline at the regional and local government levels—who now account for over 75 percent of government spending, excluding social security.
  - Disclosure practices remain insufficient to prompt early identification of fiscal profligacy, elicit public censure, and stimulate corrective action.
  - Weak areas include:
    - Insufficient reporting of off-budget capital spending (via public enterprises and entities, public-private partnerships, etc.).
    - Long lags in the publication of comparable, national accounts-based data for territorial governments.
  - Authorities highlighted continuing efforts in these areas, including an ongoing census of all regional public entities.
  - Given the key role of peer pressure in a decentralized system, staff saw a useful role for independent assessments of fiscal policy plans and outturns at the various levels of government.

- Efficiency of spending and pension pressures:
  - Successive budgets emphasize “productive expenditure” (R&D, infrastructure, etc.); staff called for a thorough review of the efficiency of such spending. The authorities noted the creation of a government agency that included that function.
  - Long-term rise in age-related public spending currently estimated at 8½ percentage points of GDP (by 2050) implies that preserving budgetary stability will require further pension reform, beyond that agreed in 2006—a point recognized by the authorities.

- General Government Fiscal Operations (In percent of GDP):
  - Revenue: 2003: 38.2; 2004: 38.6; 2005: 39.4; 2006 (Prel.): 40.3; 2007 (Proj.): 39.9; 2008: 39.7; 2009: 39.5
  - Expenditure 1/: 2003: 38.2; 2004: 38.0; 2005: 38.2; 2006 (Prel.): 38.4; 2007 (Proj.): 38.6; 2008: 38.6; 2009: 38.6
  - Primary expenditure 1/: 2003: 35.9; 2004: 36.0; 2005: 36.4; 2006 (Prel.): 36.8; 2007 (Proj.): 37.1; 2008: 37.2; 2009: 37.3
  - Interest costs: 2003: 2.3; 2004: 2.0; 2005: 1.8; 2006 (Prel.): 1.6; 2007 (Proj.): 1.5; 2008: 1.4; 2009: 1.3
  - Balance 1/: 2003: 0.0; 2004: 0.5; 2005: 1.1; 2006 (Prel.): 1.8; 2007 (Proj.): 1.3; 2008: 1.1; 2009: 0.9
  - Primary balance 1/: 2003: 2.3; 2004: 2.6; 2005: 2.9; 2006 (Prel.): 3.5; 2007 (Proj.): 2.8; 2008: 2.5; 2009: 2.2
  - Structural overall balance 1/: 2003: 0.1; 2004: 0.7; 2005: 1.2; 2006 (Prel.): 1.8; 2007 (Proj.): 1.2; 2008: 1.1; 2009: 0.9
  - Gross debt: 2003: 48.8; 2004: 46.2; 2005: 43.2; 2006 (Prel.): 39.8; 2007 (Proj.): 37.2; 2008: 34.2; 2009: 31.3
  - Note: 1/ Calculations exclude one-off expenditure amounting to 0.7 percent of GDP in 2004.

### FINDINGS ON MACRO RISKS AND NECESSARY POLICY FOCUS
- Summary findings:
  - Spanish economy grew strongly in 2006 with signs of rebalancing: rapid employment expansion, a significant deceleration in inflation, a pickup in manufacturing productivity, and a strong fiscal outturn.
  - Downside risks remain pronounced due to rising private-sector indebtedness.
  - Growth is expected to settle close to potential in 2007–08, but the already very large current account deficit is set to widen further, to 9½–10 percent of GDP.
  - The counterpart to the current account deficit is growing private sector indebtedness, whose accumulation cannot go on indefinitely; agents may adjust their balance sheets more rapidly than foreseen.
  - Regaining competitiveness within EMU may entail a protracted period of weak activity given significant domestic market rigidities that hinder resource reallocation.

### POLICY RECOMMENDATIONS AND PRIORITIES
- Overarching priorities:
  - Safeguarding budgetary stability while tempering demand.
  - Raising supply capacity and improving competitiveness.
  - Keeping the financial sector strong.
- Fiscal policy recommendations:
  - A more resolute, expenditure-based countercyclical fiscal stance would be consistent with the new Budget Stability Law and help contain demand.
  - The Law’s first year of implementation—2008—should be exemplary.
  - The central government expenditure ceiling should keep primary spending constant as a share of GDP.
  - Regional governments should target an ambitious surplus, reflecting their share of the permissible deficit in low-growth periods.
  - Preserving budgetary stability will require substantial strengthening of fiscal accountability, timely publication of comparable, national accounts-based data for territorial governments, and improvements in reporting of off-budget operations at all levels of government.
  - The next legislature should aim for an early revival of reforms to place the pension system on a sustainable long-term path.
- Competition and structural reform:
  - Competition-promoting efforts should be stepped up and underpinned by a strengthened political commitment to promote contestable markets.
  - The draft Competition Law introduces valuable institutional measures that will need proactive implementation.
  - The independence of sectoral regulators should be enhanced by an arm’s length relationship with sectoral ministries.
  - Work on transposing the EU Services Directive should be accelerated to open up highly sheltered sectors.
  - Labor market flexibility gains from large immigration flows should be consolidated by reforms.
- Financial sector recommendations:
  - The Bank of Spain's continued vigilance is well-placed given rapid credit growth and loan concentration in the real estate sector.
  - Spain’s support for European financial integration should be reflected in a timely passage of the Markets in Financial Instruments Directive (MiFID).
  - Basel II legislation—with conservative approaches to banks’ industrial holdings—should proceed forthwith.
  - The proposed spin-off of insurance supervision from the Ministry of Economy has clear merits and should be revived.
  - Improvements in savings banks’ governance are needed to enhance exposure to market discipline.

