London, 13 April 2018 -- Moody's Investors Service, ("Moody's") has
today upgraded the Government of Spain's long-term issuer
and senior unsecured ratings to Baa1 from Baa2 and the senior unsecured
MTN program ratings to (P)Baa1 from (P)Baa2; the senior unsecured
shelf rating to (P)Baa1 from (P)Baa2; the other short-term
rating of (P)P-2 is affirmed. The outlook remains stable.
The key driver for today's rating action is Moody's view that
improvements in Spain's credit profile that have emerged recently,
in particular enhanced economic resiliency due to an increasingly balanced
growth profile and improved banking sector fundamentals, now outweigh
the drag from political/institutional factors.
Moody's has also upgraded the long-term issuer rating of
the Fondo de Reestructuracion Ordenada Bancaria (FROB) to Baa1 from Baa2.
The short-term issuer rating was affirmed at P-2.
The outlook on the ratings remains stable.
The stable outlook on Spain's Baa1 ratings reflects Moody's
view that further changes in the rating are unlikely over the medium term
given that material structural macroeconomic and fiscal reforms are unlikely
to materialise over the medium-term.
In a related move, Moody's raised Spain's long-term
country ceilings to Aa1 from Aa2 for foreign and local currency bonds
and bank deposits. Spain's short-term country ceilings
are unchanged at P-1.
RATINGS RATIONALE
Recent years have seen gradual, but increasingly sustainable,
improvements to Spain's credit profile. Much has been done
to address the weaknesses in the banking sector that emerged during the
financial crisis. It has also become increasingly clear that structural
changes in the economy have changed the growth model to one that is broader-based
and more sustainable than in past recoveries, though we do expect
growth to decelerate from current above-potential rates.
However, those improvements have been counterbalanced by institutional
weaknesses that have threatened to undermine the gains from reform and
recovery. In 2016, Moody's changed the outlook in Spain's
Baa2 rating from positive to stable to reflect concerns relating to the
effectiveness of fiscal and economic policymaking, partly reflecting
the absence of a settled government. More recently, the rising
independence sentiment in Catalunya heightened uncertainty regarding the
effectiveness of Spain's governing institutions.
Today's upgrade reflects Moody's conclusion that, while
institutional weaknesses are likely to remain a constraining factor for
some time, the improvements seen in recent years are sufficiently
well-entrenched to move to a higher rating. The stable outlook
reflects the view that, in part because of the uncertain impact
of institutional and political dynamics on fiscal and economic policy,
upside pressures are limited; the upgrade reflects a step improvement
in Spain's credit profile rather than a clearly improving trajectory
that we expect to continue.
RATIONALE FOR UPGRADING THE RATING TO Baa1
With that context, today's action reflects two key positive
drivers.
FIRST DRIVER: A MORE BALANCED GROWTH PROFILE HAS IMPROVED SPAIN'S
ECONOMIC RESILIENCY
Spain has experienced growth in excess of 3% per annum for the
past three years. This cyclical upturn in growth rates in itself
is not particularly credit relevant but it has revealed the degree to
which the Spanish economy's structure has changed in ways that makes
it more robust to shocks. This is evident in current account trends,
demand-side growth drivers, and productivity improvements
in tradeable sectors.
As the economic recovery has matured, the drivers of growth are
much more balanced than they were during previous growth upswings and
the economy is therefore more resilient. Growth continues to be
driven by domestic demand, particularly private consumption and,
more recently, investment activity. However, net external
demand has also played an important role in driving growth. Initially,
this shift was due to import compression, a natural result of Spain's
deep recession. However, more structural changes to cost
competitiveness, diversification of export markets, and lower
import propensity due to import substitution have also occurred that should
sustain external demand going forward.
For over 20 years, Spain ran -- sometimes large -- current
account deficits (peaking at 9.6% of GDP in 2007),
which in turn led to a material increase in external debt and a large
negative net international investment position accumulated. When
the financial crisis broke and the housing bubble burst, Spain's
current account deficit shrank very quickly -- in part due to import
compression -- and in 2013 the deficit turned to surplus.
However, a sterner test came with the advent of the economic recovery,
particularly the current period of growth rates in excess of 3%.
