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European and Spanish Economic Outlook

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Global economy: a gradual acceleration supported by growth in developed economies. Europe: the slow recovery continues, the risk of deflation is very low, but… Spain: upside risks for the first time since the beginning of the crisis. Spain: commitment to the reform process is crucial to consolidate “recent” market improvement and increase potential growth.
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European and Spanish Economic Outlook Jorge Sicilia Chief Economist, BBVA Group March 2014
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Page 1: European and Spanish Economic Outlook

European and Spanish Economic Outlook

Jorge Sicilia Chief Economist, BBVA Group March 2014

Page 2: European and Spanish Economic Outlook

European and Spanish Economic Outlook, March 2014

Main messages

1

2

3

The global economic cycle is improving and we expect a moderate acceleration in growth in 2014-15, supported by growth in developed economies

Some economic policy uncertainties have been resolved but there are still risks, although not of a systemic nature, as was the case in the past

The slow recovery in the eurozone continues, thanks to favourable economic policies and an improvement in the financial environment. The comprehensive review should eventually help to reduce financial fragmentation

For the first time since the beginning of the crisis, the bias to our forecasts for the Spanish economy is to the upside. The recovery is being driven by exports, import substitution and the recovery in new lending

The scope of the reforms needs to be expanded, if they are to underpin a robust and sustained recovery and, within a reasonable period, replace the jobs destroyed

4

5

Page 2

Page 3: European and Spanish Economic Outlook

European and Spanish Economic Outlook, March 2014

Index Section 1

Global economy: a gradual acceleration supported by growth in developed economies Section 2

Europe: the slow recovery continues, the risk of deflation is very low, but… Section 3

Spain: upside risks for the first time since the beginning of the crisis

Section 4

Spain: commitment to the reform process is crucial to consolidate “recent” market improvement and increase potential growth

Page 3

Page 4: European and Spanish Economic Outlook

European and Spanish Economic Outlook, March 2014

Main messages Global GDP growth (%) Source: BBVA Research

The global expansion will continue in 2014-15, but this time around with higher contributions from

advanced economies

Growth risks are more balanced, with an upward bias in the US

However, downside risks remain: the exit from QE and flows to emerging markets,

the uneven recoveries and vulnerabilities in EM, and, still, the eurozone

2.8

-0.4

5.2

4.0

3.23.0

3.6

3.9

-2

-1

0

1

2

3

4

5

6

2008 2009 2010 2011 2012 2013 (e) 2014 (f) 2015 (f)

Adv. Economies Emerging economies

Baseline Jan14 Baseline Oct-13

Page 4

Page 5: European and Spanish Economic Outlook

European and Spanish Economic Outlook, March 2014

The global momentum is improving Manufacturing PMIs Source: BBVA Research based on Markit Economics

BBVA Financial Stress Index Source: BBVA Research

BBVA GAIN Source: BBVA Research

46

48

50

52

54

56

58

60

Oct

10

Mar

11

Aug 1

1

Jan

12

Jun 1

2

No

v 1

2

Apr

13

Sep

13

Feb 1

4

Global

Advanced economies

BBVA Eagles

-0.5

-0.1

0.3

0.7

1.1

-0.12

-0.08

-0.04

0.00

0.04

Mar

-12

Jul-1

2

Nov-1

2

Mar

-13

Jul-1

3

Nov-1

3

Mar

-14

Emerging Markets, left axis

Developed Markets, right axis

0.0

0.2

0.4

0.6

0.8

1.0

1.2

3 m

onth

s ago

Curr

ent

3 m

onth

s ago

Curr

ent

Q1-13 Q2-13 Q3-13 Q4-13 Q1-14

Actual Estimates

Page 5

Page 6: European and Spanish Economic Outlook

European and Spanish Economic Outlook, March 2014

Fed’s forward guidance and ECB’s room for manoeuvre should anchor the global financial scenario

The tightening of liquidity conditions is impacting on EM; anyway, differentiation remains

US: the sustained recovery and the fiscal agreement provide upward bias to our scenario for the US (between 2.5% and 3.0%)

The eurozone: positive growth with an increasing contribution from domestic demand

China: growth momentum is supported by recent stimulus measures and improving external demand

The global economic cycle is improving

Page 6

Page 7: European and Spanish Economic Outlook

European and Spanish Economic Outlook, March 2014

0.00

2.00

4.00

6.00

8.00

10.00

12.00

14.00

16.00

Jan-1

2

Feb-1

2

Mar

-12

Apr-

12

May

-12

Jun-1

2

Jul-1

2

Aug-1

2

Sep-1

2

Oct

-12

Nov-

12

Dec

-12

Jan-1

3

Feb-1

3

Mar

-13

Apr-

13

May

-13

Jun-1

3

Jul-1

3

Aug-1

3

Sep-1

3

Oct

-13

Nov-

13

Dec

-13

Jan-1

4

Feb-1

4

Mar

-14

Developed

EM

Tapering talks

The portfolio re-balancing away from EM to DM, triggered by Fed tapering but reinforced by idiosyncratic risks Capital flows to Emerging and Developed Markets (Cumulative since 2012, as % of AUM) Source: BBVA Research, IMF and EPFR

Tapering + Idiosyncratic factors

Politics and/or policy mismanagement also played a role: doubts on Brazil and China, and

idiosyncratic factors in Argentina and Turkey

Despite sound fundamentals across EM, investors remain alert with respect to those countries more

reliant on capital flows

Differentiation between EMs is playing a role

Page 7

Page 8: European and Spanish Economic Outlook

European and Spanish Economic Outlook, March 2014

Risk measure: EM and European periphery EMBI and European periphery bond spread vs. Germany Source: Bloomberg and BBVA Research

The re-balancing of portfolios is benefiting the European periphery

Relative risk perception of European periphery (vs. EM) is decreasing

Growth perspective is also improving across Europe, particularly in some periphery countries

100

105

110

115

120

125

130

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

4.5

Jan-11 Jul-11 Jan-12 Jul-12 Jan-13 Jul-13 Jan-14

10Y US BOND (lhs) EM FX index (rhs)

FedTapering

ECB OMT& FedQE3

European debt cris (ECB SMP)EM slowdonUS downgrade

Page 8

Page 9: European and Spanish Economic Outlook

European and Spanish Economic Outlook, March 2014

Portfolio flows show a strong preference for peripheral Europe, mainly supported by institutional investors Country flows into European markets (Accumulated country flows as a %AUM) Source BBVA Research through EPFR data

Country flows into peripheral Europe by type of investor (Accumulated country flows as a %AUM) Source BBVA Research through EPFR data

-5,00

0,00

5,00

10,00

15,00

20,00

25,00

Total Europe Core Total Peripheral Europe

-5,00

0,00

5,00

10,00

15,00

20,00

25,00

30,00

35,00

Retail Total Institutional Total

Page 9

Page 10: European and Spanish Economic Outlook

European and Spanish Economic Outlook, March 2014

Interconnected risk events with the potential to impact on global growth

(*) Heterogeneous developments among countries

QE exit and disruptive effects of portfolio re-balancing

Adjustment in China and other EM (*) The eurozone

Switching from banking union towards strong disinflation (and deflation risks)

Page 10

Page 11: European and Spanish Economic Outlook

European and Spanish Economic Outlook, March 2014

Index Section 1

Global economy: a gradual acceleration supported by growth in developed economies

Section 2

Europe: the slow recovery continues, the risk of deflation is very low, but… Section 3

Spain: upside risks for the first time since the beginning of the crisis

Section 4

Spain: commitment to the reform process is crucial to consolidate “recent” market improvement and increase potential growth

Page 11

Page 12: European and Spanish Economic Outlook

European and Spanish Economic Outlook, March 2014

EMU: annual contribution to GDP growth (pp) Source: Eurostat and BBVA Research

Gradual recovery with domestic demand playing an increasing role

-10

-8

-6

-4

-2

0

2

4

6

2008 2009 2010 2011 2012 2013 2014 2015

Domestic Demand Exports Imports Net exports GDP

Exports will remain as the main driver of growth in both 2013 and 2014

Domestic demand has weighed on growth in 2013...