### RECOMMENDATION ON CONSULTATION CYCLE
- It is recommended that the next consultation be held on the 12-month cycle.

### MACROECONOMIC PROJECTIONS AND LABOR (selected series, exact figures preserved)
- Real GDP growth (annual percent): 2002: 2.7; 2003: 3.0; 2004: 3.2; 2005: 3.5; 2006: 3.9; 2007: 3.6; 2008: 3.4.
- Contributions to demand and supply (growth rates in constant prices):
  - Private consumption: 2002: 2.8; 2003: 2.8; 2004: 4.2; 2005: 4.2; 2006: 3.7; 2007: 3.3; 2008: 3.1.
  - Gross fixed investment: 2002: 3.4; 2003: 5.9; 2004: 5.0; 2005: 7.0; 2006: 6.3; 2007: 5.6; 2008: 4.8.
  - Construction investment: 2002: 6.2; 2003: 6.2; 2004: 5.5; 2005: 6.0; 2006: 5.9; 2007: 5.0; 2008: 4.0.
  - Total domestic demand: 2002: 3.2; 2003: 3.8; 2004: 4.8; 2005: 5.0; 2006: 4.6; 2007: 4.0; 2008: 3.7.
  - Exports of goods and services: 2002: 2.0; 2003: 3.7; 2004: 4.1; 2005: 5.1; 2006: 6.2; 2007: 6.2; 2008: 6.2.
  - Imports of goods and services: 2002: 3.7; 2003: 6.2; 2004: 9.6; 2005: 7.0; 2006: 8.4; 2007: 7.3; 2008: 6.9.
- Potential output growth: 2002: 3.6; 2003: 3.4; 2004: 3.3; 2005: 3.4; 2006: 3.5; 2007: 3.5; 2008: 3.5.
- Output gap (percent of potential): 2002: 0.0; 2003: -0.3; 2004: -0.4; 2005: -0.3; 2006: 0.1; 2007: 0.2; 2008: 0.1.
- Employment and labor market:
  - Unemployment rate (in percent): 2002: 11.5; 2003: 11.5; 2004: 11.0; 2005: 9.2; 2006: 8.5; 2007: 7.8; 2008: 7.7.
  - Employment growth (labor input): 2002: 2.3; 2003: 2.4; 2004: 2.6; 2005: 3.1; 2006: 3.1; 2007: 2.7; 2008: 2.4.
  - Labor participation rate (percent, national definition): 2002: 54.3; 2003: 55.5; 2004: 56.7; 2005: 57.7; 2006: 58.7; (2007–08: not reported).

### PRICES, COMPETITIVENESS, AND EXTERNAL SECTOR
- Prices and competitiveness:
  - GDP deflator: 2002: 4.3; 2003: 4.1; 2004: 4.0; 2005: 4.1; 2006: 3.8; 2007: 3.4; 2008: 3.1.
  - HICP (average): 2002: 3.6; 2003: 3.1; 2004: 3.1; 2005: 3.4; 2006: 3.6; 2007: 2.6; 2008: 2.7.
  - HICP (end of period): 2002: 4.0; 2003: 2.7; 2004: 3.3; 2005: 3.7; 2006: 2.7.
  - Differential with euro area average: 2002: 1.4; 2003: 1.0; 2004: 0.9; 2005: 1.2; 2006: 1.4; 2007: 0.5; 2008: 0.8.

- External sector and balance of payments:
  - Trade balance (goods, percent of GDP): 2002: -5.0; 2003: -5.1; 2004: -6.4; 2005: -7.6; 2006: -8.3; 2007: -8.5; 2008: -8.8.
  - Current account balance (percent of GDP): 2002: -3.3; 2003: -3.5; 2004: -5.3; 2005: -7.4; 2006: -8.8; 2007: -9.4; 2008: -9.8.
  - Exports of goods (in billions of euro): 2005: 156.4; 2006: 172.1.
  - Imports of goods (in billions of euro): 2005: 202.6; 2006: 225.3; 2006 total imports of goods and services: 252.7.
  - Current account balance (in billions of euro): 2002: -23.8; 2003: -27.5; 2004: -44.2; 2005: -66.6; 2006: -86.0.
  - Net international investment position (in billions of euro): 2005: -658.2; 2006: -761.6; projected 2007: -874.6; 2008: -993.7; 2009: -1,120.4; 2010: -1,253.2 (Table 5 projections).
  - Official reserves (US$ billions, end-of-period): 2002: 34.5; 2003: 19.8; 2004: 12.4; 2005: 9.7; 2006: 10.8.
  - Official reserves in months of imports: 2002: 2.1; 2003: 0.9; 2004: 0.5; 2005: 0.3; 2006: 0.3.

### FISCAL ACCOUNTS AND PUBLIC DEBT (selected)
- General government balance (percent of GDP): 2002: -0.3; 2003: 0.0; 2004: 0.5; 2005: 1.1; 2006: 1.8; 2007: 1.3; 2008: 1.1.
- Primary balance (percent of GDP): 2002: 2.4; 2003: 2.3; 2004: 2.6; 2005: 2.9; 2006: 3.5; 2007: 2.8; 2008: 2.5.
- Structural balance (percent of GDP): 2002: -0.3; 2003: 0.1; 2004: 0.7; 2005: 1.2; 2006: 1.8; 2007: 1.2; 2008: 1.1.
- General government debt (percent of GDP): 2002: 52.5; 2003: 48.8; 2004: 46.2; 2005: 43.2; 2006: 39.8; 2007: 36.0; 2008: 33.8.

### FINANCIAL SECTOR INDICATORS AND VULNERABILITIES
- Public sector debt (Maastricht definition): 2002: 52.5; 2003: 48.8; 2004: 46.2; 2005: 43.2; 2006: 39.8.
- Three-month T-bill yield: 2002: 3.3; 2003: 2.2; 2004: 2.2; 2005: 2.2; 2006: 3.3.
- Stock market index (general, december 1985=100): 2002: 634.0; 2003: 807.9; 2004: 959.1; 2005: 1,156.2; 2006: 1,554.9.
- Selected banking soundness indicators (percent):
  - Regulatory capital to risk-weighted assets: 2002: 12.5; 2003: 12.6; 2004: 12.2; 2005: 12.0; 2006: 11.9.
  - Nonperforming credit to total gross credit: 2002: 1.0; 2003: 0.9; 2004: 0.7; 2005: 0.6; 2006: 0.6.
  - Return on assets: 2002: 0.9; 2003: 0.9; 2004: 1.0; 2005: 0.9; 2006: 1.0.
  - Return on equity: 2002: 12.1; 2003: 13.2; 2004: 14.5; 2005: 16.9; 2006: 19.9.

