Public Information Notice: IMF Executive Board Concludes 2011 Article IV Consultation with Spain
IMF News, July 29, 2011
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- Published: July 29, 2011
Background and macroeconomic context
- Spain experienced more than a decade of strong expansion led by a credit-fueled housing boom followed by three major shocks: the global financial crisis, the busting of Spain’s domestic boom, and the euro area debt crisis.
- These shocks exposed accumulated imbalances and pushed the economy into a sharp recession, with the euro area debt crisis putting pressure on funding costs.
- Recovery and rebalancing:
- Growth picked up from Q1 2010, led by strong exports as rebalancing to external demand proceeded.
- Private sector savings-investment balances improved, helping stabilize debt ratios and reduce the current account deficit.
- Housing market continued to adjust.
- Real wages moderated and unit labor costs improved.
- Unemployment remained very high: “at around 21 percent” (text).
- Inflation picked up, led by energy prices and indirect taxes, and was again above the euro area average.
- Labor market reform: a reform of collective bargaining aiming at greater firm-level flexibility was presented to Parliament in June 2011, complementing the June 2010 labor market reform.
- Fiscal stance:
- Fiscal consolidation underway, aimed at achieving a deficit target of 3 percent of GDP in 2013.
- Fiscal deficit improved by about 2 percentage points of GDP from 2009 to 9.2 percent of GDP in 2010; the 2010 deficit target was reached.
- Revenue rebound notably in VAT; lower expenditure.
- About half of the regions missed their targets, more than offset by central government over-performance.
- A comprehensive draft pension reform was agreed with social partners; dissemination of fiscal data at the regional level was enhanced.
- Banking sector:
- Banks are deleveraging and increasing capital buffers but asset quality continued to deteriorate.
- Lower lending activity and increasing nonperforming assets reduced banks’ interest margins while funding costs rose since end-2010.
- Tier 1 capital ratio increased from 8.4 percent in 2008 to 9.6 percent in 2010.
- Saving bank sector consolidated: number declined from 45 to 18 through merger/integration.
- February 2011 decree strengthened capital standards, prompted savings banks to transfer banking activities to commercial bank entities and prepare recapitalization plans via IPOs or FROB participation.
- Transparency improved via enhanced disclosure of individual banks’ real estate exposures and funding profiles.
Executive Board assessment and policy recommendations
- Overall view:
- Directors noted the authorities’ strong and wide ranging policy response that helped strengthen market confidence.
- Directors underscored that downside risks still dominate and that unwinding imbalances and reallocating resources across sectors will need continued and decisive policy action.
- Financial sector:
- Commended reconfiguration of the savings bank sector, enhanced capital standards, and greater transparency in individual bank exposures.
- Welcomed wide participation of Spanish financial institutions in recent EU stress tests; noted results highlight importance of authorities’ backstop.
- Agreed that decisive implementation of the financial sector reform strategy is critical to allay lingering market concerns.
- Saw scope for further strengthening provisioning and capital buffers, and building on recent transparency efforts.
- Fiscal policy:
- Noted that an improved policy framework would facilitate achieving fiscal targets.
- Welcomed authorities’ commitment to reduce the fiscal deficit and the recent enactment of pension reform.
- Emphasized that steadfast fiscal adjustment is key; if near-term risks materialize, additional measures may be needed.
- Urged all levels of government to deliver on fiscal commitments, given reliance on sub-national measures.
- Encouraged vigilance and consideration of further fiscal measures as needed to achieve medium-term targets and put the debt ratio on a firmly declining path.
- Labor market and structural reforms:
- Recognized efforts to address entrenched rigidities and encouraged perseverance with reforms to reduce high unemployment.
- Called for more decentralized wage bargaining, less indexation, and further lowering severance payments.
- Agreed that structural reforms in the non-tradable sector to raise productivity and growth potential should complement labor market adjustments.
- Priorities: establishing a more efficient regulatory environment and further opening up regulated professions and services.