... but will contribute to the recovery in 2014

Page 12

Page 13: European and Spanish Economic Outlook

European and Spanish Economic Outlook, March 2014

GDP growth by country (%) Source: BBVA Research

-0,4

1,1

1,9

0,5

1,8 2,0

0,2

1,1

1,6

-1,8

0,8

1,5

-1,2

0,9

1,9

-2,5

-2,0

-1,5

-1,0

-0,5

0,0

0,5

1,0

1,5

2,0

2,5

2013

2014

2015

2013

2014

2015

2013

2014

2015

2013

2014

2015

2013

2014

2015

EMU Germany France Italy Spain

Current Forecast (February 14) Previous Forecast (November 13)

Widespread mild recovery across countries

Germany: slight upward revision. Mild recovery on track, supported by domestic fundamentals

France: despite upward revision, GDP is set to remain virtually flat in 2013, while any moderate

recovery in 2014 will be dependent on the implementation of economic policy

Italy: unchanged forecast. Though activity is likely to have stabilised over 2H13, sharp downward in 2013. Slight growth in 2014, but downside risks

increase

Page 13

Page 14: European and Spanish Economic Outlook

European and Spanish Economic Outlook, March 2014

The fiscal stance is less restrictive EMU: Fiscal consolidation by country (pp of GDP) Source: BBVA Research

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

4.5

France Italy Spain Portugal

Fiscal Consolidation 2013 Revised Fiscal Consolidation 2014 Revised

Fiscal Consolidation 2013 Previous Fiscal Consolidation 2014 Previous

The European Commission revised deficit targets in May 2013, implying slower austerity

Apart from this direct effect, some countries are more relaxed about meeting their fiscal targets

Less austerity is probably also having an impact on confidence

Page 14

Page 15: European and Spanish Economic Outlook

European and Spanish Economic Outlook, March 2014

EZ: HICP inflation (% y/y) Source: Eurostat and BBVA Research

-1.0

-0.5

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

Dec-

08

Mar

-09

Jun-0

9

Sep

-09

Dec-

09

Mar

-10

Jun-1

0

Sep

-10

Dec-

10

Mar

-11

Jun-1

1

Sep

-11

Dec-

11

Mar

-12

Jun-1

2

Sep

-12

Dec-

12

Mar

-13

Jun-1

3

Sep

-13

Dec-

13

Mar

-14

Jun-1

4

Sep

-14

Dec-

14

20% 40% 60% 80%

Eurozone. GDP and prices Source: Eurostat and BBVA Research

-4.0

-3.0

-2.0

-1.0

0.0

1.0

2.0

3.0

4.0

-6

-4

-2

0

2

4

6

Jan-9

6

Oct

-96

Jul-9

7

Apr-

98

Jan-9

9

Oct

-99

Jul-0

0

Apr-

01

Jan-0

2

Oct

-02

Jul-0

3

Apr-

04

Jan-0

5

Oct

-05

Jul-0

6

Apr-

07

Jan-0

8

Oct

-08

Jul-0

9

Apr-

10

Jan-1

1

Oct

-11

Jul-1

2

Apr-

13

Jan-1

4

Oct

-14

GDP (% y/y, LHS) GDP (t-2, % y/y, LHS) HICP (% y/y, RHS)

In a “normal” world, inflation should stabilise first and then pick up in late 2014

Page 15

Page 16: European and Spanish Economic Outlook

European and Spanish Economic Outlook, March 2014

• Fewer than 10% of HICP items at negative inflation rates over three consecutive months, declining to 5% over six consecutive months

• The trimmed mean inflation statistic suggests that, on average, inflation will remain relatively stable at slightly above 1% YoY over the next 2 1/2 years

EZ: proxy of deflation (% CPI items with persistent negative m/m swda rates) Source BBVA Research

EZ: measures of trend inflation Source BBVA Research

-1

0

1

2

3

4

Dec-

02

Jun-0

3

Dec-

03

Jun-0

4

Dec-

04

Jun-0

5

Dec-

05

Jun-0

6

Dec-

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Jun-0

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8

Dec-

08

Jun-0

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Dec-

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0

Dec-

10

Jun-1

1

Dec-

11

Jun-1

2

Dec-

12

Jun-1

3

Dec-

13

Europe (Trimmed means) Europe (core CPI)

Is this price stability?

Still far from outright deflation

0

5

10

15

20

25

Jan-9

9Ju

l-99

Jan-0

0Ju

l-00

Jan-0

1Ju

l-01

Jan-0

2Ju

l-02

Jan-0

3Ju

l-03

Jan-0

4Ju

l-04

Jan-0

5Ju

l-05

Jan-0

6Ju

l-06

Jan-0

7Ju

l-07

Jan-0

8Ju

l-08

Jan-0

9Ju

l-09

Jan-1

0Ju

l-10

Jan-1

1Ju

l-11

Jan-1

2Ju

l-12

Jan-1

3Ju

l-13

Jan-1

43 consecutive months 6 consecutive months

9 consecutive months 12 consecutive months

Page 16

Page 17: European and Spanish Economic Outlook

European and Spanish Economic Outlook, March 2014

The probability of deflation increases under more extreme situations EZ: Distribution of probability of inflation (average 2014) Source BBVA Research

Baseline scenario

Inflation Prob. of deflation

Monetary restriction (M3 growth = 0.9%)

1% 7.5%

0,8% 14%

Monetary restriction + shock (M3 growth = 0.9%; growth <-1)

0,8% 14%

Unanchored expectations (M3 growth = 0.9%; growth <-1)

0,28% 47% 0.0

0.1

0.2

0.3

0.4

0.5

0.6

0.7

-3.0 -2.0 -1.0 0.0 1.0 2.0 3.0 4.0

Base scenario

Monetary-restriction scenario

Monetary restriction + negativeGDP shock

All the previous and unanchored inflation expectations

Page 17

Page 18: European and Spanish Economic Outlook

European and Spanish Economic Outlook, March 2014

Eurozone goes from one constraint (financial fragmentation) to another (low inflation and

difficult debt adjustment)

Uneven adjustment across countries: under a deflationary scenario, the debt burden

increases

Asymmetry

Inflation expectations in the medium term are well below 2% (1.5% in 2016)

The median contribution of inflation to the reduction in debt to disposable income (ratio) was almost 70%

in episodes associated with a banking crisis

Against this background, tensions could (re)emerge

Page 18

Page 19: European and Spanish Economic Outlook

European and Spanish Economic Outlook, March 2014

Will the ECB change its mind

towards QE?