### FSAP RECOMMENDATIONS (selected) AND IMPLEMENTATION STATUS
- Tighten provisioning or capital requirements for nontraditional housing and construction loans: Short term — Pending.
- Adopt most conservative approach under Basel II for industrial participations: Short term — Contemplated in the current draft of Basel II legislation to be adopted by the end of 2007.
- Ongoing reforms of the Statutes of the Autonomous Communities should clearly maintain prudential and supervisory responsibilities at the State level: Short term — Despite some ambiguities, Statute revisions basically maintain status quo whereby Bank of Spain retains full responsibility for prudential and supervisory tasks.
- Separate insurance supervision from the Ministry of Economy: Medium term — A proposal to transfer solvency regulation to the Bank of Spain and consumer protection issues to the CNMV is currently stalled.
- Delegate the authority to issue norms and sanction violations from the Ministry of Economy and the Council of Ministers to the respective regulatory agencies: Short term or within 12 months — Pending.
- Create an institutional mechanism for permanent and continued coordination among the main regulators: Short term — Establishment of the Financial Stability Committee.
- Appoint members of the CNMV's board to longer non-renewable terms: Medium term — Pending.
- Monitor results of 2002–03 governance regulations on savings banks and strengthen them if required: Medium term or 1 to 3 years — Ongoing public debate.
- Allow savings banks to merge freely within and across Autonomous Communities if the Bank of Spain approves: Medium term — No requests for mergers have been formulated in the last year.
- Promote use of cuotas participativas to raise high-quality capital and to introduce market discipline: Medium term — Continued active encouragement of issuance, but none to date.
- Reduce over time public sector representation ceiling on savings bank boards: Medium term — Ongoing public debate.

### IMMIGRATION: AUTHORITIES’ STUDY (SUMMARY OF FINDINGS)
- Aggregate impact and demographics:
  - Spain’s economic growth during 2001–06: 3.3 percent annually compared with the euro area’s 1.5 percent.
  - Immigrants: 2.1 million; accounted for half of employment growth and about 60 percent of growth stemming from labor mobilization.
  - Composition: Immigrants mainly from Latin America (45 percent) and Europe (34 percent); described as medium- to high-skilled on average.
- Labor market and income effects:
  - Immigrants have on average an educational attainment higher than the native population, although the relationship reverts when comparing similar age cohorts.
  - Job overqualification is more common among immigrants than among natives.
  - Immigration accounted directly for one-fourth of the 1.6 percent annual income per capita growth during 2001–05.
  - Indirectly raised occupation rates among natives, including female participation by providing domestic services.
  - Controlling for human capital, immigrants earn 7 percent less than the native population.
- Fiscal impact:
  - In 2005, immigrants accounted for 6.6 percent of fiscal revenues and received 5.4 percent of fiscal expenses — with a net effect equivalent to half of the fiscal surplus.
  - Immigrants’ net fiscal contribution is projected to peak in 2012 and become negative by 2030 owing to retirement.
- External sector impact:
  - Authorities estimate immigration had an appreciable negative effect on Spain’s current account due to: (i) immigrants’ remittances; (ii) higher borrowing to purchase durables and housing; and (iii) induced investment through a higher marginal return on capital.
- Demographic potential:
  - Spain’s 2005 immigrants-to-population ratio: 12 percent (about the middle of OECD countries).
  - Population density is 68 percent of the euro area; large regions still have low immigration levels.

### IMF STAFF UPDATE (Statement by the IMF Staff Representative, May 16, 2007)
- Recent developments since the 2007 Article IV Staff Report: The thrust of the staff appraisal remains unaltered.
- Growth and activity (early 2007):
  - Bank of Spain estimates place GDP growth at 4 percent in the first quarter of 2007 (year-on-year), the same pace as Q4 2006.
  - Pattern of growth remained stable with dominant contribution from domestic demand and continuing drag from the external sector.
  - Private consumption and equipment investment remained dynamic; construction activity decelerated in line with gradual cooling of the housing market.
- Inflation and competitiveness (through April 2007):
  - Inflation remained around 2½ percent.
  - Differential vis-à-vis the euro area hovered in the 0.5–0.7 percentage point range.

### STOCK MARKET TURBULENCE, REGULATORY ISSUES, AND EXECUTIVE BOARD ASSESSMENT
- Stock market and construction sector:
  - Construction company stocks declined sharply at end-April, with some spillover to banks heavily exposed to the real estate sector.
  - Cumulative decline of the IBEX 35 index from its peak has been relatively contained, bringing the index to end-2006 levels—still viewed as richly valued by several market analysts.
  - Volatility and some downward sentiment remain, with observers pointing to the risk of a spillover to construction activity—a risk officially viewed as contained.
- Fiscal developments and revenues:
  - Exceptionally strong revenue collection raised the central government surplus in the first quarter of 2007 to almost 0.7 percent of (projected) annual GDP, compared to 0.5 percent of annual GDP in the same period of 2006.
  - Authorities cautioned that this outcome does not yet reflect the effects of the 2006 tax reform, which stand to dampen the likely full-year revenue outturn.
  - In April, the government and the regions agreed to a surplus target for regional budgets of ¼ percent of GDP in 2008.
  - The general government surplus in 2006 reached an unprecedented 1.8 percent of GDP despite steadily rising primary expenditure; public debt declined below 40 percent of GDP.
- Regulatory and governance issues:
  - Controversy surrounding the takeover process of a large electricity company renewed attention on the independence of the regulatory authorities.
  - Divergences over the handling of the protracted takeover bid led to the resignation of the head of the securities commission.
  - Directors supported strengthening the independence of sectoral regulators and proactive exercise of the competition authority’s new powers.
- Executive Board assessment — risks and policy guidance:
  - Directors commended stability-oriented macroeconomic policies and structural reforms underpinning the prolonged expansion and welcomed the incipient rebalancing of growth away from housing investment toward nonhousing investment and exports.
  - Directors cautioned that sustained increases in private sector indebtedness and the widening current account deficit pose risks, citing:
    - A sharper-than-expected balance-sheet consolidation.
    - A possible correction in high real estate valuations.
    - The need to regain competitiveness within EMU, which could entail a possibly protracted period of slow growth given persistent economic rigidities.
  - Policy guidance from Directors included:
    - Safeguard budgetary stability while tempering demand.
    - Expand supply and improve competitiveness by increasing productivity and reducing inflation relative to the euro area.
    - Preserve financial sector stability through continued Bank of Spain vigilance in the face of strong credit growth and exposure to the real estate sector.
    - Implement a more resolute expenditure-based countercyclical fiscal stance; many Directors advised that the 2008 budget aim to keep central government primary expenditure constant as a share of GDP.
    - Step up implementation of competition-enhancing measures, early passage of the new Competition Law, and implementation of the EU Services Directive to foster deregulation and competition in sheltered sectors.
    - Encourage early action in the next legislature to place the pension and health care systems on a sustainable long-term path.