We expect current account surpluses of 1.7-1.8%
of GDP over the next few years, which marks a notable break from
past trends where Spain has struggled to maintain current account surpluses
in times of strong growth. While falling energy prices have clearly
played an important role in driving this trend, the share of exports
in GDP increased significantly during the crisis years, and export
levels have broadly been maintained. While tourism remains an important
source of services export revenue, it has not been the sole driver
of growth in services income. Other services exports, such
as professional services and IT-related services, have also
been important sources of services growth.
SECOND DRIVER: THE ONGOING RECOVERY OF THE BANKING SECTOR HAS FURTHER
REDUCED THE THREAT THAT IT POSES TO THE SOVEREIGN'S BALANCE SHEET
Spain's robust economic recovery has supported the authorities in
their broader efforts to rebuild and restructure the financial sector
and has helped its financial institutions to rebuild their credit fundamentals,
notably through improved asset quality and stronger capital and funding
positions. Although legacy issues remain and improvements are starting
from a low base, we consider the Spanish banking sector to be less
of a material event risk to the sovereign's balance sheet.
The Spanish banking sector has been restructured, with higher capital
ratios and more sound funding structures in place -- nevertheless,
capital levels remain below those of other European banking systems such
as Ireland's (A2 stable) or Slovenia's (Baa1 stable).
Spanish banks' funding gap has narrowed materially in recent years,
reducing their reliance on wholesale finance, thanks to a combination
of customer deleveraging and stable deposits. The governance,
regulatory and supervisory frameworks have also been overhauled,
and the successful resolution of Spanish lender Banco Popular Espanol,
S.A.'s (Banco Popular, long-term deposits
at Baa3 positive, Adjusted BCA ba3) in June 2017 - with no
significant impact on financial stability - marked the first use
of the EU's Single Resolution Board (SRB) under the Bank Recovery
and Resolution Directive.
Spanish banks' stock of nonperforming loans (NPLs) has been falling gradually
since peaking in late-2013. The overall NPL share in total
loans, according to Moody's calculations, has fallen
to 7.38% as of the end of 2017, from 12.9%
four years before. Banks will continue to reduce their stocks of
problematic assets, with the decline being accelerated by the continued
cyclical recovery and large real estate portfolio sales, like those
announced in 2017 by Banco Santander S.A. (Spain) (long-term
deposits at A3 stable, BCA baa1) and Banco Bilbao Vizcaya Argentaria,
S.A. (BBVA, long-term senior debt at Baa1/long-term
deposits at A3 stable, BCA baa2). Spanish banks also hold
a sizeable stock of real-estate assets repossessed from troubled
borrowers -- either through foreclosures or payments in kind -
which, after rising in the years following the crisis, has
started declining since 2016.
RATIONALE FOR THE STABLE OUTLOOK
The stable outlook reflects Moody's view that, while downside
pressures emanating from the political sphere are manageable, upside
pressures are similarly weak.
The political crisis in Catalunya has abated somewhat and it appears to
have not caused any deterioration in Spain's macroeconomic or fiscal
performance to date. While we expect political tensions between
the central government and pro-independence forces in Catalunya
to remain elevated for the foreseeable future, our baseline is still
that Catalunya will remain part of Spain. And while the crisis
is, in part, responsible for the government's difficulties
-- for the second year running -- in passing a budget,
we do not think that the government's current challenges,
or the prospect of regional and potentially national elections,
will bring about a marked credit negative policy shift over the coming
years. Cyclically high growth will abate slowly towards its medium-term
potential level of 1.5%-2%, but in the
meantime will provide further policy space to buffer credit negative political
shocks.
Nevertheless, we do not expect material structural fiscal or macroeconomic
measures to be legislated in the coming years; rather, the
authorities' medium-term challenge will be to resist pressures
to roll back reforms that were pursued during the crisis. Spain
is highly indebted and is likely to remain so for many years: while
nominal deficits have fallen and are likely to continue to do so while
the cyclical recovery lasts, its structural fiscal position has
weakened and, according to European Commission estimates,
is back to 2012 levels. We do not expect any material changes in
the debt burden; the debt-to-GDP ratio is likely to
remain over 90% for some years. The impact on the effectiveness
of fiscal policy of changes being negotiated to the relationship between
central and regional/local governments remains unclear -- as indeed
are the changes themselves given the Catalan situation -- but the
negotiations could conceivably result in some of the credit positive changes
introduced during the crisis being unwound.
