Spain: IMF Staff Concluding Statement of the 2020 Article IV Mission
IMF News, September 30, 2020
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- Published: September 30, 2020
Pandemic impact and immediate findings
- Spain’s people and economy have been severely hit by the global pandemic; the impact of the COVID-19 pandemic has been particularly grave for Spain, with the sharpest GDP drop among major advanced economies in the first half of the year.
- Structural features increasing vulnerability: large service sector dominated by SMEs, importance of tourism, widespread use of temporary contracts.
- Policy responses so far: swift income and liquidity support by the government and loosened monetary policy by the ECB provided important lifelines.
- Preserving people’s health is the top priority; preparedness of the healthcare system and vaccine purchase/distribution are critical.
Near-term outlook and projections
- The uncertainty about the outlook is unprecedented; the path of the pandemic and policy actions will shape the economic outlook.
- Staff projections:
- Annual loss of real output in 2020 of 12.8 percent.
- Real GDP growth in 2021 of 7.2 percent, helped by the utilization of the EU Recovery and Resilience Facility and its confidence effects.
- Risks are tilted strongly to the downside, including failure to control outbreaks, slower vaccine progress, a no-deal Brexit, and escalation of trade tensions.
- Output will take several years to reach its pre-pandemic level.
Near-term policy recommendations (containment, support, and financial stability)
- Fiscal support should remain in place until the recovery is firmly underway; continuation of income and liquidity measures in a targeted and flexible manner is key.
- Continue and calibrate:
- Short-time work schemes (ERTE), particularly for hardest hit sectors.
- Public loan guarantees and various forms of income support to prevent “cliff effects” (bankruptcies, income loss, loan defaults) when measures expire.
- Be ready to temporarily upgrade support should the outlook deteriorate sharply; EU facilities and ECB monetary policy are critically supportive by keeping borrowing costs low.
- Corporate sector vulnerabilities:
- Enhance private debt resolution frameworks promptly.
- Consider public equity support for viable firms facing pandemic-related strains; create transparent exit strategies and monitor fiscal risk.
- Strengthen supervision and continue bank relief measures to prevent real-financial doom loops.
Social protection, labor market, and measures to limit scarring
- Over time, unemployment benefits should gradually become the predominant safety net to facilitate job reallocation and avoid propping up unviable firms.
- Unemployment benefits and social assistance may need temporary upgrades (eligibility, benefits, duration) to support those impacted by long-lasting changes.
- Support measures for firms:
- State-investment fund under SEPI is a welcome tool for temporary equity support to systemic companies.
- Consider similar recapitalization options for viable smaller firms and temporary injections that create public claims (e.g., in form of future tax liabilities).
- Strengthen private debt restructuring and insolvency frameworks:
- Improve out-of-court restructuring and incentives to encourage debt restructuring, including for SMEs.
- Swift and adequate transposition of the EU Directive on restructuring and insolvency, facilitating procedures involving public creditors.
Use of EU Recovery and Resilience Facility and structural transformation
- The European Recovery and Resilience Facility can provide important demand stimulus, support job creation, limit scarring, and catalyze greener and more digital activities.
- Efficient coordination, implementation, oversight, and a clear governance structure for EU-funded plans are critical given the unprecedented size of the funds.
- Recommended investment priorities to create jobs and foster decarbonization:
- Retrofitting buildings.
- Creating charging stations for electric vehicles.
- Upgrading water infrastructure and waste management.
- Public support for firms should be conditioned on binding sustainability commitments to avoid locking in future emissions.
- Use EU funds to facilitate labor reforms, expand vocational training (including in SMEs), digitalize the economy, and ease transition costs from reforms (e.g., introducing a separation fund while making open-ended contracts more attractive).
- Improve firms’ ability to innovate by modifying size-related regulations that hinder growth, improving competition, and fostering private-public innovation collaborations.
Equity, poverty, and social measures
- Socio-economic disparities were high pre-COVID-19 and are set to widen; poverty is likely to increase.
- Those with precarious employment (many young, low-skilled, in hardest-hit sectors) have been most impacted.
- The Minimum Vital Income scheme introduced by the government is a welcome step.
- Further measures to enhance mobility and affordability:
- Expand social rental housing and assistance programs for renting and relocation.
- Simplify building and zoning regulations.
- Policies to enhance gender equality should focus on boosting family and childcare support and promoting flexible working arrangements.
Public debt outlook and medium-term fiscal strategy
- The pandemic is expected to push the public debt ratio up by nearly 30 percentage points to over 120 percent of GDP in the coming years.
- A gradual fiscal adjustment to put public debt on a firm downward path should start once the economy is on a sustainable growth path with falling unemployment; under current projections that would be at the earliest in 2022.
- Recommendation: advanced announcement of a gradual adjustment plan contingent on the state of the economy to signal markets and promote transparency.
- The adjustment plan should include sustainable structural measures, especially on the revenue side, to rebuild fiscal buffers while supporting inclusion and innovation.
- A sustainable pension reform package is needed to balance pension sustainability and social acceptability.
- Renewed political commitment to structural reforms is important to support growth prospects that facilitate debt reduction.
Banking sector resilience and financial stability
- Banks entered the crisis with stronger balance sheets than a decade ago due to significant deleveraging; bank credit to the private sector has been robust.
- Lending supported by public loan guarantees and bank capital relief/conservation measures.
- Risks and concerns:
- Credit risk has deteriorated; loan defaults expected to increase, especially in the non-financial corporate segment as borrower-support measures expire.
- Banks’ lending capacity could face constraints; profitability is set to worsen; severe scenarios could pose solvency challenges.
- Lower initial average CET1 ratio compared with EU peers may amplify impact; geographic diversification benefits may be limited for banks with international business.
- Recommended bank actions and supervisory measures:
- Continue adjusting provisioning decisions on precautionary grounds and follow prudent dividend policies.
- Timely recognition of problem assets; pursue cost rationalization and invest in technology.
- Dispose of legacy assets where manageable; consolidation (e.g., recent merger announcement) is an adequate response to profitability challenges.
- Supervisors should monitor and review banks’ forward-looking NPL resolution plans and ensure resilient capital positions.
- Regulatory relief measures should facilitate the use of capital and liquidity buffers, followed by gradual rebuilding.
- Strengthen oversight beyond banks:
- The role of the National Financial Stability Authority (AMCESFI) is critical to monitor financial stability risks, including those from interconnectedness between banks and nonbank financial institutions.
- Enhance crisis management frameworks at European and national levels by addressing shortcomings in resolution and liquidation regimes; completing the banking union with a common deposit insurance scheme would strengthen resilience.
IMF Staff Concluding Statement, Spain: 2020 Article IV Mission; September 30, 2020.