*Source: EXECUTIVE SUMMARY AND INTRODUCTION (_cr07175).*

### EXECUTIVE SUMMARY AND INTRODUCTION

### EXECUTIVE SUMMARY AND INTRODUCTION

### Background: 2006 performance and emerging imbalances
- Output growth reached 3.9 percent for the year 2006.
- Brisk job creation absorbed further increases in female participation and immigration.
- Inflation moderated appreciably.
- Signs of rebalancing: away from consumption and construction and toward corporate investment and exports.
- Private consumption dampened by higher interest rates and weaker household finances; nonhousing investment picked up on strong corporate profitability.
- Revival in partner demand reduced the external sector’s drag on growth, but the external deficit remained large:
  - General government surplus: 1.8 percent of GDP (2006).
  - Current account deficit: 8.8 percent of GDP.
  - Private sector indebtedness reached 187 percent of GDP.
- Revenue buoyancy lifted the public sector position; public debt reduced to below 40 percent of GDP and the social security reserve fund built up to 4 percent of GDP.

### Outlook and risks (summary)
- Immediate growth prospects are bright; central scenario is for a smooth landing but with appreciable downside risks.
- Main risk: agents may adjust their balance sheets more rapidly than anticipated, and rigidities may hamper quick resource shifts to export sectors, leading to a protracted period of weak activity.
- Staff projection: current account deficit around 9½–10 percent of GDP through the forecast horizon.
- Staff illustrative medium-term implications:
  - Net external liability position projected to increase by about 30 percentage points of GDP over the next five years from the current 58 percent of GDP.
- Key vulnerability drivers:
  - Weak competitiveness from poor productivity performance and resilient price and labor cost differentials.
  - High and rising nonfinancial private sector indebtedness (mainly variable-rate household debt).
  - Risk of pronounced balance-sheet retrenchment, particularly if low- and middle-income households curtail borrowing.
  - A possible pronounced correction in real estate valuations could exacerbate retrenchment; construction accounts for one percentage point of GDP growth and 14 percent of employment.

### Authorities’ view and areas of agreement
- Authorities agreed on the nature of the risks but assigned a lesser probability to adverse scenarios, citing:
  - Incipient rebalancing of growth.
  - Recent manufacturing productivity gains, inflation declines, and export pick-up.
  - Structural changes that expanded supply capacity (including a 5 million increase in population).
  - Large housing wealth supporting household solvency.
  - The accumulation of imbalances reflected private saving and investment decisions.
- A consensus that policies must address root causes of the external imbalance and ensure medium-term growth continuity: contain demand and expand supply.

### Policy recommendations (summary)
- Three policy priorities to forestall an adverse scenario:
  - Safeguard budgetary stability while tempering demand.
  - Raise supply capacity and improve competitiveness.
  - Keep the financial sector strong.
- Specific recommendations:
  - Strengthen institutional mechanisms for fiscal discipline at all levels of government.
  - Step up competition-enhancing efforts, backed by political commitment.
  - Proceed forthwith with worthwhile pending economic legislation.
- Authorities generally shared staff’s recommendations but placed less urgency on them given lower assessed probability of adverse scenarios.

### Article IV consultation context and timing
- Discussions centered on the required policy response—containing demand and expanding supply—building on past Fund advice.
- Electoral calendar noted as a factor in implementation pace:
  - Regional and local elections in May 2007.
  - Parliamentary elections by March 2008.

### Fiscal policy: preserving budgetary stability while tempering demand
- Revenue and expenditure developments:
  - Higher-than-budgeted revenues (notably corporate and capital gains taxes) were used to raise the surplus, reduce debt, and build the social security reserve fund.
  - Primary spending rose by about 0.4 percentage points of GDP in both 2005 and 2006, driven by investment and rising regional government spending.
  - Official forecast: general government surplus of 1 percent of GDP in 2007 (authorities expected this to be exceeded).
- Staff concern:
  - Combined effect of the 2006 tax reform, regional tax-cutting initiatives, and planned additional spending likely to result in an untimely procyclical stimulus in 2007–08 if policies remain unchanged.
- Central elements for 2008 (first year of application of the new Budget Stability Law):
  - With GDP growth projected to exceed 3 percent, the new Law requires the central and territorial governments to be in surplus.
  - The Law does not specify the level or allocation of the surplus among government levels; authorities agreed all levels, including the regions (in balance in 2006), should contribute.
  - Authorities intend to apply strictly the Law’s provisions governing possible exclusion of certain capital expenditure from the targeted balance.
  - Staff recommended setting the expenditure ceiling to keep primary spending constant in relation to GDP; authorities viewed this as useful but could not commit at the budget-preparation stage.
  - Political considerations: a minority government might face difficulty obtaining approval of a tight budget at end of term, but there was wide support for budgetary stability among parliamentarians and trade unions and no calls to “spend” the fiscal surplus.

