Summary of the BBVA Research report "Spain Economic Outlook: 2Q12"

Spain Economic Outlook

Madrid, 09 May 2012

Spain Economic Outlook, 9 May 2012

Page 2

Key themes

1

2

3

Despite the dynamism of the global economy, Europe is decoupling

The international context of the Spanish economy will be largely determined by the outcome of the European crisis

Europe needs a long-term plan to boost activity and to share sovereign risk in exchange for improved coordination, governance and structural reforms

Spain mantains the prospect of a GDP contraction of 1.3% in 2012 and a slow recovery in 2013, but with increased uncertainty

Improving confidence depends upon the design, execution and communication of a credible reform agenda

4

5


Page 3

Section 1

International environment: continued global growth and risks in EuropeSection 2

Spain: recession confirmed, yet getting no worse. The reforms introduced will stimulate growth

Contents


Page 4

Evidence of global growth, although heterogenous

Global growth (quarterly %)Source: BBVA Research and Haver analytics

Wider growth gap between the U.S. and Japan, on the one hand, and Europe, on the other

Emerging economies will continue growing faster than developed economies

Moderate global growth

-3

-2

-1

0

1

2

3

2008 2009 2010 2011 2012 2013

Global Developed Emerging


Page 5

The European crisis continues

Significant progress... ... but still with challenges ahead

To date, the authorities have been a step behind the events half measures to overcome the crisis

Restructuring of Greek debt and bringing forward the ESM

Long-term ECB liquidity provision

Reforms in Portugal, Spain, and Italy

Approval of the Stability Treaty

1. Doubts in Greece and Portugal

4. Growth agenda

3. Greater progress towards a fiscal union

2. Need for an efficient firewall


Page 6

1. Uncertainty in Greece and Portugal

Greece and Portugal: public debt forecasts (% of GDP)Source: BBVA Research and IMF

Greece: highly ambitious targets, but uncertainty following the elections, and in a deep recession

Portugal: despite significant progress, there is no guarantee of a return to capital markets in 2013

There is still a high risk of setbacks

40

60

80

100

120

140

160

180

2010

2011

2012

2013

2014

2015

2016

2017

2018

2019

2020

2021

2022

2023

2024

2025

2026

2027

2028

2029

2030

Portugal Greece*

* Optimistic scenario for Greece. Assumes 95% participation in the haircut, growth close to 3% as of 2015 and primary surplus of 4.5% of GDP as of 2014 (primary deficit of 2.4% in 2011)


Page 7

2. Need for an efficient firewall

New lending capacity: €500Bn (in addition to the €200Bn already commited to under the EFSF)

The EFSF can keep on lending until mid-2013, so as to enable the capitalisation of the ESM

It is more important that the available resources are used efficiently: they shouldn't crowd out private demand

The increase in IMF funds (€330Bn)

The debate is centered around the amount of resources available, but it goes beyond:


Page 8


From the Stability Treaty...

Despite difficulties estimating it, the Treaty makes the right empahsis on structural

adjustment...

...but it raises doubts about how the extraordinary circumstances clause will be

applied

Not ambitious enough for an assertive move from the ECB hardliners and Germany?

...to a fiscal union

Eurobonds: a convenient mechanism for mutualising risk

The "blue" and "red" bond proposalensures a degree of market discipline

A union with temporary (rather than permanent) fiscal transfers would be sufficient


Page 9

Banking system: Eurozone sovereign bond holdings as % of assetsSource: ECB and BBVA Research

Indirect ECB intervention in the sovereign bond market via banks

The increased exposure of banks to sovereign debt increases the potential negative feedback

between the two

Emphasises the need for a definite solution to the doubts about sovereign solvency


Objective: eliminate the interaction between sovereign risk and bank risk

4.0

4.5

5.0

5,5

6.0

6.5

7.0

7.5

8.0

Jan

-10

Mar

-10

May

-10

Jul-1

0

Sep

-10

No

v-10

Jan

--11

Mar

-11

May

-11

Jul-1

1

Sep

-11

No

v-11

Jan

-12

Mar

-12

Spain Italy


Page 10

4. Growth plan

Clear route map for the future of EMU

Balance between growth and austerity:reforms in exchange for a growth strategy

Short-term objective: to avoid the risk of an austerity-recession vicious circle and the doubts regarding the solvency of

sovereign debt

Gradual fiscal adjustment with multi-year plans.Focus on structural deficits as the Treaty proposes

