Spain: IMF Staff Concluding Statement of the 2017 Article IV Mission

IMF News, July 18, 2017

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• Published: July 18, 2017

Overview and Outlook

• Spain’s economic recovery remains strong, with consumption, investment, and net exports all contributing to a more balanced growth pattern.
• The services sector is creating most new jobs; a shift in resources toward Spain’s competitive export sector has played an important part in the rebound.
• Banking sector balance sheets are stronger, private sector debt is coming down, and credit availability is improving.
• Real GDP is projected to grow by 3.1 percent this year.
• GDP likely surpassed its pre-crisis level in the second quarter, with growth remaining well above the euro area average.
• Upside risks exist as the momentum created by past reforms may be bigger than estimated.
• Remaining macroeconomic vulnerabilities:
  • Public debt ratio close to 100 percent of GDP.
  • Structural unemployment and population aging creating fiscal pressures.
  • Productivity lags EU peers.
  • Large net debtor position with the rest of the world.
  • Ongoing financial sector adjustment and incomplete institutional reforms.

Fiscal Policy: Rebuilding Buffers

• Key assessment:
  • The supportive economic environment is an opportunity to lower fiscal vulnerabilities.
  • Spain’s high public debt ratio, close to 100 percent of GDP, leaves little room to respond to shocks.
  • Population dynamics imply a significant increase in age-related spending over the medium term.
• Policy recommendations:
  • Maintain the gradual adjustment pace established for 2017 until the structural budget is in balance to accelerate debt reduction.
  • Implement the expenditure rule at all government levels to support the envisaged expenditure restraint for 2018.
  • Pursue structural measures mainly on the revenue side and increase expenditure efficiency.
  • Gradually shift more consumption to standard VAT rates to provide resources for debt reduction while properly shielding vulnerable groups.
  • Bring environmental taxes and levies more in line with EU peers and reduce inefficiencies in the tax system.
  • Conduct planned expenditure reviews, including for pharmaceutical spending, tied closely to reforms of the regional financing framework.
• Pensions:
  • Spain adopted comprehensive pension reforms in 2011 and 2013 that ensure financial stability of the pension system and annual nominal pension increases for all pensioners.
  • Thirty years from today the average pension of a Spanish pensioner relative to the average wage in the economy (the benefit ratio) would still be well above the projected EU average.
  • Critical to implement reforms in full and avoid one-off adjustments (e.g., in the pension indexation rate).
  • If changes are needed, spread the burden across and within generations via measures to incentivize longer work lives and encourage supplementary savings.
  • Ensure full transparency about financial sustainability and implications for retirement income.

Labor Market: Towards Better Employability and Less Duality

• Current outcomes:
  • Unemployment rate in the first quarter of 2017 was 18.8 percent, lower than in the first quarter of 2010.
  • Youth and long-term unemployment rates have improved significantly but remain among the highest in Europe.
  • Temporary hires continue to outnumber permanent ones; involuntary part-time employment remains high.
• Recommendations:
  • Maintain competitiveness with flexible working conditions aligned to firm- and sector-specific conditions.
  • Tackle labor market duality.
  • Expand well-designed and targeted active labor market policies to help low-skilled youth and the long-term unemployed return to work.
  • Complement active labor market policies with improvements in formal education and training to address skills mismatches and raise productivity.

Structural Reforms: Raising Medium-term Growth Prospects

• Challenge:
  • Raising productivity growth is critical as the working-age population is projected to shrink due to population aging.
• Observations:
  • Exit of less productive firms has lifted aggregate productivity growth post-crisis.
  • Evidence of improved credit allocation to more productive and financially healthier firms following banking sector restructuring.
  • Productivity levels in manufacturing, trade and market services remain considerably lower than in EU peers.
• Policy priorities:
  • Lower barriers to competition (e.g., implementation of the Market Unity Law).
  • Support firm growth and innovation (e.g., fewer size-related regulations and more research and development spending).
  • Facilitate access to equity financing for startups.

Financial Sector: Completing the Crisis Legacy Clean-Up and Reform Agenda

• Progress:
  • Bold reforms since 2012 have produced a stronger and leaner banking system.
  • Profitability and solvency have vastly improved for most banks; credit availability is better.
  • Swift resolution of a publicly listed domestically systemic bank removed a source of uncertainty; consolidation is proceeding.
  • Non-performing and foreclosed assets have declined but remain relatively high in a few banks.
  • Banks have raised capital in line with regulatory requirements; they remain less leveraged due to higher risk weight intensity.
• Near-term policy priorities from the 2017 FSAP:
  • Address remaining banks’ weaknesses and legacy issues.
  • Prepare to handle financial stability headwinds.
  • Strengthen and modernize institutional arrangements.
• Recommended actions:
  • Accelerate balance sheet cleanup building on the ECB’s guidance on reducing non-performing loans and application of IFRS9.
  • Carefully analyze banks’ property value assumptions and apply supervisory actions to enhance progress.
  • Continue improving bank profitability, build capital buffers, and adjust funding positions.
  • Some banks should increase regulatory capital or capital buffers to compensate for phase-out of regulatory exemptions and to guard against unexpected shocks.
  • Adjust liability structures where necessary to meet new regulatory requirements and prepare for eventual gradual tapering of the ECB’s accommodative monetary policy.
  • Comprehensive reform of the credit cooperative sector to strengthen corporate governance and resolvability.
  • Establish an interagency Systemic Risk Council to enhance systemic risk surveillance and macroprudential decision making.
  • Expand macroprudential toolkit potentially to include limits on loan-to-value and debt service-to-income ratios to address real estate-related exposures.
  • Review fragmentation of resolution arrangements that separate preventive and executive resolution responsibilities over time.
  • Governance enhancements welcome: reforms to selection process for financial oversight authorities, establishment of an independent insurance and pension fund agency, introduction of a single ombudsman scheme for financial consumer complaints, and transfer of responsibility for general purpose accounting standards and audit oversight to the capital markets regulator.

The views in this statement also reflect the findings of the 2017 Financial Sector Assessment Program (FSAP), conducted by the IMF over the period October 2016-July 2017.

Source: Spain: IMF Staff Concluding Statement of the 2017 Article IV Mission (July 18, 2017).

References

• Spain and the IMF
• IMF Policy Advice -- A Factsheet
• Mission Concluding Statements
• PRESS CENTER
• https://www.imf.org/en/home