*Source: EXECUTIVE SUMMARY AND INTRODUCTION (_cr07175).*

### 7.      Mechanisms to ensure fiscal discipline in a highly decentralized system need

### 7.      Mechanisms to ensure fiscal discipline in a highly decentralized system need strengthening

### Fiscal discipline, transparency, and monitoring
- With extensive decentralization, strengthened transparency and monitoring (in line with 2005 fiscal ROSC recommendations) remain the most effective means to secure fiscal discipline at the regional and local government levels—who now account for over 75 percent of government spending, excluding social security.
- Disclosure practices remain insufficient to prompt early identification of fiscal profligacy, elicit public censure, and stimulate corrective action.
- Weak areas include:
  - Insufficient reporting of off-budget capital spending (via public enterprises and entities, public-private partnerships, etc.).
  - Long lags in the publication of comparable, national accounts-based data for territorial governments.
- The authorities highlighted continuing efforts in these areas, including an ongoing census of all regional public entities.
- Given the key role of peer pressure in a decentralized system, staff saw a useful role for independent assessments of fiscal policy plans and outturns at the various levels of government.

### Efficiency of spending and pension pressures
- Successive budgets emphasize “productive expenditure” (R&D, infrastructure, etc.); staff called for a thorough review of the efficiency of such spending. The authorities noted the creation of a government agency that included that function.
- Long-term rise in age-related public spending currently estimated at 8½ percentage points of GDP (by 2050) implies that preserving budgetary stability will require further pension reform, beyond that agreed in 2006—a point recognized by the authorities.

### General Government Fiscal Operations (In percent of GDP)
- Revenue: 2003: 38.2; 2004: 38.6; 2005: 39.4; 2006 (Prel.): 40.3; 2007 (Proj.): 39.9; 2008: 39.7; 2009: 39.5
- Expenditure 1/: 2003: 38.2; 2004: 38.0; 2005: 38.2; 2006 (Prel.): 38.4; 2007 (Proj.): 38.6; 2008: 38.6; 2009: 38.6
- Primary expenditure 1/: 2003: 35.9; 2004: 36.0; 2005: 36.4; 2006 (Prel.): 36.8; 2007 (Proj.): 37.1; 2008: 37.2; 2009: 37.3
- Interest costs: 2003: 2.3; 2004: 2.0; 2005: 1.8; 2006 (Prel.): 1.6; 2007 (Proj.): 1.5; 2008: 1.4; 2009: 1.3
- Balance 1/: 2003: 0.0; 2004: 0.5; 2005: 1.1; 2006 (Prel.): 1.8; 2007 (Proj.): 1.3; 2008: 1.1; 2009: 0.9
- Primary balance 1/: 2003: 2.3; 2004: 2.6; 2005: 2.9; 2006 (Prel.): 3.5; 2007 (Proj.): 2.8; 2008: 2.5; 2009: 2.2
- Structural overall balance 1/: 2003: 0.1; 2004: 0.7; 2005: 1.2; 2006 (Prel.): 1.8; 2007 (Proj.): 1.2; 2008: 1.1; 2009: 0.9
- Gross debt: 2003: 48.8; 2004: 46.2; 2005: 43.2; 2006 (Prel.): 39.8; 2007 (Proj.): 37.2; 2008: 34.2; 2009: 31.3
- Sources: Authorities and IMF staff estimates.
- Note: 1/ Calculations exclude one-off expenditure amounting to 0.7 percent of GDP in 2004.

### Findings on macro risks and necessary policy focus (extracted from broader appraisal)
- The Spanish economy grew strongly in 2006 with signs of rebalancing: rapid employment expansion, a significant deceleration in inflation, a pickup in manufacturing productivity, and a strong fiscal outturn.
- Downside risks remain pronounced due to rising private-sector indebtedness.
- Growth is expected to settle close to potential in 2007–08, but the already very large current account deficit is set to widen further, to 9½–10 percent of GDP.
- The counterpart to the current account deficit is growing private sector indebtedness, whose accumulation cannot go on indefinitely; agents may adjust their balance sheets more rapidly than foreseen.
- Regaining competitiveness within EMU may entail a protracted period of weak activity given significant domestic market rigidities that hinder resource reallocation.

### Policy recommendations and priorities
- Three priorities should orient policies to ensure sustainability:
  - Safeguarding budgetary stability while tempering demand.
  - Raising supply capacity and improving competitiveness.
  - Keeping the financial sector strong.
- Fiscal policy:
  - A more resolute, expenditure-based countercyclical fiscal stance would be consistent with the new Budget Stability Law and help contain demand.
  - The Law’s first year of implementation—2008—should be exemplary.
  - The central government expenditure ceiling should keep primary spending constant as a share of GDP.
  - Regional governments should target an ambitious surplus, reflecting their share of the permissible deficit in low-growth periods.
  - Preserving budgetary stability will require substantial strengthening of fiscal accountability, timely publication of comparable, national accounts-based data for territorial governments, and improvements in reporting of off-budget operations at all levels of government.
  - The next legislature should aim for an early revival of reforms to place the pension system on a sustainable long-term path.
- Competition and structural reform:
  - Competition-promoting efforts should be stepped up and underpinned by a strengthened political commitment to promote contestable markets.
  - The draft Competition Law introduces valuable institutional measures that will need proactive implementation.
  - The independence of sectoral regulators should be enhanced by an arm’s length relationship with sectoral ministries.
  - Work on transposing the EU Services Directive should be accelerated to open up highly sheltered sectors.
  - Labor market flexibility gains from large immigration flows should be consolidated by reforms.
- Financial sector:
  - The Bank of Spain's continued vigilance is well-placed given rapid credit growth and loan concentration in the real estate sector.
  - Spain’s support for European financial integration should be reflected in a timely passage of the Markets in Financial Instruments Directive (MiFID).
  - Basel II legislation—with conservative approaches to banks’ industrial holdings—should proceed forthwith.
  - The proposed spin-off of insurance supervision from the Ministry of Economy has clear merits and should be revived.
  - Improvements in savings banks’ governance are needed to enhance exposure to market discipline.