• Rates were kept unchanged. They retain a downward bias

• Mr. Draghi once again used verbal intervention to strengthen his forward guidance

• Inflation significantly below 2% for a long period of time (1.5% for 2016)

• Mr. Draghi seemed to downplay the potential role of other instruments available for eventual further policy action

ECB: No action taken (and none foreseen)

Latest What do we expect? Policy pause until 2016

Once it has become clear that the ECB is ready to accept inflation of 1.5% in 2016 without taking further action, the expectation of further (decisive) measures in the short-term in the absence of sizeable shocks is very low Any and all liquidity measures remain on the table (SMP non-sterilisation) in the event of an unwarranted tightening in money markets

Do not expect a weakening of the euro

Page 19

Page 20: European and Spanish Economic Outlook

European and Spanish Economic Outlook, March 2014

March, SRM agreement

March, ECB AQR methodology

End of the year, SSM SSM/AQR results (possibly before Nov. 2014)

April, EBA stress test methodology

April, Last EU Parliamentary session. Tight deadline to endorse SRM & BBRD (April)

End of the year: Tentative deadline for IGA national ratifications (80% threshold),

Progress on Banking Union

Eurozone: event calendar and pending issues

Elections May, European elections

OMT Pending on ECJ decision

Peripheral countries

Portugal: exiting the programme or asking for another programme? (April)

Greece: additional package (Summer)

Italy: uncertainty over the new government

Spain: further fiscal adjustments needed, while facing increasing political uncertainty

Page 20

Page 21: European and Spanish Economic Outlook

European and Spanish Economic Outlook, March 2014

• ECB as the ultimately responsible regulatory authority for all eurozone banks

• Direct supervisor of top 130 banks

• National authorities will supervise the less significant entities

• Start: 04/11/2014

• Prudential (Basel III), resolution framework (bail-in), harmonised deposit protection rules

• Start: 2014 - 2016

• Start: unknown

• New Single Resolution Authority in co-operation with national resolution authorities

• Single Resolution Fund funded by bank contributions

• Start: 2015 - 2016

Common Rules

Single Supervision

Single Resolution

Single Depo Guarantee Scheme

Pillar I

Pillar II Pillar III

Pillar IV Setting up a robust supranational framework ?

Banking union is progressing and will be a key factor in 2014

Page 21

Page 22: European and Spanish Economic Outlook

European and Spanish Economic Outlook, March 2014

BU is a milestone in European history. The highest transfer of sovereignty since the euro

Banking union is a necessary condition but is not sufficient on its own. We also need fiscal and political union

Single Supervision

Single Rulebook

Single Resolution

Backstops

Single supervisory criteria will stop regulatory ring-fencing practices

Common rules are developed from a preventive perspective

A centralised resolution authority will apply the same criteria for resolution actions

The bail-in and the Resolution Fund will reduce the reliance on sovereign. Still uncertainty on the

common backstop

The banking union is a true game changer, and it is advancing

Page 22

Page 23: European and Spanish Economic Outlook

European and Spanish Economic Outlook, March 2014

Progress on banking union: the ECB (SSM) has announced the main features of its comprehensive assessment

Valuation

Supervisory Risk Assessment to review key risks, including liquidity, leverage

and funding

Asset Quality Review (AQR) to analyse the quality of banks’ assets, collateral valuation and provisions

Stress Test to examine the resilience of banks’ balance sheets to stress scenarios

In principle, details point to a balanced exercise with a sufficiently wide scope

However, some issues require further clarification: bail-in, stress test methodology (April 2014), publication of data to replicate the exercise…

Transparency is pivotal to eliminating all concerns over the solvency of the European

banking sector

Composed of 3 pillars

• The exercise should be strict enough to dispel any doubts on the resilience of the balance sheets

• Particular attention should be paid to the AQR. Is it happening? Up to a point, but it is a good start

Page 23

Page 24: European and Spanish Economic Outlook

European and Spanish Economic Outlook, March 2014

Single Supervision needs Single Resolution

Single Supervision Single Resolution

IDENTIFY LEGACY PROBLEM (2014)

AQR + Stress Test

SOLVE THE LECAGY PROBLEM (2014-15)

• Private/partial bail-in (if state aid)

• Public national/ESM/direct recap?

FULLY OPERATIVE SRM (2016)

• Single authority • Bail-in • Single Fund • Common backstop?

When the ECB identifies problems in a particular entity, the Single Resolution Fund will act as a private backstop after a minimum bail-in

Page 24

Page 25: European and Spanish Economic Outlook

European and Spanish Economic Outlook, March 2014

Banking union is expected to reduce fragmentation Composite measure of EZ financial fragmentation* Source: BBVA Research and Bloomberg

-2,0

-1,0

0,0

1,0

2,0

3,0

4,0

5,0

6,0

Jan-

08

Jul-0

8

Jan-

09

Jul-0

9

Jan-

10

Jul-1

0

Jan-

11

Jul-1

1

Jan-

12

Jul-1

2

Jan-

13

Jul-1

3

!

Break the ‘doom loop’ between sovereigns and

banks

Strengthen the monetary union by reinforcing the institutional architecture

Restore the monetary policy transmission channel

Page 25

Page 26: European and Spanish Economic Outlook

European and Spanish Economic Outlook, March 2014

Index Section 1

Global economy: a gradual acceleration supported by growth in developed economies

Section 2

Europe: the slow recovery continues, the risk of deflation is very low, but… Section 3

Spain: upside risks for the first time since the beginning of the crisis Section 4

Spain: commitment to the reform process is crucial to consolidate “recent” market development and increase potential growth

Page 26

Page 27: European and Spanish Economic Outlook

European and Spanish Economic Outlook, March 2014

The Spanish economy’s recovery is confirmed … Spain: GDP growth and MICA-BBVA forecasts (% QoQ) Source: BBVA Research based on INE

After three years in recession, domestic demand started to make a positive contribution to growth

again in the second half of 2013…

… as a consequence of improved fundamentals, less restrictive fiscal policy, reduced uncertainty

and increased import substitution

The available information points to growth of at least 0.4% in 1Q14

-1.5

-1.0

-0.5

0.0

0.5

1.0

-1.5

-1.0

-0.5

0.0

0.5

1.0

2Q

09

3Q

09

4Q

09

1Q

10

2Q

10

3Q

10

4Q

10

1Q

11

2Q

11

3Q

11

4Q

11

1Q

12

2Q

12

3Q

12

4Q

12

1Q

13

2Q

13

3Q

13

4Q

13

1Q

14

(f)

CI at 60%CI at 40%CI at 20%Data (f: MICA-BBVA Research forecast)

Page 27

Page 28: European and Spanish Economic Outlook

European and Spanish Economic Outlook, March 2014

… and, in spite of the uncertainty regarding the deficit in 2013 …

The significant fiscal consolidation efforts in 2012 and 2013 …

… have resulted in containment of the public deficit at around 7.0% of GDP

The wider the deviation from the target deficit for 2013, the greater the effort that will have to be

made in 2014

9.1

3.0

5.2

6.8

1.8 1.6

6,7

-0.3 0.9

5.8

-0.7

0.0

5.1

0

2

4

6

8

10

12

14

Defici

t2

01

1

Pass

ive f

isca

l polic

y

Fis

cal eff

ort

Defici

t 2

01

2

Pass

ive f

isca

l polic

y

Fis

cal eff

ort

Defici

t 2

01

3

Pass

ive f

isca

l polic

y

Fis

cal eff

ort

Defici

t 2

01

4

Pass

ive f

isca

l polic

y

Fis

cal eff

ort

Defici

t 2

01

5

2012 2013 (e ) 2014 (f) 2015 (f)

(*) Without factoring in aid to financial institutions (e) estimate; (f) forecast

General government: expected fiscal tightening* (% GDP) Source: BBVA Research based on INE

Page 28

Page 29: European and Spanish Economic Outlook

European and Spanish Economic Outlook, March 2014

… the risks are to the upside for the first time … Spain: GDP growth forecasts, 2014 (% YoY) Source: BBVA Research based on Consensus Forecast Inc.