WHAT WOULD CHANGE THE RATING UP/DOWN
A positive outlook or upgrade in Spain's rating will likely be driven
by a combination of factors, but the critical consideration will
be the strength of the government's commitment to the further fiscal and
economic changes commonly identified as pre-requisites for a material
and sustainable fall in the country's debt burden. Such a commitment
is likely to be evidenced by robust implementation of fiscal and macroeconomic
reforms, and improvements in the structural deficit. We would
ultimately expect such a positive scenario to be reflected in sustained
and meaningful reductions in Spain's debt burden. A further abatement
of the political tensions over Catalunya would also be credit positive,
but would not be sufficient on its own to move either the outlook or the
rating.
We would consider a negative outlook or a downgrade were there to be fiscal
slippage against Stability Program targets, leading to a later stabilisation
of Spain's public debt ratio at a higher level. A reversal of reforms
-- in particular pension or labour market reforms -- that have
been legislated in recent years would also place downward pressure on
Spain's rating. A re-emergence of elevated financial and
debt market stress, while unlikely, would also be highly credit
negative. Although extremely unlikely at this point in time,
an increasing probability that Catalunya would secede from Spain would
also be negative for the Spanish sovereign rating given the size and economic
importance of the region for Spain overall.
GDP per capita (PPP basis, US$): 36,347 (2016
Actual) (also known as Per Capita Income)
Real GDP growth (% change): 3.3% (2016 Actual)
(also known as GDP Growth)
Inflation Rate (CPI, % change Dec/Dec): 1.6%
(2016 Actual)
Gen. Gov. Financial Balance/GDP: -4.5%
(2016 Actual) (also known as Fiscal Balance)
Current Account Balance/GDP: 1.9% (2016 Actual) (also
known as External Balance)
External debt/GDP: [not available]
Level of economic development: High level of economic resilience
Default history: No default events (on bonds or loans) have been
recorded since 1983.
On 10 April 2018, a rating committee was called to discuss the rating
of the Spain, Government of. The main points raised during
the discussion were: The issuer's economic fundamentals, including
its economic strength, have materially increased. The issuer's
institutional strength/ framework, have not materially changed.
The issuer's fiscal or financial strength, including its debt profile,
has not materially changed. The issuer has become less susceptible
to event risks.
The principal methodology used in these ratings was Sovereign Bond Ratings
published in December 2016. Please see the Rating Methodologies
page on www.moodys.com for a copy of this methodology.
The weighting of all rating factors is described in the methodology used
in this credit rating action, if applicable.
REGULATORY DISCLOSURES
For ratings issued on a program, series or category/class of debt,
this announcement provides certain regulatory disclosures in relation
to each rating of a subsequently issued bond or note of the same series
or category/class of debt or pursuant to a program for which the ratings
are derived exclusively from existing ratings in accordance with Moody's
rating practices. For ratings issued on a support provider,
this announcement provides certain regulatory disclosures in relation
to the credit rating action on the support provider and in relation to
each particular credit rating action for securities that derive their
credit ratings from the support provider's credit rating.
For provisional ratings, this announcement provides certain regulatory
disclosures in relation to the provisional rating assigned, and
in relation to a definitive rating that may be assigned subsequent to
the final issuance of the debt, in each case where the transaction
structure and terms have not changed prior to the assignment of the definitive
rating in a manner that would have affected the rating. For further
information please see the ratings tab on the issuer/entity page for the
respective issuer on www.moodys.com.
For any affected securities or rated entities receiving direct credit
support from the primary entity(ies) of this credit rating action,
and whose ratings may change as a result of this credit rating action,
the associated regulatory disclosures will be those of the guarantor entity.
Exceptions to this approach exist for the following disclosures,
if applicable to jurisdiction: Ancillary Services, Disclosure
to rated entity, Disclosure from rated entity.
Regulatory disclosures contained in this press release apply to the credit
rating and, if applicable, the related rating outlook or rating
review.
Please see www.moodys.com for any updates on changes to
the lead rating analyst and to the Moody's legal entity that has issued
the rating.
Please see the ratings tab on the issuer/entity page on www.moodys.com
for additional regulatory disclosures for each credit rating.
Sarah Carlson
Senior Vice President
Sovereign Risk Group
Moody's Investors Service Ltd.
One Canada Square
Canary Wharf
London E14 5FA
United Kingdom
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454
Yves Lemay
MD - Sovereign Risk
Sovereign Risk Group
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454
Releasing Office:
Moody's Investors Service Ltd.
One Canada Square
Canary Wharf
London E14 5FA
United Kingdom
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454
