## Spain: IMF Staff Concluding Statement of the 2020 Article IV Mission _IMF News, September 30, 2020_ ## Source details **Canonical URL:** [Spain: IMF Staff Concluding Statement of the 2020 Article IV Mission](https://www.imf.org/en/news/articles/2020/09/29/mcs092920-spain-imf-staff-concluding-statement-of-the-2020-article-iv-mission) ## Other formats - [Markdown version](/en/news/articles/2020/09/29/mcs092920-spain-imf-staff-concluding-statement-of-the-2020-article-iv-mission/index.md) - [Structured JSON version](/en/news/articles/2020/09/29/mcs092920-spain-imf-staff-concluding-statement-of-the-2020-article-iv-mission/index.json) - [Bundle manifest](/en/news/articles/2020/09/29/mcs092920-spain-imf-staff-concluding-statement-of-the-2020-article-iv-mission/bundle-manifest.json) ## Bibliographic details - 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.* --- ## References - [Spain and the IMF](http://www.imf.org/external/country/ESP/index.htm) - [IMF Policy Advice -- A Factsheet](https://www.imf.org/en/about/factsheets/imf-surveillance) - [Mission Concluding Statements](https://www.imf.org/en/news/searchnews) - [PRESS CENTER](http://presscenter.imf.org/) - [Article IV](https://www.imf.org/external/pubs/ft/aa/index.htm) - [https://www.imf.org/en/home](https://www.imf.org/en/home) _Source: https://www.imf.org/en/news/articles/2020/09/29/mcs092920-spain-imf-staff-concluding-statement-of-the-2020-article-iv-mission_