Economic policy decisions have eliminated the risk scenarios

The differential performance of the Spanish economy confirms this improvement in the trends

If these trends are confirmed, growth could be even stronger than we are forecasting

0

5

10

15

20

25

30

35

40

45

50

(< -1,2) (-1,2;-0,8) (-0,8;-0,4) (-0,4;0) (0;0,4) (0,4;0,8) (0,8;1,2) (>1,2)

Rel

ativ

e fr

equen

cy

GDP Growth forecast

July-2013 (mean: 0,2%) Feb-2013 (mean:0,3%)

Jan-2014 (mean: 0.7%)

BBVA Research (Jan-14)

Page 29

Page 30: European and Spanish Economic Outlook

European and Spanish Economic Outlook, March 2014

... as economic recovery has been in line with the stylised facts from previous cycles,…

Export growth

Investment in machinery and equipment

Gross operating surplus

New credit operations (flow)

Employment growth

GDP growth

Growth in stock of credit Declining

Variables that precede the cycle

.

= .

Lagging variables

Page 30

Page 31: European and Spanish Economic Outlook

European and Spanish Economic Outlook, March 2014

..., and this time without a currency depreciation, so competitiveness gains are not merely temporary

Spain: Export growth, exchange rate movement and ULC (% change over the next 14 quarters after exports reached lowest level) Source: BBVA Research based on Consensus Forecast Inc.

-20

-10

0

10

20

30

40

50

1994 2009

Total Export Growth

Currency depreciation (-) / appreciation (+) vs. dollar

REER based on ULC

Page 31

Page 32: European and Spanish Economic Outlook

European and Spanish Economic Outlook, March 2014

Spanish exports have grown in the last year despite the recession

in the EU

This is partly due to an increase in the share of exports to BBVA-EAGLEs countries and other

developed economies...

... but also to gains in Spanish competitiveness in both price and quality

Total exports (annual cumulative change 1Q12-3Q13 in %, seasonally adjusted) Source: BBVA Research based on INE data

(*): Data until 2Q13

Upside risks: 1. Exports will continue to expand

Page 32

-5% 0% 5% 10% 15%

Norway

Sweden

Finland

France

Ireland*

United Kingdom

Italy

Denmark

Germany

Belgium

European Union

Euro area

Austria

Switzerland

Netherlands

Portugal

Spain

Page 33: European and Spanish Economic Outlook

European and Spanish Economic Outlook, March 2014

Upside risks: 1. Exports will continue to expand Spain: growth and breakdown of goods exports by broad geographical area Source: BBVA Research based on Datacomex

We expect the recovery to continue to be driven by the increase in exports

The deceleration in exports is a temporary phenomenon, and will reverse in a scenario of

stronger global growth

The slowing momentum in EMs has been offset by the recovery in the EMU

0

10

20

30

40

50

60

-24

-18

-12

-6

0

6

12

EMU EAGLEs

Nominal growth, 1Q13 average % YoY (LHS)

Nominal growth, 4Q13 average % YoY (LHS)

Share over total exports in 2013 (%, RHS)

Page 33

Page 34: European and Spanish Economic Outlook

European and Spanish Economic Outlook, March 2014

Upside risks: 1. Exports will continue to expand Spain: growth and breakdown of goods exports by geographical area in 2013 Source: BBVA Research based on Datacomex

European destinations still account for a large share of goods exports

However, destinations outside Europe and North America have grown strongly …

… representing 34.5% of total exports in 2013 0

6

12

18

24

30

36

42

48

54

-5

0

5

10

15

20

25

30

35

40

EM

U

Rest

of

worl

d

EU

(excl

. EM

U)

EA

GLEs

Nort

h A

meri

ca

Oce

ania

Export growth by main geographical area in 2013, goods % YoY nominal (LHS)

Composition of goods exports by destination in 2013, % of total (RHS)

Page 34

Page 35: European and Spanish Economic Outlook

European and Spanish Economic Outlook, March 2014

Upside risks: 1. Exports will continue to expand Spain: export growth and composition by product category, volume (YoY, %) Source: BBVA Research based on Datacomex

Likewise, a large proportion of product categories (73%) experienced positive export growth in 2013

About 50% of the export basket expanded at a rate above 5% YoY in real terms

Some key sectors for the Spanish economy, e.g. motor vehicles, chemicals and machinery &

equipment, are growing at a very healthy pace

0

2

4

6

8

10

12

14

16

05

10152025303540455055606570

Synth

eti

c fib

res

Mach

ine-to

ols

Meta

l pro

ducts

for

con

str.

Gla

ss a

nd

gla

ss p

rodu

cts

Oth

er

chem

ical pro

du

cts

Leath

er

pro

ducts

Moto

r vehic

les

Oth

er

clo

thin

g a

nd

acces

.

Navig

atio

n in

stru

ments

Ele

ctr

ical dis

trib

uti

on e

qu

ip.

Off

ice m

achin

ery

an

d e

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.

Iron

and

ste

el pro

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Foo

twear

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ctr

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ires

Oth

er

speci

fic

mach

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Do

mest

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pp

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Made-u

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s, e

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appare

l

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er

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oden p

rod

ucts

Pers

onal care

Pest

icid

es

and a

gro

chem

ical

s

Liv

est

ock

pro

du

cts

Sta

rch p

rodu

cts

Oth

er

machin

ery a

nd m

ech

.…

Furn

iture

Knit

ted f

abri

cs

Pain

ts

Musi

cal in

stru

men

ts

Textile

s

Oth

er

textile

art

icle

s

Pla

stics

Textile

yarn

s

Pro

du

cts fro

m r

efin

ed o

il

Export growth in 2013, % YoY volumes (LHS)

Composition of exports by product category in 2013, % of total (RHS)

118%

Page 35

Page 36: European and Spanish Economic Outlook

European and Spanish Economic Outlook, March 2014

Upside risks: 1. Exports will continue to expand Regions: average annual growth in exports of goods due to diversification (2009-2012) (%, Spain: weighted average) Source: BBVA Research Export growth is based on improvements in

competitiveness and, above all, on diversification

On average, 75% of the growth in exports during the crisis was due to product and geographical

diversification

This export diversification prevented even greater negative GDP growth

-5

0

5

10

15

20

GA

L

C&

L

BA

L

ARA

EX

T

RIO

SPA

NA

V

VA

L

CLM BC

CA

T

MA

D

CA

NT

AST

AN

D

MU

R

CA

N

Diversification by destination Product diversification Combined effect

Page 36

Page 37: European and Spanish Economic Outlook

European and Spanish Economic Outlook, March 2014

For the first time in two decades, price competitiveness gains have been recorded in the

prices of domestic products against imports...