A growth plan that complements fiscal adjustment


Page 11

Europe decoupling from global growth

GDP growth (% yoy)Source: BBVA Research

The debt crisis continues, with Portugal under the spotlight and concerns about Spain

High levels of financial stress in Europe, with a risk of credit restrictions

Stability Treaty: towards Maastricht 2.0.More emphasis on growth

Expansive, but no homogeneous, monetary policies by the Fed, the Bank of England and the

ECB

A slow, heterogeneous and vulnerable recovery

3.64.0

-0.2

0.9

2.3 2.2

5.8

6.4

-1

0

1

2

3

4

5

6

7

2012 2013 2012 2013 2012 2013 2012 2013

Global EMU USA EAGLES

May-12 Feb-12


Page 12

Section 1

International environment: continued global growth and risks in Europe

Section 2

Spain: recession confirmed, yet getting no worse. The reforms introduced will stimulate growth

Contents


Page 13

National environment

Main changes in the economic scenario in 2012

Main drivers behind the economic scenarioSource: BBVA Research

New

fact

ors

Growth forecast 3 months ago

2012 growth forecast unchanged, but increased uncertainty -1.3%

3. Increased financial stress

4. Unprecedented fiscal adjustment due to the deviation in 2011

5. BSL and the Supplier Payment Plan

6. Labour market reform

-1.3%

1. Information on 1Q and 2Q confirms the scenario

2. Rising oil prices


Page 14

1. Available data confirms the scenario

Spain: real GDP growth and forecasts based on MICA-BBVA model (%, qoq)Source: BBVA ResearchCurrent forecast: 4 May The Spanish economy entered technical recession

in 1Q12...

Employment continues to be hindered by the negative outlook for growth

Published data indicates that 2Q12 growth is likely to have remained negative

...albeit with no acceleration in the rate of deterioration versus 4Q11

CI at 60% CI at 40% CI at 20%

MICA-BBVA point estimation (21% of data for 2Q12)

Actual (BBVA Research official forecast for 2Q12)

-1.5

-1.0

-0.5

0.0

0.5

1.0

2Q0

9

3Q0

9

4Q

09

1Q10

2Q10

3Q10

4Q

10

1Q11

2Q11

3Q11

4Q

11

1Q12

2Q12

-1.5

-1.0

-0.5

0.0

0.5

1.0

1.51.5


Page 15

1. Available data confirms the scenario

Spain: fiscal adjustment and economic growth (%)Source: BBVA Research

Information published so far has led to small changes in regional forecasts

Lower household savings rate and higher unemployment hinder private domestic demand

Both tourism and exports support a better performance of some autonomous communities

Fiscal adjustment in the autonomous communities, the main cause of the differences

MAD

GAL

CANANAV

RIO

CYL BASC

ARA

AVG.

AND

AST

VAL

CAT

BAL

CANT MUR

EXT

CLM

-2.5

-2.0

-1.5

-1.0

-0.5

0.0

0.0 1.0 2.0 3.0 4.0 5.0 6.0 7.0

2012

GD

P gr

owth

(%

)

2012 deficit adjustment as detailed in 2012-2014 Stability Programme (% of GDP)


Page 16

2. Pick up in oil prices

Spain: impact on activity and prices of recent oil price increase (deviation from previous scenario)Source: BBVA Research

The increase is the result of both supply-side and demand-side factors

No expectations of a contractionay monetary policy response

Of a transitory nature on its long term trend

Negative, but limited impact

-1.0

-0.8

-0.6

-0.4

-0.2

0.0

0.2

0.4

0.6

0.8

2012 2013 2012 2013

GDP (%y/y) CPI (%y/y)

Supply Precautionary demand Global demand Total

S


Page 17


The difficulties to reach the 2012 and 2013 deficit targets.The fear that fiscal austerity may lead to a vicious circle

