Fitch Revises Spain's Outlook to Stable; Affirms at 'BBB'

Fri Nov 1, 2013 12:39pm EDT

Link to Fitch Ratings' Report: Spain - Rating Action ReportLONDON, November 01 (Fitch) Fitch Ratings has revised Spain's Outlook to Stable from Negative and affirmed its Long-term foreign and local currency IDRs and senior unsecured bond ratings at 'BBB'. The Short-term foreign currency IDR has been affirmed at 'F2' and the Country Ceiling at 'AA'. KEY RATING DRIVERS The revision of Outlook to Stable reflects the following key rating drivers, all of which carry a medium weight:- Spain has improved its policy track record in 2012-13. Fiscal consolidation over that period has shaved 2.5pp off the general government deficit/GDP ratio despite strong cyclical headwinds. The authorities have made significant reforms of the labour market, pension system, fiscal framework and financial sector. The pace of reform is likely to slow in 2014-15 as external pressures ease and 2015 elections loom, but the effort made to date should put the economy on a surer footing. -Spain's balance-of-payments adjustment within the eurozone is proceeding at a faster pace than expected. Fitch has revised up its forecast for Spain's current account balance and now expects a surplus of 1.2% in 2013. While partly a result of its economic contraction, this improvement also reflects strong exports and competitiveness gains. -The banking sector restructuring has advanced well since 2012. This has not been without fiscal cost; a total of 6% of GDP of state capital has been injected since the crisis began. The risk of the system requiring state support of a similar magnitude over the medium term is low. -Financing conditions for the sovereign have improved in 2013, reflected in substantial savings in interest expenditure this year (we estimate 0.7-0.8% of GDP) and a recent issue of a new 30 year benchmark bond. -Spain has exited recession in H213, sooner than forecast in our previous review in February 2013. However, we expect performance to remain very weak (0.5% real GDP growth in 2014). Spain's 'BBB' IDRs also reflect the following key rating drivers:- -The ratings remain supported by Spain's high value-added and diversified economy, which is slowly adjusting after its credit bubble. Strong improvement in productivity since 2008 has been broad-based and private sector deleveraging is underway. -Spain's ratings are lower than those of other large advanced economies, reflecting the large risks to creditworthiness posed by its economic and financial adjustment within the eurozone. Medium-term growth prospects are weak, all sectors of the economy remain very indebted and unemployment is exceptionally high. -The general government deficit remains large: we forecast 7% of GDP in 2013, including state support to banks. Public debt/GDP has risen 11pp per year on average since 2008 and we expect the ratio to peak at 103% of GDP in 2015-16, higher than in our previous review. -Although Spain's debt dynamics remain sensitive to shocks, its investment-grade rating reflects Fitch's opinion that the sovereign maintains modest fiscal headroom. The authorities' commitment to reducing public borrowing is strong, but the fiscal deficit will take several more years to be eliminated in structural terms. RATING SENSITIVITIES The Stable Outlook reflects the fact that in Fitch's view, upside and downside risks to the ratings are balanced. The following risk factors may, individually or collectively, result in a negative rating action: -Failure to place the public debt/GDP ratio on a downward path over the medium term -Greater uncertainty over the continuity of Spain's economic and fiscal policy stance -Weaker economic performance over the medium term, which would undermine the fiscal consolidation effort and erode bank asset quality. A sustained current account surplus is also key to a reduction of Spain's heavy external debt burden. -A deterioration in fiscal funding conditions, which would feed through to tighter private sector lending conditions. The following risk factors may, individually or collectively, result in a positive rating action: -A sustained economic recovery leading to an improvement of the labour market and fiscal dynamics. -Further evidence that Spain's fiscal strategy is on track, lowering the risks to debt dynamics. -Further improvement in Spain's international competitiveness and implementation of growth-enhancing reforms. KEY ASSUMPTIONS Fitch forecasts that the economy will begin to recover in 2014 as headwinds from fiscal austerity and financing conditions ease. As is currently the case, the recovery will be primarily driven by net exports; domestic demand will remain subdued for a longer period. The agency maintains its potential growth assumption of 1.5% in the second half of the decade. Fitch projects that public debt will peak in 2015-16 at 103% and decline gradually thereafter, assuming an effective interest rate close to current levels. Medium-term forecasts assume some slippage relative to official public deficit targets. Fitch judges that the contingent liabilities from the banking sector have been adequately sized and that additional capital injections required from the Spanish sovereign will not exceed EUR20bn. Nonetheless, if the recession is deeper and longer than currently expected, the risk that the government may be required to make further injections of capital cannot be fully discounted. We assume no official debt relief on Spain's existing EUR41.3bn loan from the European Stability Mechanism (AAA/Stable). The ratings are based on the assumption that early parliamentary elections will not be called before 2015; that the current administration will broadly maintain its policy stance; that there will be no constitutional crisis in Spain; and that future governments will keep public debt/GDP on a gently declining path in latter half of the decade. The ratings reflect Fitch's judgement that Spain will retain market access and that EU intervention would be requested in a timely manner, if needed, to avoid unnecessary strains on sovereign liquidity. Fitch assumes there will be progress in deepening fiscal and financial integration at the eurozone level in line with commitments by eurozone policy makers. It also assumes that the risk of fragmentation of the eurozone remains low. Contact: Primary Analyst Douglas Renwick Senior Director +44 20 3530 1045 Fitch Ratings Limited 30 North Colonnade London E14 5GN United Kingdom Secondary Analyst Michele Napolitano Director +44 20 3530 1536 Committee Chairperson Ed Parker Managing Director +44 20 3530 1176 Media Relations: Peter Fitzpatrick, London, Tel: +44 20 3530 1103, Email: peter.fitzpatrick@fitchratings.com; Pilar Perez, Barcelona, Tel: +34 93 323 8414, Email: pilar.perez@fitchratings.com. Additional information is available on www.fitchratings.com Applicable criteria, 'Sovereign Rating Criteria' dated 13 August 2012 and 'Country Ceilings' dated 09 August 2013, are available at www.fitchratings.com. Applicable Criteria andALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.

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