*Source: IMF staff report excerpt (section title and content as provided).*

### 19.      It is recommended that the next consultation be held on the 12-month cycle.

### _cr07175 - 19.      It is recommended that the next consultation be held on the 12-month cycle.

### Recommendation
- It is recommended that the next consultation be held on the 12-month cycle.

### Macroeconomic projections and labor
- Real GDP growth (annual percent): 2002: 2.7; 2003: 3.0; 2004: 3.2; 2005: 3.5; 2006: 3.9; 2007: 3.6; 2008: 3.4.
- Contributions to demand and supply (selected series, growth rates in constant prices):
  - Private consumption: 2002: 2.8; 2003: 2.8; 2004: 4.2; 2005: 4.2; 2006: 3.7; 2007: 3.3; 2008: 3.1.
  - Gross fixed investment: 2002: 3.4; 2003: 5.9; 2004: 5.0; 2005: 7.0; 2006: 6.3; 2007: 5.6; 2008: 4.8.
  - Construction investment: 2002: 6.2; 2003: 6.2; 2004: 5.5; 2005: 6.0; 2006: 5.9; 2007: 5.0; 2008: 4.0.
  - Total domestic demand: 2002: 3.2; 2003: 3.8; 2004: 4.8; 2005: 5.0; 2006: 4.6; 2007: 4.0; 2008: 3.7.
  - Exports of goods and services: 2002: 2.0; 2003: 3.7; 2004: 4.1; 2005: 5.1; 2006: 6.2; 2007: 6.2; 2008: 6.2.
  - Imports of goods and services: 2002: 3.7; 2003: 6.2; 2004: 9.6; 2005: 7.0; 2006: 8.4; 2007: 7.3; 2008: 6.9.
- Potential output growth: 2002: 3.6; 2003: 3.4; 2004: 3.3; 2005: 3.4; 2006: 3.5; 2007: 3.5; 2008: 3.5.
- Output gap (percent of potential): 2002: 0.0; 2003: -0.3; 2004: -0.4; 2005: -0.3; 2006: 0.1; 2007: 0.2; 2008: 0.1.
- Employment and labor market:
  - Unemployment rate (in percent): 2002: 11.5; 2003: 11.5; 2004: 11.0; 2005: 9.2; 2006: 8.5; 2007: 7.8; 2008: 7.7.
  - Employment growth (labor input): 2002: 2.3; 2003: 2.4; 2004: 2.6; 2005: 3.1; 2006: 3.1; 2007: 2.7; 2008: 2.4.
  - Labor participation rate (percent, national definition): 2002: 54.3; 2003: 55.5; 2004: 56.7; 2005: 57.7; 2006: 58.7; (2007–08: not reported).

### Prices and competitiveness
- GDP deflator: 2002: 4.3; 2003: 4.1; 2004: 4.0; 2005: 4.1; 2006: 3.8; 2007: 3.4; 2008: 3.1.
- HICP (average): 2002: 3.6; 2003: 3.1; 2004: 3.1; 2005: 3.4; 2006: 3.6; 2007: 2.6; 2008: 2.7.
- HICP (end of period): 2002: 4.0; 2003: 2.7; 2004: 3.3; 2005: 3.7; 2006: 2.7.
- Differential with euro area average: 2002: 1.4; 2003: 1.0; 2004: 0.9; 2005: 1.2; 2006: 1.4; 2007: 0.5; 2008: 0.8.

### External sector and balance of payments
- Trade balance (goods, percent of GDP): 2002: -5.0; 2003: -5.1; 2004: -6.4; 2005: -7.6; 2006: -8.3; 2007: -8.5; 2008: -8.8.
- Current account balance (percent of GDP): 2002: -3.3; 2003: -3.5; 2004: -5.3; 2005: -7.4; 2006: -8.8; 2007: -9.4; 2008: -9.8.
- Exports and imports (selected levels and growth):
  - Exports of goods (in billions of euro): 2005: 156.4; 2006: 172.1.
  - Imports of goods (in billions of euro): 2005: 202.6; 2006: 225.3; 2006 total imports of goods and services: 252.7.
  - Current account balance (in billions of euro): 2002: -23.8; 2003: -27.5; 2004: -44.2; 2005: -66.6; 2006: -86.0.
- Net international investment position (in billions of euro): 2005: -658.2; 2006: -761.6; projected 2007: -874.6; 2008: -993.7; 2009: -1,120.4; 2010: -1,253.2 (Table 5 projections).
- Official reserves (US$ billions, end-of-period): 2002: 34.5; 2003: 19.8; 2004: 12.4; 2005: 9.7; 2006: 10.8.
- Official reserves in months of imports: 2002: 2.1; 2003: 0.9; 2004: 0.5; 2005: 0.3; 2006: 0.3.

### Fiscal accounts and public debt
- General government balance (percent of GDP): 2002: -0.3; 2003: 0.0; 2004: 0.5; 2005: 1.1; 2006: 1.8; 2007: 1.3; 2008: 1.1.
- Primary balance (percent of GDP): 2002: 2.4; 2003: 2.3; 2004: 2.6; 2005: 2.9; 2006: 3.5; 2007: 2.8; 2008: 2.5.
- Structural balance (percent of GDP): 2002: -0.3; 2003: 0.1; 2004: 0.7; 2005: 1.2; 2006: 1.8; 2007: 1.2; 2008: 1.1.
- General government debt (percent of GDP): 2002: 52.5; 2003: 48.8; 2004: 46.2; 2005: 43.2; 2006: 39.8; 2007: 36.0; 2008: 33.8.
- Fiscal accounts (selected ratios, percent of GDP, 2003–08 projections):
  - Total revenues: 2003: 38.2; 2004: 38.6; 2005: 39.4; 2006: 40.3; 2007: 39.9; 2008: 39.7.
  - Total expenditures: 2003: 38.2; 2004: 38.0; 2005: 38.2; 2006: 38.4; 2007: 38.6; 2008: 38.6.
  - Interest payments: 2003: 2.3; 2004: 2.0; 2005: 1.8; 2006: 1.6; 2007: 1.5; 2008: 1.4.
  - Overall balance: 2003: 0.0; 2004: 0.5; 2005: 1.1; 2006: 1.8; 2007: 1.3; 2008: 1.1.