The potentially higher cost of bank restructuring as a result of the adjustment in the real estate sector and the slower growth

The idea that both Europe and Spain have lacked a medium and long-term strategic plan

The higher amount of sovereign debt on banks' balance sheets: negative interaction between sovereign and banking risks

Despite the ECB liquidity, the progress being made in Europe, and the reforms in Spain, markets are still cautious due to:


Page 18

Spain: balance of payments and capital flows(12 months cumulative, % of GDP)Source: BBVA Research based on Bank of Spain


FDI and other capital flows entering the country were financing the current account deficit before

the onset of the financial crisis

As of 2007, other capital inflows (bonds, loans, etc.) became highly volatile...

... which affected the economy's dependance on flows through the Eurosystem

It is liquidity, not solvency

Faced with a lack of liquidity, the main risk lies in self-fulfilling expectations

-15

-10

-5

0

5

10

15

Dec

-99

Au

g-0

0

Ap

r-0

1

Dec

-01

Au

g-0

2

Ap

r-0

3

Dec

-03

Au

g-0

4

Ap

r-0

5

dic

-05

Au

g-0

6

Ap

r-0

7

Dec

-07

Au

g-0

8

Ap

r-0

9

Dec

-09

Au

g-1

0

Ap

r-11

Dec

-11

FDI Rest Eurosystem Current Account


Page 19


Spain: Public Administration receipts and expenditures (% of GDP)Source: BBVA Research based on MINHAP and INE

The 2.5pp deviation from the 2011 deficit target was the result of...

a worse-than-expected cyclical slump in receipts, and...

a structural adjustment in expenditure that was insufficient to meet the objective

20.0

22.5

25.0

27.5

30.0

32.5

35.0

37.5

40.0

42.5

45.0

47.5

50.0

200

0

200

1

200

2

200

3

200

4

200

5

200

6

200

7

200

8

200

9

2010

2011

2012

(f)

2013

(f) -12

-10

-8

-6

-4

-2

0

2

4

Financing Cap. (+) / Req. (-) (rhs.)

Receipts (lhs.) Expenditures (lhs.)


Page 20


Spain: adjustment of Public Administration deficit (% of GDP)Source: BBVA Research Fiscal adjustment measures worth 5.1pp of GDP

are required in order to reach the -5.3% target for 2012

The 2012-2015 Stability and Growth Pact contains measures that make the central government

target credible...

... with the focus of compliance on the autonomous communities

Additional room for manouevre: privatisations or other measures not yet announced by the

autonomous communities

0.8

3.2

2.3

-3

-2

-1

0

1

2

3

4

5

6

2011 (Deficit: 8.5%) 2012 (Target: -5.3%) 2013 (Target: -3.0%)

Cyclically adjusted Cyclical deterioration Discretionary measures Structural deterioration Total

(+) Reduces deficit

(-) Increases deficit


Page 21


Spain: Public Administration financing cap. (+) / req. (-)(% of GDP)Source: BBVA Research, based on MINHAP

Structural deficit objectives

More gradual adjustments

Multi-year programme with announcements of future fiscal measures

Towards a new European strategy on fiscal adjustment

-14

-12

-10

-8

-6

-4

-2

0

2

4

6

8

199

5

199

6

199

7

199

8

199

9

200

0

200

1

200

2

200

3

200

4

200

5

200

6

200

7

200

8

200

9

2010

2011

2012

(f)

2013

(f)

Cyclically adjusted Cyclical balance Total


Page 22

5. The Budget Stability Law

EU27: index of standardised fiscal rules (2010)Source: BBVA Research, based on EC data

Spain has been a pioneer in this kind of legislation

Main improvements: structural targets and control mechanisms for the autonomous

communities

This legislation is likely to improve significantlythe perception on Spanish institutions

Budget Stability Law

-1.5

-1.0

-0.5

0.0

0.5

1.0

1.5

2.0

2.5

UK

DK

BG LT SE NL SP PL EE FR LU DE

AT SI FI SK CZ

HU BE

LV PT RO IT IE CY EL MT

EU27


Page 23

GDP impact on 2012 from the Supplier Payment Programme (pp of GDP)Source: BBVA Reaerch based on MINHAP

