Inflation, debt and pensions. These are the three issues about which the credit rating agency S&P Global has just warned Spain after it decided to maintain the country’s rating at A/A-1, with a stable outlook. “Despite political uncertainty, the competitive Spanish economy, driven by services, should register growth rates above the euro zone averages in 2023 and 2024,” it says in a statement.
The confirmation of Spain’s rating reflects, according to S&P, the resistance of the Spanish economy in the face of a series of disturbances. According to the rating agency, strong tax collection and good labor market results, in a context of external deleveraging of the private sector, support Spain’s solvency.
Thus, S&P predicts that the Spanish economy will expand faster than the euro area average, given the resilience of the labor market, and despite the forecasts for somewhat higher oil and gas prices during the rest of 2023 and in 2024.
All this despite the uncertain political scenario after the elections on July 23. In this sense, the agency has noted that any coalition agreement to form a minority government would likely involve “complex political concessions that could make the next government vulnerable to the demands of a few smaller parliamentary groups.” If negotiations fail, Spain would repeat national elections early next year.
“So far, the political paralysis has had minimal effects on the Spanish economy,” the rating agency said. For 2023, S&P estimates growth in the Spanish economy of 1.6%, while for next year it has projected a slight slowdown, before growth of 2.3% in 2025, supported by greater execution of funds from the EU Recovery and Resilience Mechanism.
At the same time, it is expected that the gross debt of the Spanish Public Administrations will be around 108% of GDP in 2023, 12 percentage points above pre-pandemic levels, and that a large part of it is in the hands of no residents.
“The future pace of debt reduction depends on greater budgetary consolidation, Spain’s economic growth prospects and the absence of new disruptions,” the note warns.
Even so, gradual budgetary consolidation is expected between 2023 and 2026, although the agency has warned that the indexation of pension spending to inflation will continue to weigh on budgetary results, preventing the reduction of the debt of the Public Administrations.
The stable outlook reflects balanced risks to Spain’s solvency, given high public debt, weakening demand in key European trading partners and political uncertainty.