### Financial sector indicators and vulnerabilities
- Public sector debt (Maastricht definition): 2002: 52.5; 2003: 48.8; 2004: 46.2; 2005: 43.2; 2006: 39.8.
- Three-month T-bill yield: 2002: 3.3; 2003: 2.2; 2004: 2.2; 2005: 2.2; 2006: 3.3.
- Stock market index (general, december 1985=100): 2002: 634.0; 2003: 807.9; 2004: 959.1; 2005: 1,156.2; 2006: 1,554.9.
- Selected banking soundness indicators (percent):
  - Regulatory capital to risk-weighted assets: 2002: 12.5; 2003: 12.6; 2004: 12.2; 2005: 12.0; 2006: 11.9.
  - Nonperforming credit to total gross credit: 2002: 1.0; 2003: 0.9; 2004: 0.7; 2005: 0.6; 2006: 0.6.
  - Return on assets: 2002: 0.9; 2003: 0.9; 2004: 1.0; 2005: 0.9; 2006: 1.0.
  - Return on equity: 2002: 12.1; 2003: 13.2; 2004: 14.5; 2005: 16.9; 2006: 19.9.

### FSAP recommendations and implementation status (selected)
- Tighten provisioning or capital requirements for nontraditional housing and construction loans: Short term — Pending.
- Adopt most conservative approach under Basel II for industrial participations: Short term — Contemplated in the current draft of Basel II legislation to be adopted by the end of 2007.
- Ongoing reforms of the Statutes of the Autonomous Communities should clearly maintain prudential and supervisory responsibilities at the State level: Short term — Despite some ambiguities, Statute revisions basically maintain status quo whereby Bank of Spain retains full responsibility for prudential and supervisory tasks.
- Separate insurance supervision from the Ministry of Economy: Medium term — A proposal to transfer solvency regulation to the Bank of Spain and consumer protection issues to the CNMV is currently stalled.
- Delegate the authority to issue norms and sanction violations from the Ministry of Economy and the Council of Ministers to the respective regulatory agencies: Short term or within 12 months — Pending.
- Create an institutional mechanism for permanent and continued coordination among the main regulators: Short term — Establishment of the Financial Stability Committee.
- Appoint members of the CNMV's board to longer non-renewable terms: Medium term — Pending.
- Monitor results of 2002–03 governance regulations on savings banks and strengthen them if required: Medium term or 1 to 3 years — Ongoing public debate.
- Allow savings banks to merge freely within and across Autonomous Communities if the Bank of Spain approves: Medium term — No requests for mergers have been formulated in the last year.
- Promote use of cuotas participativas to raise high-quality capital and to introduce market discipline: Medium term — Continued active encouragement of issuance, but none to date.
- Reduce over time public sector representation ceiling on savings bank boards: Medium term — Ongoing public debate.

### Immigration: authorities’ study (summary of findings)
- Aggregate impact and demographics:
  - Spain’s economic growth during 2001–06: 3.3 percent annually compared with the euro area’s 1.5 percent.
  - Immigrants: 2.1 million; accounted for half of employment growth and about 60 percent of growth stemming from labor mobilization.
  - Composition: Immigrants mainly from Latin America (45 percent) and Europe (34 percent); described as medium- to high-skilled on average.
- Labor market and income effects:
  - Immigrants have on average an educational attainment higher than the native population, although the relationship reverts when comparing similar age cohorts.
  - Job overqualification is more common among immigrants than among natives.
  - Immigration accounted directly for one-fourth of the 1.6 percent annual income per capita growth during 2001–05.
  - Indirectly raised occupation rates among natives, including female participation by providing domestic services.
  - Controlling for human capital, immigrants earn 7 percent less than the native population.
- Fiscal impact:
  - In 2005, immigrants accounted for 6.6 percent of fiscal revenues and received 5.4 percent of fiscal expenses — with a net effect equivalent to half of the fiscal surplus.
  - Immigrants’ net fiscal contribution is projected to peak in 2012 and become negative by 2030 owing to retirement.
- External sector impact:
  - Authorities estimate immigration had an appreciable negative effect on Spain’s current account due to: (i) immigrants’ remittances; (ii) higher borrowing to purchase durables and housing; and (iii) induced investment through a higher marginal return on capital.
- Demographic potential:
  - Spain’s 2005 immigrants-to-population ratio: 12 percent (about the middle of OECD countries).
  - Population density is 68 percent of the euro area; large regions still have low immigration levels.

### Fund relations, data, and procedural notes
- Membership: Spain became a member of the Fund on September 15, 1958; on July 15, 1986, Spain accepted the obligations of Article VIII Sections 2, 3, and 4.
- Quota and SDRs:
  - Quota: SDR Million 3,048.90 (100.00 percent quota).
  - Fund holdings of currency: 2,819.84 (92.49 percent).
  - Reserve position: 229.04 (7.51 percent).
  - SDR net cumulative allocation: 298.81 (100.00 percent); holdings: 219.55 (73.48 percent).
- Outstanding purchases and loans: None.
- Latest financial arrangements: None.
- Data dissemination: Spain subscribes to the Fund’s Special Data Dissemination Standard; economic data are adequate for surveillance.
- Article IV consultations: Last Article IV consultation concluded on June 12, 2006. Spain is on the standard 12-month consultation cycle.
- Mission and staff: Mission in Madrid, March 19–26, 2007. Staff team included Mr. Leipold (head), Mr. Escolano, Ms. Gutierrez, and Mr. Bennett (all EUR). Country interlocutors included the Second Vice-President and Minister of Economy and Finance Mr. Pedro Solbes Mira, the Bank of Spain Governor Mr. Miguel Fernández Ordóñez, Congress’s Economy and Finance Committee, employers, labor unions, opposition representatives, and private sector representatives.

