(The following statement was released by the rating agency)
-- In our opinion, Spain is likely to have an extended period of subdued
economic growth, which weakens its budgetary position.
-- We are lowering our long-term rating on the Kingdom of Spain to 'AA'
from 'AA+'.
-- The negative outlook reflects the possibility of a downgrade if Spain's
budgetary position underperforms to a greater extent than we currently
anticipate.
April 28 - Standard & Poor's Ratings Services today said it had lowered its
long-term sovereign credit rating on the Kingdom of Spain to 'AA'.
At the same time, the 'A-1+' short-term sovereign credit rating was
affirmed.
Standard & Poor's transfer and convertibility assessment is unchanged at
'AAA'. The downgrade primarily reflects Standard & Poor's downward revision of
its medium-term macroeconomic projections. "We now believe that the Spanish
economy's shift away from credit-fuelled economic growth is likely to result in
a more protracted period of sluggish activity than we previously assumed,"
Standard & Poor's credit analyst Marko Mrsnik said.
"We now project that real GDP growth will average 0.7% annually in
2010-2016, versus our previous expectations of above 1% annually over this
period." We have also revised our views on the GDP deflator, so that we now
expect nominal GDP to regain the 2008 level by 2015; previously, we had assumed
that nominal GDP would exceed the 2008 level in 2013.
In addition, and while not factored into our base case, we have taken into
account the possibility that Spanish public and private sector borrowing costs
could remain elevated in 2010-2011 and further slow Spain's recovery from the
current recession.
Our conclusion is that challenging medium-term economic conditions will
further pressure Spain's public finances, and additional measures are likely to
be needed to underpin the government's fiscal consolidation strategy and
planned program of structural reforms.
We consider the main factors dampening Spain's medium-term growth prospects
to be:
-- Private sector indebtedness at 178% of GDP, which in our estimation is
higher than that of many of Spain's peers;
-- An inflexible labor market (we expect unemployment to reach 21% in
2010), which we believe is likely to slow the recovery of external price
competitiveness;
-- A fairly low export capacity--currently, Spain's exports are close to
25% of GDP--coupled with eroded competitiveness due to past high increases in
unit labor costs compared with those of its peers;
-- The financial system's asset quality, which in our opinion is under
pressure as reflected in the recent revision of our Banking Industry Country
Risk Assessment (BICRA) for Spain to group 3 from group 2. Although the degree
of possible additional official support for Spanish banks is uncertain, we
currently anticipate a cumulative fiscal cost of at least 5% of GDP.
This cost relates to the likely financing needs of the Fondo de
Reestructuracion Ordenada Bancaria (FROB; EUR34 billion) and the Fondo de
Adquisicion de Activos Financieros (EUR19 billion), which we incorporate into
our measure of the general government debt burden; and
-- An unwinding of the government's fiscal stimulus as part of its current
strategy to reduce the general government deficit to 3% of GDP by 2013. We
continue to believe that the 2010 fiscal deficit will be broadly in line with
the government's target of 9.8% of GDP.
However, over the medium term we anticipate weaker revenue performance and
higher spending pressures than what the government envisages, mainly due to our
view of more subdued economic growth compared with the government's current
estimates. As a result, Standard & Poor's projects that the general government
deficit is likely to still exceed 5% of GDP by 2013, significantly higher than
the government's official target of 3%.
Consequently, we estimate that gross government debt is likely to rise
above 85% of GDP in 2013 and continue to trend higher until the middle of the
decade. Increases in Spain's borrowing costs, beyond what we factor into our
base case, could, in our opinion, also reduce the government's ability to meet
its fiscal targets this year and next.
Our general government debt projections assume that banks will not draw
more than the EUR27 billion in funds available and not yet used via the
government's FROB vehicle between now and 2013. However, under our current
weaker baseline growth scenario, we believe there is a possibility that the
banking system's capital needs could exceed this figure. The negative outlook
reflects the possibility of a downgrade if Spain's fiscal position
underperforms to a greater extent than we currently anticipate. Conversely, we
could revise the outlook to stable if the government meets or exceeds its
fiscal objectives in 2010 and 2011 and Spain's economic growth prospects prove
to be more buoyant than we currently envisage. Spanish Government Economic
Scenarios And Standard & Poor's Updated Baseline Scenario.
Average 2010-2013
Spain SGP S&P Baseline
Real GDP growth (% yoy) 1.9 0.6
Nominal GDP growth (% yoy) 3.4 1.4
GG deficit (% of GDP) 6.4 8.1
Gross GG debt (% of GDP, end-2013) 74.1 87.5
SGP--Stability and Growth Program. GG--General government. yoy--Year on year.