Important liquidity injection

5. Supplier Payment Programme

*/ Max and Min depend on agents' level of liquidity restriction

Government will inject 2.5% of GDP (€27Bn) to pay off local and regional government

debts with suppliers

If suppliers are experiencing liquidity restrictions, the impact on growth could be significant

To a large extent, the final impact will depend upon the level of uncertainty

0.0

0.1

0.2

0.3

0.4

0.5

0.6

0.7

0.8

0.9

1.0

20% 33% 50%Percentage of unpaid invoices discounted


Page 24

Spain: response to labour market reform (% deviation from trend)Source: BBVA Research

The challenge: from adjustment to growth

Short-term objective: to prevent further job losses→ adjustment via working hours + labour

flexibility and a better organization of production

To stimulate growth where it is weak and to take advantage of it in sectors that are buoyant

A redistribution of factor inputs towards the more dynamic firms and sectors

(exporting sector)

To eliminate internal growth barriers via a more favourable regulatory framework

6. Labour market reform

-2

0

2

4

6

8

10

12

14

16

18

2012

2013

2014

2015

2016

2017

2018

2019

2020

2021

GDP Employment


Page 25

6. The challenge of increasing productivty

Spain: total factor productivity(Percentage deviation from trend)Source: BBVA Research based on Correa-López and de Blas (2011)

Spain, an economy dependant on foreign technology

The medium-term challenge is to increase total factor productivity

Following the labour market reform, Spain needs additional reforms to improve competitiveness

and make the economy more attractive

It is vital that Spain does not miss the train of technology adoption, through bilateral trade links

and FDI

12

8

4

0

-4

-8

-12

Medium-term cycle Medium-frequency component

1951

1955

1959

196

3

196

7

1971

1975

1979

198

3

198

7

199

1

199

5

199

9

200

3

200

7


Page 26

Conclusions

1

2

3

Despite the dynamism of the global economy, Europe is decoupling

The international context of the Spanish economy will be largely determined by the outcome of the European crisis

Europe needs a long-term plan to boost activity and to share sovereign risk in exchange for improved coordination, governance and structural reforms

Spain mantains the prospect of a GDP contraction of 1.3% in 2012 and a slow recovery in 2013, but with increased uncertainty

Improving confidence depends upon the design, execution and communication of a credible reform agenda

Thank youwww.bbvaresearch.com

4

5

Spain Economic Outlook

Madrid, 09 May 2012


Page 28

Appendix

Macroeconomic forecastsSource: BBVA Research, based on INE, Bank of Spain, and Eurostat data(*) contribution to growth

Spain EMU Spain EMU Spain EMU Spain EMUHouseholds final consumption expenditure 0.7 0.8 -0.1 0.2 -2.0 -0.4 -0.9 0.6General government final consumption expenditure 0.2 0.5 -2.2 0.1 -8.0 -0.6 -5.6 0.3Gross fixed capital formation (G.F.C.F.) -6.2 -0.7 -5.1 1.6 -7.4 -2.6 -1.0 1.4

Equipment and cultivated assets 5.3 4.8 1.5 4.5 -4.5 -2.9 2.9 2.0Equipment and machinery 5.5 4.2 1.6 5.1 -4.6 -2.5 2.8 2.2Construction -10.1 -4.3 -8.1 -0.4 -9.2 -2.9 -3.2 0.8

Housing -9.8 -3.3 -4.9 1.9 -6.6 -1.4 -1.6 1.1Other constructions -10.4 -5.4 -11.2 -2.9 -11.8 -4.7 -4.9 0.5

Changes in inventories (*) 0.0 0.5 0.0 0.0 0.0 -0.1 0.0 0.0Domestic Demand (*) -1.0 1.0 -1.8 0.5 -4.5 -1.0 -1.8 0.7Exports 13.5 11.1 9.1 6.3 4.0 2.4 8.9 4.3Imports 8.9 9.4 -0.1 4.0 -6.2 0.6 1.6 4.1External Demand (*) 0.9 0.8 2.5 1.0 3.1 0.8 2.4 0.3