### IMF staff update (Statement by the IMF Staff Representative, May 16, 2007)
- Recent developments since the 2007 Article IV Staff Report: The thrust of the staff appraisal remains unaltered.
- Growth and activity (early 2007):
  - Bank of Spain estimates place GDP growth at 4 percent in the first quarter of 2007 (year-on-year), the same pace as Q4 2006.
  - Pattern of growth remained stable with dominant contribution from domestic demand and continuing drag from the external sector.
  - Private consumption and equipment investment remained dynamic; construction activity decelerated in line with gradual cooling of the housing market.
- Inflation and competitiveness (through April 2007):
  - Inflation remained around 2½ percent.
  - Differential vis-à-vis the euro area hovered in the 0.5–0.7 percentage point range.

*Source: IMF staff report contained in _cr07175 (Article IV staff report excerpts and tables)._*

### 3.      Recent stock market turbulence reflects a correction of the overvalued

### 3.      Recent stock market turbulence reflects a correction of the overvalued

### Stock market developments and construction sector
- Construction company stocks declined sharply at end-April, with some spillover to banks heavily exposed to the real estate sector.
- The cumulative decline of the IBEX 35 index from its peak has been relatively contained, bringing the index to end-2006 levels—still viewed as richly valued by several market analysts.
- Volatility and some downward sentiment remain, with observers pointing to the risk of a spillover to construction activity—a risk officially viewed as contained.

### Fiscal developments and revenues
- Exceptionally strong revenue collection raised the central government surplus in the first quarter of 2007 to almost 0.7 percent of (projected) annual GDP, compared to 0.5 percent of annual GDP in the same period of 2006.
- Authorities cautioned that this outcome does not yet reflect the effects of the 2006 tax reform, which stand to dampen the likely full-year revenue outturn.
- In April, the government and the regions agreed to a surplus target for regional budgets of ¼ percent of GDP in 2008—a relatively modest objective in the current cyclical circumstances.
- The general government surplus in 2006 reached an unprecedented 1.8 percent of GDP despite steadily rising primary expenditure; public debt declined below 40 percent of GDP.

### Regulatory and governance issues
- Controversy surrounding the takeover process of a large electricity company renewed attention on the independence of the regulatory authorities.
- Divergences over the handling of the protracted takeover bid led to the resignation of the head of the securities commission.
- The replacement failed to garner opposition support; the issue remains subject to parliamentary enquiries and debate.
- Directors supported strengthening the independence of sectoral regulators and proactive exercise of the competition authority’s new powers.

### Executive Board assessment — risks and policy guidance
- Directors commended stability-oriented macroeconomic policies and structural reforms underpinning the prolonged expansion and welcomed the incipient rebalancing of growth away from housing investment toward nonhousing investment and exports.
- Directors cautioned that sustained increases in private sector indebtedness and the widening current account deficit pose risks. Specific risks cited:
  - A sharper-than-expected balance-sheet consolidation.
  - A possible correction in high real estate valuations.
  - The need to regain competitiveness within EMU, which could entail a possibly protracted period of slow growth given persistent economic rigidities.
- Policy recommendations included:
  - Safeguard budgetary stability while tempering demand.
  - Expand supply and improve competitiveness by increasing productivity and reducing inflation relative to the euro area.
  - Preserve financial sector stability through continued Bank of Spain vigilance in the face of strong credit growth and exposure to the real estate sector.
  - Implement a more resolute expenditure-based countercyclical fiscal stance; many Directors advised that the 2008 budget aim to keep central government primary expenditure constant as a share of GDP.
  - Step up implementation of competition-enhancing measures, early passage of the new Competition Law, and implementation of the EU Services Directive to foster deregulation and competition in sheltered sectors.
  - Encourage early action in the next legislature to place the pension and health care systems on a sustainable long-term path.

### Financial sector and macro indicators (selected highlights)
- Current account deficit widened to 8.8 percent of GDP; net external liabilities rose to 58 percent of GDP.
- Private sector indebtedness reached 185 percent of GDP.
- Loan losses rose but remained at low levels and were well provisioned.
- Average annual inflation increased in 2006, but inflation and the inflation differential with the euro-area average narrowed by end-2007.
- Fiscal and macro figures (selected):
  - Real GDP growth: 2002 2.7, 2003 3.0, 2004 3.2, 2005 3.5, 2006 3.9
  - Domestic demand growth: 2002 3.2, 2003 3.8, 2004 4.8, 2005 5.0, 2006 4.6
  - HICP (average): 2002 3.6, 2003 3.1, 2004 3.1, 2005 3.4, 2006 3.6
  - Unemployment rate (in percent): 2002 11.5, 2003 11.5, 2004 11.0, 2005 9.2, 2006 8.5
  - Overall balance (general government; in percent of GDP): 2002 -0.3, 2003 0.0, 2004 0.5, 2005 1.1, 2006 1.8
  - Primary balance (in percent of GDP): 2002 2.4, 2003 2.3, 2004 2.6, 2005 2.9, 2006 3.5
  - Money market rate: 2002 3.3, 2003 2.3, 2004 2.0, 2005 2.1, 2006 2.8
  - Government bond yield: 2002 5.0, 2003 4.1, 2004 4.1, 2005 3.4, 2006 3.8
  - Trade balance (in percent of GDP): 2002 -5.0, 2003 -5.1, 2004 -6.4, 2005 -7.6, 2006 -8.3
  - Current account (in percent of GDP): 2002 -3.3, 2003 -3.5, 2004 -5.3, 2005 -7.4, 2006 -8.8
- Exchange rate and Fund position (as of February 28, 2007):
  - Holdings of currency (in percent of quota) 92.5
  - Holdings of SDRs (in percent of allocation) 73.5
  - Quota (in millions of SDR) 3,048.9
  - Present rate (April 05, 2007) US$ 1.3428 per euro
  - Nominal effective rate (2000 = 100): 2002 102.9, 2003 106.7, 2004 107.8, 2005 105.9, 2006 107.0
  - Real effective rate (2000 = 100): 2002 106.4, 2003 111.1, 2004 113.3, 2005 113.3, 2006 114.8

*Public Information Notice (PIN) No. 07/54 — May 18, 2007*

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_Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2007/_cr07175.pdf_