.... and they have been reinforced by a relative demand for imports that is more elastic to the

relative price

It is estimated that these processes explain 42% of the fall in imports

Spain: imports of goods and services and change in relative prices (%, 1Q08-3Q13) Source: BBVA Research based on Eurostat

GER EST

IRL

ESP

FRA

ITA

CYP

LUX

MLT

HOL

AUS

POR

SLV

SLQ

-20

-15

-10

-5

0

5

10

15

20

-10 -5 0 5 10 15

Gro

wth

rate

of

impo

rts

(1

Q0

8 -

3Q

13

)

Relative price of imports. Growth rate

Upside risks: 1. Import substitution will continue

GER EST

IRL

ESP

FRA

ITA

CYP

LUX

MLT

HOL

AUSPOR

SLV

SLQ

-20

-15

-10

-5

0

5

10

15

20

-10 -5 0 5 10 15

Gro

wth

rat

e of im

port

s (1

Q0

8 -

3Q

13

)

Relative price of imports. Growth rate

Page 37

Page 38: European and Spanish Economic Outlook

European and Spanish Economic Outlook, March 2014

Upside risks 2. Net savings by firms have improved

The maintenance of savings in the private sector and the reduction of investment...

... which has improved the position of companies to increase investment once a less uncertain

environment is consolidated

… have facilitated a deleveraging process with the rest of the world over the last five years...

Spain: net foreign borrowing (-) / lending (+) needs (% of GDP) Source: BBVA Research, based on INE data

-15%

-10%

-5%

0%

5%

10%

2007 2013 (f)

Public sector Financial and non-financial companies Households Total

Page 38

Page 39: European and Spanish Economic Outlook

European and Spanish Economic Outlook, March 2014

Spain: Rating by agencies and BBVA Research models Source: BBVA Research

Upside risks 2. More certainty and fewer financial tensions

Improved international perceptions of the Spanish economy have enabled Spain to reduce its

dependence on ECB funding

Reduced financial tensions are reflected in the economy with a lag of 6-9 months

A permanent 100bp drop in sovereign interest rates implies up to one percentage point more

growth for the economy

2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

Rating Agencies BBVA Models Average

AAA AA+ AA AA- A+ A A- BBB+ BBB BBB- BB+ BB BB- B+ B B- CCC+ CCC CCC- CC

Page 39

Page 40: European and Spanish Economic Outlook

European and Spanish Economic Outlook, March 2014

Upside risks 3. More dynamic investment Spain: exports and investment in equipment and machinery (2008=100) Source: BBVA Research based on INE

The recovery we expect in the EMU and the continuing export growth …

… should translate into an increase in private-sector investment

In fact, investment in equipment and machinery had grown 6.3% by 4Q13

60

70

80

90

100

110

120

130

140

dic

-99

sep

-00

jun-0

1

mar

-02

dic

-02

sep

-03

jun-0

4

mar

-05

dic

-05

sep

-06

jun-0

7

mar

-08

dic

-08

sep

-09

jun-1

0

mar

-11

dic

-11

sep

-12

jun-1

3

mar

-14

dic

-14

sep

-15

Goods and services exports

Investment in equipment and machinery

60

70

80

90

100

110

120

130

140

dic

-99

sep-0

0ju

n-0

1m

ar-

02

dic

-02

sep-0

3ju

n-0

4m

ar-

05

dic

-05

sep-0

6ju

n-0

7m

ar-

08

dic

-08

sep-0

9ju

n-1

0m

ar-

11

dic

-11

sep-1

2ju

n-1

3m

ar-

14

dic

-14

sep-1

5

Goods and services exports

Investment in equipment and machinery

Page 40

Page 41: European and Spanish Economic Outlook

European and Spanish Economic Outlook, March 2014

Average evolution of consumption + investment and credit stock (C+I=100 at the trough, average of crises in Finland, Japan, Norway, Spain and Sweden) Source: Biggs et al (2009)

94

96

98

100

102

104

106

108

110

112

98

100

102

104

106

108

110

112

t-3

t-2

t-1 t

t+1

t+2

t+3

Consumption + Investment (left) Credit Stock (right)

-10

-8

-6

-4

-2

0

2

4

6

98

100

102

104

106

108

110

112

t-3

t-2

t-1 t

t+1

t+2

t+3

Consumption + Investment (left) Credit Flow (right)

Average evolution of consumption + investment and credit flow (C+I=100 at the trough, average of crises in Finland, Japan, Norway, Spain and Sweden) Source: Biggs et al (2009)

Upside risks 4. Improvement in new lending flows

Page 41

Page 42: European and Spanish Economic Outlook

European and Spanish Economic Outlook, March 2014

Private-sector: new loans and repayments (Quarterly figures, EUR mn) Source: Bank of Spain and BBVA Research

100000

150000

200000

250000

300000

350000

Mar-

03

Mar-

04

Mar-

05

Mar-

06

Mar-

07

Mar-

08

Mar-

09

Mar-

10

Mar-

11

Mar-

12

Mar-

13

Mar-

14

Mar-

15

Mar-

16

Mar-

17

New Business Repayments and write-offs

Upside risks 4. Improvement in new lending flows

Spanish statistics on new loans include ‘novations’ (changes in terms and conditions), so refinanced

operations are included

The forecast suggests that new lending may have bottomed-out in the first half of 2013. In the

future, refinancing will play a less important role

However, new lending will not exceed repayments until the end of 2015, so private-sector

deleveraging has to continue

Page 42

Page 43: European and Spanish Economic Outlook

European and Spanish Economic Outlook, March 2014

Spain: GDP (Growth, %) Source: BBVA Research based on INE

Upside risks 5. GDP is now growing

-0,8

-0,6

-0,4

-0,2

0,0

0,2

0,4

0,6

0,8

1Q

10

2Q

10

3Q

10

4Q

10

1Q

11

2Q

11

3Q

11

4Q

11

1Q

12

2Q

12

3Q

12

4Q

12

1Q

13

2Q

13

3Q

13

4Q

13

1Q

14 (

f)

2Q

14 (

f)

3Q

14 (

f)

4Q

14 (

f)

1Q

15 (

f)

2Q

15 (

f)

3Q

15 (

f)

4Q

15 (

f)

GDP – QoQ growth GDP – QoQ growth - Forecast

As scheduled, GDP began growing after exports, savings, investment in M&E, and new credit flows

started going up

Growth will average around 1% in 2014, and will slowly accelerate towards an annualised pace of

2% by the end of this year

Exports should accelerate and substitute more modest domestic demand growth

Page 43

Page 44: European and Spanish Economic Outlook

European and Spanish Economic Outlook, March 2014

Spain: LFS employment (Variation in annual average, %) Source: BBVA Research based on INE