GDP mp -0.1 1.8 0.7 1.5 -1.3 -0.2 0.6 0.9

Pro-memoria

GDP excluding housing 0.8 2.1 1.2 1.5 -0.9 -0.1 0.7 0.9GDP excluding contruction 2.0 2.6 2.3 1.7 0.0 0.1 1.1 0.9Total employment (LFS) -2.3 -0.5 -1.9 0.3 -4.6 -0.5 -2.0 0.0Unemployment rate (% Active pop.) 20.1 10.1 21.6 10.2 24.6 10.9 24.8 11.0Current account balance (% GDP) -4.5 0.2 -3.5 0.4 -1.9 0.8 -0.4 1.2Public debt (% GDP) 61.2 85.5 68.5 87.3 79.8 89.5 82.3 89.6Public deficit (% GDP) -9.3 -6.2 -8.5 -4.1 -5.3 -3.1 -3.0 -2.3CPI (average) 1.8 1.6 3.2 2.7 1.9 2.4 0.7 1.5CPI (end of period) 3.0 2.0 2.4 2.9 1.7 2.1 0.7 1.3

2012 (f) 2013 (f)(% YoY)

2010 2011 (f)


Page 29

Appendix

The Spanish economy entered a technical recession in 1Q12...

Employment continues to be hindered by the negative growth outlook

Published data indicates that 2Q12 growth is likely to have remained negative

...albeit with no acceleration in the rate of deterioration versus 4Q11

Spain: GDP and main indicators from the MICA-BBVA model (CVEC data, %, qoq unless otherwise stated)Source: BBVA Research based on official organism

Cost of financing (change in bp)

Interest rate curve (change in GDP)

-2.0 -1.0 0.0 1.0 2.0 3.0

Registered unemployment

Electricity demand

Financial market stress (change in bp)

Industrial confidence (change in dt)

Real GDP

Social Security affiliation

Real credit to private sector

Consumer confidence (change in dt)

Real wage income

4Q11 1Q12


Page 30

Appendix

Bn euro % GDP

Deficit 2011 (a) -91.4 -8.5Objective 2012 (b) -57.1 -5.3

Difference (c=b-a) 34.3 3.2Additional adjustment (d) 20.7 1.9

Total necessary adjustment (c+d) 55.0 5.1Announced measures

PGE 2012 25.7 2.4Local Corporations.: increase of IBI 0.9 0.1Autonomous Communities: more revenues 4.1 0.4Fight against the Social Sec. fraud 1.9 0.2Autonomous Communities : education, public health and social services

5.7 0.5

Local Corporations : duplicities and issues on competencies 0.1 0.0Central Government: less spending 0.3 0.0Autonomous Communities: spending adjustment rebalancing plans

5.7 0.5

Local Corporations: adjustment rebalancing plans3.1 0.3

Total measures 47.4 4.4PromemoriaNominal GDP 1,073.9

2012 Fiscal adjustment Source: BBVA Research based on MEC


Page 31

Appendix

More cumulative fiscal consolidation in two years. OECD, 1978-2009 Descomposition by adjustmentSource: BBVA Research based on Devries et al (2011)

0

1

2

3

4

5

6

7

8

9

ITA FIN ITA ITA ITA SWE IRL DNK FIN NLD

1992 -1993

1993 -1994

1991 -1992

1993 -1994

1994 -1995

1995 -1996

1982 -1983

1983 -1984

1994 -1995

1983 -1984

Increase of revenues

Decrease of expenditures

Revenues% of GDP before adjustment

44 56 43 45 44 55 39 55 57 53

Spain: 36% revenues/GDP

Spain: 2012-2013 measures to reach 3% of deficit: 7.3% GDP


Page 32

Appendix

Economic impact of substituting social security contributions by indirect taxes(Diference with respect to base scenario, percentage points)Source: BBVA Research

0.0

0.3

0.6

0.9

1.2

1.5

tt+1

GDP Employment

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Summary of the BBVA Research report "Spain Economic Outlook: 2Q12"

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