Spain: Economy OK, but Politics are Challenging

Alleviating this uncertainty, DBRS Morningstar points out that Spain achieved significant economic and fiscal progress in past years, even in the absence of stable governments. Its economy and job growth has been faster than many other European countries and DBRS Morningstar expects such outperformance to continue.

The political fragmentation in Parliament, combined with increasing polarisation, could affect the government’s ability to pass ambitious reforms. There is also the risk of undesired effects from a reversal of previous structural reforms, such as the pension and labour market re-forms. DBRS Morningstar would view any significant reversal in a negative light. Nevertheless, DBRS Morningstar considers that the government will continue to gradually improve the country’s fiscal position over time and opt for policy continuity.

“The latest revision to deficit and debt paths targeted by the government, though less ambitious, remain consistent with a gradual improvement in debt and deficit metrics.” said Javier Rouillet, Vice President, Global Sovereign Ratings. “The achievement of this new path will remain contingent on additional fiscal measures being implemented, which the snap elections in Catalonia might prevent from being passed this year.” added Mr. Rouillet.

On the situation in Catalonia, “New regional elections could potentially mean the resurgence of uncertainty as the outcome of the vote might bring ERC to reconsider its implicit support for Prime Minister Sanchez’s government” said Nicolas Fintzel, Vice President of Sovereign Ratings at DBRS Morningstar. “On the other hand, an election outcome that would confirm a softer strategy on the independence question, such as the one currently followed by ERC, would benefit our assessment of the region’s political risk and subsequently support Catalonia’s rating.” added Mr. Fintzel.