Upside risks 5. Changes in the labour market

-3.1

0.0

1.1

-3.1

0.4

1.0

-3,5

-3,0

-2,5

-2,0

-1,5

-1,0

-0,5

0,0

0,5

1,0

1,5

2013 2014 2015

Spain Outlook 4Q13 Spain Outlook 1Q14

Net job-creation has started sooner than we expected, partly as a reflection of wage

moderation

Had labour institutions been in better shape at the beginning of the crisis, a million job losses could

have been avoided

In 2014, employment will be created for the first time since the beginning of the crisis; and labour market reform has prevented the destruction of

300,000 jobs

Page 44

Page 45: European and Spanish Economic Outlook

European and Spanish Economic Outlook, March 2014

Spain: housing investment, compared with previous recessions (Maximum during expansion = 100) Source: BBVA Research, based on INE data

40

50

60

70

80

90

100

110

120

130

140

tt+

1t+

2t+

3t+

4t+

5t+

6t+

7t+

8t+

9t+

10

t+11

t+12

t+13

t+14

t+15

t+16

t+17

t+18

t+19

t+20

t+21

t+22

t+23

t+24

t+25

t+26

t+27

t+28

t+29

t+30

t+31

t+32

Mar-80 Sep-90 Dec-06

The real-estate cycle: this time is different

40

50

60

70

80

90

100

110

120

130

140

QQ

+1

Q+2

Q+3

Q+4

Q+5

Q+6

Q+7

Q+8

Q+9

Q+10

Q+11

Q+12

Q+13

Q+14

Q+15

Q+16

Q+17

Q+18

Q+19

Q+20

Q+21

Q+22

Q+23

Q+24

Q+25

Q+26

Q+27

Q+28

Q+29

Q+30

Q+31

Q+32

Mar-80 Sep-90 Dec-06

The recovery of investment in the real-estate sector tends to run ahead of the cycle...

... however, the current excess of supply will make it unlikely that this time it will accompany the

recovery (effect vs. cause)

The ambitious reform process must also ensure an efficient redistribution of resources between

sectors

Page 45

Page 46: European and Spanish Economic Outlook

European and Spanish Economic Outlook, March 2014

Spain: Housing market variables (% average 2004-07) Source: BBVA Research based on Ministry of Public Works

0

5

10

15

20

25

30

35

40

45

Employment Permits Housing starts Completed houses

The real-estate cycle: this time is different

Supply-side correction has already taken place

Housing starts in 2013 were only 5% of those observed at the peak of the cycle

Consequently, housing investment has suffered a large correction: in 2013 it was 4.4% of GDP,

compared to 12.5% in 2006

Page 46

Page 47: European and Spanish Economic Outlook

European and Spanish Economic Outlook, March 2014

Spain: home purchases (%, y/y) Source: BBVA Research based on Ministry of Public Works

The real-estate cycle: this time is different

Although demand has adjusted considerably, interest by foreigners has recently improved

Citizens from the UK or Germany have led the charge, but non-traditional clients (such as the

Russians and Chinese) have also appeared

The improvement in domestic demand fundamentals leads us to believe that sales could

have reached their minimum in 2013

-60

-40

-20

0

20

40

60

Mar

-11

Jun-1

1

Sep

-11

Dec-

11

Mar

-12

Jun-1

2

Sep

-12

Dec-

12

Mar

-13

Jun-1

3

Sep

-13

Foreign Domestic

Page 47

Page 48: European and Spanish Economic Outlook

European and Spanish Economic Outlook, March 2014

Spain: Real prices in the housing sector (100 = peak of the cycle) Source: BBVA Research based on Ministry of Public Works

60

70

80

90

100

1 2 3 4 5 6 7 8 9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

# quarters

Sep-78 Dec-91 Sep-07

4Q13

The real-estate cycle: this time is different

From the peak, house prices have fallen about 37.5% in real terms, the largest correction of any

of the recent crises

In the coming years, a growing demand scenario is expected, within an environment of reducing

housing supply

In the coming quarters, further declines in house prices will be limited: the overall fall from peak to

trough will be around 40%

Page 48

Page 49: European and Spanish Economic Outlook

European and Spanish Economic Outlook, March 2014

Spain: Real prices in the housing sector (%, fall from maximum in real terms) Source: BBVA Research based on Ministry of Public Works

-50-45-40-35-30-25-20-15-10-50

ARA

MUR

CLM

MAD

RIO

CANT

CAT

VAL

AND

ESP

CYL

CAN

GAL

BAL

NAV

PV

EXT

AST

The real-estate cycle: this time is different

The real estate market displays increasingly heterogeneous behaviour among regions

Market behaviour is closely related to the level of oversupply and exposure to foreign demand

In some regions, housing prices have accumulated several quarters of growth: Madrid, Balearic

Islands, Canary Islands and Navarra

Page 49

Page 50: European and Spanish Economic Outlook

European and Spanish Economic Outlook, March 2014

Spanish banking system: Capital ratios Source: BBVA Research based on Bank of Spain

5%

6%

7%

8%

9%

10%

11%

12%

13%

2007 2008 2009 2010 2011 2012 jun-13

Total Capital Ratio Tier 1 ratio Leverage (Equity/Assets)

The financial system. Solvency: capital is now higher and of better quality

Recapitalisation of weak entities with public funds; bail-in of subordinated debt

• Capital increases: Popular, Sabadell • AT1 issuance: BBVA • Liabilities management exercises

Disposal of non-core assets (equity participations, real estate, etc.)

Deleveraging / RWA optimisation

Page 50

Page 51: European and Spanish Economic Outlook

European and Spanish Economic Outlook, March 2014

The financial system. Solvency: what will be the impact of the comprehensive assessment on Spanish banks?

Spain 2012-13

Supervisory Risk Assessment to review key risks, including liquidity, leverage

and funding

Asset Quality Review (AQR) to analyse the quality of the banks’ assets, collateral valuation

and provisions

Stress Test to examine the resilience of the banks’ balance sheets to stress scenarios

Auditors and property appraisers checked all the portfolios, the classification of loans and

collateral valuations

Bank of Spain definitions of non-performing loans and forbearance are similar those of the

EBA

Stress test conducted by Oliver Wyman. Capital needs covered by private or public (€39bn, ESM

credit line) capital injections

ECB 2014

Spanish entities went through a similar exercise, so no major surprises are expected in the ECB comprehensive assessment

Page 51

Page 52: European and Spanish Economic Outlook

European and Spanish Economic Outlook, March 2014

Real estate exposures net of provisions (EUR bn) Source: Bank of Spain

0

50

100

150

200

250

Dec-11 Asset salesand others

Transfer toSareb

ProvisionsRoyal Decree

Laws

Dec-12

Credits

Foreclosures

Asset quality: entities have made a big effort to improve asset quality

Real estate accounted for 60% of total defaulted assets

The worst-affected entities have transferred 90% of their assets to Sareb, and are subject to

restructuring plans

The exposure was unevenly distributed among entities (from 2% to 26% of total credit)

The banks have almost finished cleaning-up real estate exposures, in particular the sound entities

Page 52

Page 53: European and Spanish Economic Outlook

European and Spanish Economic Outlook, March 2014

Germany France Spain Italy

Commercial policy 1.66 -- -- --

ECB official rate 1.03 1.24 1.29 1.47

Spread 12 months (12m-Euribor) 0.59 1.21 1.6 -0.06*

Spread EMU (10y EMU-Euribor) 0.35 0.69 0.44 0.5

Spread sovereign (10y country-10y EMU) 0.17 0.46 1.22 1.05

CE Regulation 290/2009 0.15 0.54 -0.16 --

-- Does not differ significantly from zero

* Not significant at 20% confidence

Interest rates on new bank lending (%)