Key statistics and selected economic indicators (2006–11)
- Demand and supply in constant prices (percent change, unless otherwise indicated)
- Gross domestic product: 2006: 4.0; 2007: 3.6; 2008: 0.9; 2009: -3.7; 2010: -0.1; 2011: 0.8
- Private consumption: 2006: 3.8; 2007: 3.7; 2008: -0.6; 2009: -4.2; 2010: 1.2; 2011: 0.7
- Public consumption: 2006: 4.6; 2007: 5.5; 2008: 5.8; 2009: 3.2; 2010: -0.7; 2011: -1.2
- Gross fixed investment: 2006: 7.2; 2007: 4.5; 2008: -4.8; 2009: -16.0; 2010: -7.6; 2011: -2.8
- Construction investment: 2006: 6.0; 2007: -5.9; 2008: -11.9; 2009: -11.1; 2010: -8.0
- Total domestic demand: 2006: 5.2; 2007: 4.1; 2008: -6.0; 2009: -1.1; 2010: -0.4
- Net exports (contribution to growth): 2006: -1.4; 2007: -0.8; 2008: 1.5; 2009: 2.7; 2010: 1.0; 2011: 1.3
- Exports of goods and services: 2006: 6.7; 2007: -11.6; 2008: 10.3; 2009: 11.0
- Imports of goods and services: 2006: 10.2; 2007: 8.0; 2008: -5.3; 2009: -17.8; 2010: 5.4; 2011: 5.6
- Potential output growth (long run HP-filter): 2006: 2.4; 2007: 1.4; 2008: 0.5; 2009: 0.4
- Output gap (percent of potential): 2006: 3.0; 2007: 3.9; 2008: -3.4; 2009: -2.9
- Household savings (percent of disposable income): 2006: 11.1; 2007: 10.8; 2008: 13.5; 2009: 18.2; 2010: 13.1; 2011: 12.3
- Prices
- GDP deflator: 2006: 3.3; 2007: 0.6; 2008: 1.6
- HICP (average): 2006: 2.8; 2007: -0.2; 2008: 2.0
- HICP (end of period): 2006: 4.3; 2007: 2.9; 2008: 2.3
- Employment and wages
- Unemployment rate (in percent): 2006: 8.5; 2007: 8.3; 2008: 11.3; 2009: 18.0; 2010: 20.1
- Unit labor cost in manufacturing: 2006: 6.9; 2007: -4.6
- Labor cost in manufacturing: 2006: 4.8; 2007: 5.0
- Employment growth: 2009: -6.6; 2010: -2.3
- Labor force growth (in percent) 1/: 2006: 0.2
- Balance of payments (percent of GDP)
- Trade balance (goods): 2006: -8.5; 2007: -8.6; 2008: -7.9; 2009: -4.0; 2010: -4.4; 2011: -4.5
- Current account balance 2/: 2006: -9.0; 2007: -10.0; 2008: -9.6; 2009: -5.2
- Net international investment position: 2006: -65.9; 2007: -78.1; 2008: -79.3; 2009: -91.1; 2010: -87.1; 2011: -88.6
- Nominal effective rate (2000=100) 3/: 2006: 100.9; 2007: 102.8; 2008: 104.4; 2009: 105.1; 2010: 101.3; 2011: 102.6
- Real effective rate (2000=100,CPI-based) 3/: 2006: 102.2; 2007: 105.0; 2008: 106.6; 2009: 106.9; 2010: 103.6; 2011: 104.1
- Public finance (percent of GDP)
- General government balance: 2006: 1.9; 2009: -9.2; 2010: -6.2
- Primary balance: 2006: 3.5; 2009: -2.6; 2010: -9.4; 2011: -7.3; 2011 (another row): -4.1
- Structural balance: 2006: -4.9; 2009: -7.4; 2010: -4.7
- General government debt: 2006: 39.6; 2007: 36.1; 2008: 39.8; 2009: 53.3; 2010: 60.1; 2011: 67.5
- Fund position (June 30, 2011)
- Holdings of currency (percent of quota): 72.4
- Holdings of SDRs (percent of allocation): 93.8
- Quota (millions of SDRs): 4,023.4
Public Information Notice (PIN) No. 11/102 — July 29, 2011.