(to non-financial corporations, less than EUR1mn, less than one year) Source: ECB

94% of the new loans in Spain have a term of up to one year

Determinants of interest rates on new bank lending (to non-financial corporations) Source: BBVA Research based on ECB and Bloomberg

The price of credit is affected by the sovereign risk premium. The solution to this is banking union

Liquidity: the situation has improved, but current problems are related to European fragmentation

Page 53

2.00

2.50

3.00

3.50

4.00

4.50

5.00

5.50

6.00

6.50

7.00

Sep

.200

8

Jan.2

00

9

May

.2009

Sep

.200

9

Jan.2

01

0

May

.2010

Sep

.201

0

Jan.2

01

1

May

.2011

Sep

.201

1

Jan.2

01

2

May

.2012

Sep

.201

2

Jan.2

01

3

May

.2013

Sep

.201

3

Jan.2

01

4

Euro Area Germany Spain Italy France

Page 54: European and Spanish Economic Outlook

European and Spanish Economic Outlook, March 2014

Net income and loan loss provisions (€bn) Source: BBVA Research based on Bank of Spain

-20

-10

-

10

20

30

40

Dec-11 Mar-12 Jun-12 Sep-12 Dec-12 Mar-13 Jun-13 Sep-13

Provisions Net income

72bn

-57bn

Profitability: on average, the system is unlikely to return to the pre-crisis levels

Average profitability will not return to the pre-crisis levels

In the future there will be lower interest rates, higher risk aversion, stricter regulation and

supervision and less buoyant liquidity

However, dispersion among entities can be higher, as banks that anticipate these changes will show a

better performance

Banks that have already diversified geographically will be in a better position

Page 54

Page 55: European and Spanish Economic Outlook

European and Spanish Economic Outlook, March 2014

Desirable solution

Complete the restructuring

Overcapacity

Deleverage of the private sector

Quick resolution of intervened institutions, as international experience shows that public banks can be inefficient

Networks should adapt to the new size of the market. Number of branches and employment have been reduced by 23% and 15% respectively (vs. 35% and 28% expected

by the end of the process)

Compatible with the provision of credit to solvent demand, by most capable institutions (those with access to liquidity)

Problem

An efficient implementation of current plans is crucial for the success of the restructuring

Risks: The restructuring is almost finished, but there are some pending issues

Page 55

Page 56: European and Spanish Economic Outlook

European and Spanish Economic Outlook, March 2014

Changes in the corporate insolvency law will facilitate corporate debt restructuring

New RDL on corporate debt restructuring Source: BBVA Research based on BOE

Measures

Possibility of individual debt refinancing agreements

Simplified procedures for collective debt refinancing agreements

Reduction in the level of required majorities to impose refinancing agreements on dissident creditors

BoS needs to develop new provisioning framework for refinanced loans

In case of insolvency, fresh money with privileged status and old debt non-subordinated

Takeover exemption when creditors convert into equity

Other measures: including fiscal benefits…

New measures announced last week remove obstacles to agreements between financial creditors and debtors

Spanish Financial System

• Increases legal certainty

• If restructuring ends in insolvency, financial creditors are not in a worse position

• Foreseeable better provisioning framework

• Conversion of debt into equity raises new issues (management, capital consumption..)

Corporates

• Deleveraging of worst quality loans

• Adjustment of debt to companies’ financial capacity

• New funding for viable business plans

Page 56

Page 57: European and Spanish Economic Outlook

European and Spanish Economic Outlook, March 2014

Credit to the private sector (% GDP) Source: ECB and Bank of Spain

Pending issues: deleverage is much needed in terms of stocks

8% 10% 6% 7% 7% 6%

30%

63%60%

28%38% 40%

40%

52% 46%

11%

41%

22%

33%

48%

39%

0%

20%

40%

60%

80%

100%

120%

140%

160%

180%

Dec-00 Dec-08 Dec-13 Dec-00 Dec-08 Dec-13

Spain EMU

Consumption Housing Businesses

Real estate businesses Rest of businesses

43%

Businesses

Private-sector leverage is excessive. Spanish levels are above those of EMU

Deleveraging will continue in terms of the stock of outstanding credit

Compared to EMU, the most significant differences are in real estate businesses and mortgages

Page 57

Page 58: European and Spanish Economic Outlook

European and Spanish Economic Outlook, March 2014

Activity declines at some companies, so they no longer have any demand for credit

This is a common pattern in Spanish crises, and investment is starting to improve

The most promising sectors are those related to exports

There is asymmetric information: some clients have to resort to another financial entity that does

not know them

Projects have higher risk due to the economic situation

Financial fragmentation affects funding conditions. Regulation and supervision are stricter

Credit Demand

Economic situation and uncertainty: businesses are not investing

The restructuring affects a limited number of entities, which do not have access to liquidity

Pending issues: deleverage. What factors are affecting the supply of credit?

Page 58

Page 59: European and Spanish Economic Outlook

European and Spanish Economic Outlook, March 2014

Index Section 1

Global economy: a gradual acceleration supported by growth in developed economies

Section 2

Europe: the slow recovery continues, the risk of deflation is very low, but… Section 3

Spain: upside risks for the first time since the beginning of the crisis

Section 4

Spain: commitment to the reform process is crucial to consolidate “recent” market improvement and increase potential growth

Page 59

Page 60: European and Spanish Economic Outlook

European and Spanish Economic Outlook, March 2014

The need to broaden the scope of the reform agenda GDP growth and job-creation Source: BBVA Research and Lebergott (1964)

Assumptions for the USA and the EMU are consistent with BBVA Research’s scenario. The Spanish scenario has been built assuming both that productivity per worker rises 0,6% (as was the case between 1992 and 2007) and that GDP grows on average by 2,5%

80

85

90

95

100

105

Pico 2 4 6 8 10 12 14 16 18años

Level of

em

plo

ym

ent

at

the b

egin

nin

g o

f th

e c

risi

s =

10

0

Spain, 2007-2025 EMU, 2007-2017 USA., 2007-2014

USA 1929-1940

Peak years

The recovery in employment will be very sensitive to economic growth

The objective should be to introduce the necessary reforms to increase economic growth to close to

or above 2.5%

Unless this happens, job-creation will be limited and the recovery slow

Page 60

Page 61: European and Spanish Economic Outlook

European and Spanish Economic Outlook, March 2014

Spain: what else can be done? A. Encourage a gradual deleveraging Spain: cyclical and structural components of the current account balance (% of GDP) Source: BBVA Research

-12

-10

-8

-6

-4

-2

0

2

4

1982

1983

1984

1985

1986

1987

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013 (p)

2014 (p)

2015 (p)

2016 (p)

2017 (p)

2018 (p)

2019 (p)

2020 (p)

Cyclical component Structural component

Adjusted current account Observed current account

* Provisions for loan losses, repossessed assets, early retirements, restructuring charges and other

Deleveraging must continue, in both the private and public sectors, but at a pace consistent with

economic recovery,…

…, so that the impact of the fiscal consolidation effort on growth is minimised and public finances

remain sustainable

Huge balance sheet clean-up in the banking sector: total provisions of €239bn* have been charged

against results since 2008

Page 61

Page 62: European and Spanish Economic Outlook

European and Spanish Economic Outlook, March 2014

Spain: what else can be done? B. Improve the composition of foreign financing Spain: FDI (% GDP) Source: BBVA Research based on Banco de España

Page 62

0,0

0,5

1,0

1,5

2,0

2,5

3,0

3,5

4,0

4,5

Average 2000-2008 Average 2009-2012

Strategic plan to improve competitiveness, …

…, increase the attraction of Spain to international investors, in terms of physical capital …

…, human capital and technological capital)

Page 63: European and Spanish Economic Outlook

European and Spanish Economic Outlook, March 2014

Temporary Employment Rate (% of workers with a temporary contract) Source: BBVA Research

Spain: what else can be done? C. Improvements in the labour reform

UEM17

Bel

Ger

Est

Irl Gre

Spa

Fra

Ita

Cyp

Lux

Mal

Nl

Aus

Por

Esl

Slvk

Fin

0

5

10

15

20

25

30

0 5 10 15 20 25 30

2012

2008

Page 63

Promote reforms that make it more attractive to sign open-ended contracts,…

…, improve the efficiency of both active and passive labour market policies…

…, and raise the quality of human capital

Page 64: European and Spanish Economic Outlook

European and Spanish Economic Outlook, March 2014

Spain: what else can be done? D. Improve our competitiveness EU: current account and unit labour costs change 4T08-2T13 Fuente: BBVA Research and Eurostat

BE

CZ

DK

DE

EE

IE

EL

ES

FR

IT

CYLV

LT

LU

HU

MTNL

AT

PL

PT

RO

SI

SK

FI

SE UKNO

-10

-5

0

5

10

15

20

-20 -10 0 10 20 30

Chan

ge

in t

he

curr

ent

acco

unt

bal

ance

over

G

DP (p

p)

Change in unit labor costs (%)

Productivity gains since the beginning of the crisis have been significant (more than 12%)

and generalised, across both non-tradables and…

… manufactures (growing by well over 20%)

Page 64

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European and Spanish Economic Outlook, March 2014

Spain: what else can be done? D. Improve our competitiveness Effect on a firm’s exporting probability of an exogenous change in each determinant (%) source: BBVA Research based on ESEE, Fundación SEPI

0.0

0.2

0.4

0.6

0.8

1.0

1.2

1.4

1.6

1.8

Size Skilled labor Competition Foreignownership

R&D andadoption

K per worker

The most important determinant of internationalisation is a firm’s size

An increase of 10 workers (on average, from 50 to 60 employees) would raise the firm’s exporting

probability by 1.69%

Barriers to a firm’s growth remain in the tax system or in regulation, especially in services or in

the labour market Key to tackle them to improve growth incentives

Page 65

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European and Spanish Economic Outlook, March 2014

Main messages

1

2

3

The global economic cycle is improving and we expect a moderate acceleration in growth in 2014-15, supported by growth in developed economies

Some economic policy uncertainties have been resolved but there are still risks, although not of a systemic nature, as was the case in the past

The slow recovery in the eurozone continues, thanks to favourable economic policies and an improvement in the financial environment. The comprehensive review should eventually help to reduce financial fragmentation

For the first time since the beginning of the crisis, the bias to our forecasts for the Spanish economy is to the upside. The recovery is being driven by exports, import substitution and the recovery in new lending

The scope of the reforms needs to be expanded, if they are to underpin a robust and sustained recovery and, within a reasonable period, replace the jobs destroyed

4

5

Page 66

Page 67: European and Spanish Economic Outlook

European and Spanish Economic Outlook

Jorge Sicilia Chief Economist, BBVA Group March 2014

Page 68: European and Spanish Economic Outlook

European and Spanish Economic Outlook, March 2014

Appendix: Capital flows to Emerging Markets

Página 68

Page 69: European and Spanish Economic Outlook

European and Spanish Economic Outlook, March 2014

-4,0 -2,0 0,0 2,0 4,0

USA

Canada

Sweeden

Denmark

Germany

Netherlands

Belgium

Spain

Portugal

Poland

Hungary

Russia

Brazil

Colombia

Argentina

India

Thailand

Philippines

Singapore

Portfolio re-balancing away from EM assets continues as anticipated last summer. EU Periphery has benefited the most

Portfolio Flows June 13 (Country Flows over Total Assets) Source: BBVA Research through EPFR

Portfolio Flows July-Feb* 13 (Country Flows over Total Assets, average, * Feb estimated) Source: BBVA Research through EPFR

-4,0 -2,0 0,0 2,0 4,0

USA

Canada

Sweeden

Denmark

Germany

Netherlands

Belgium

Spain

Portugal

Poland

Hungary

Russia

Brazil

Colombia

Argentina

India

Thailand

Philippines

Singapore

BBVA Country Portfolio Flows Map(Country Flows over total Assets )

Source: BBVA Research through EPFR data

USA # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # #

Japan # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # #

Canada # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # #

UK # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # #

Sweeden # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # #

Norway # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # #

Denmark # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # #

Finland # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # #

Germany # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # #

Austria # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # #

Netherlands # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # #

France # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # #

Belgium # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # #

Italy # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # #

Spain # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # #

Ireland # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # #

Portugal # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # #

Greece # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # #

Poland # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # #

Czech Rep # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # #

Hungary # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # #

Turkey # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # #

Russia # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # #

Mexico # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # #

Brazil # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # #

Chile # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # #

Colombia # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # #

PeruPeru # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # #

Argentina # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # #

China # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # #

IndiaIndia # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # #

Korea # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # #

Thailand # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # #

Indonesia # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # #

Philippines # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # #

Hong Kong # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # #

Singapore # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # #

2012 2013 2014

G4

Weste

rn E

uro

pe

EM

Eu

rLA

TA

MA

sia

2008 2009 2010 2011

###

###

###

0.50

1.20

3.00

Strong Capital Outlows (between -1 % and -2 %)

Moderate Capital Outflows (between 0 and -1 %)

Moderate Capital Inflows (between 0 and 1 %)

Strong Capital Inflows (between 1 % and 2 %)

Booming Capital Inflows (greater than 2 %)

Sharp Capital Outflows (below -2 %)

Singapore

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European and Spanish Economic Outlook, March 2014

Emerging Market flows have entered the “Undershooting” phase. Further adjustment?

-20%

-18%

-16%

-14%

-12%

-10%

-8%

-6%

-4%

-2%

0%

1 3 5 7 9 11 13 15 17 19 21 23 25 27 29 31 33 35 37 39 41 43

Current (Since May 2013) Lehman Brothers (since Aug-2008)

weeks

Capital outflows from emerging markets, tapering vs. LB’s episode (Cumulative as % of AUM) Source: BBVA Research, IMF and EPFR

Emerging Markets: Cumulative Net Capital Flows (Cumulative since 2005, US$ bn) Source: BBVA Research, IMF and EPFR

-200

-100

0

100

200

300

400

500

600

700

800

2006

2007

2008

2009

2010

2011

2012

2013

2014

Page 70

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European and Spanish Economic Outlook

Jorge Sicilia Chief Economist, BBVA Group March 2014


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