Download SPAIN INVESTORS DAY, 22th November 2010 It`s a pleasure to

SPAIN INVESTORS DAY, 22th November 2010
It’s a pleasure to share with you my view about the situation of the Spanish economy
and explain the commitments by the Government about the fiscal adjustment and the
structural reforms to accelerate growth and job creation.
Recent behavior of the Spanish economy
After the biggest world crisis since the 30’s, the global economic recovery is under
way; the path, however, is not homogeneous across geographic areas.
In Europe, uncertainties remain as the most recent developments in the sovereign
bonds market show.
The Spanish economy came out of the recession in the first quarter of 2010, and has
shown three positive growth quarters since then.
The recovery is leaded by the external sector based on gains of cost competitiveness,
specially increasing our export share in emerging countries.
But our recovery is less intense than in the euro area due to the adjustment of the
housing sector, and employment is still negative in annual growth rates.
But the recovery have helped to correct some of the important imbalances very much
linked to the real estate bubble created during the expansionary period.
First, today the weight of the real estate sector investment (4.3% of GDP) is on the
European average, versus 7.6% of GDP in 2007; and the stock of unsold houses has
started to shrink.
Second, deleverage in the private sector in underway; the loans to the real state sector
are falling more than loans to other sector activities; and the high savings ratio by the
households (18% of its disposable income) is allowing them to reduce its indebtedness
with a moderate consumption growth.
Third, we have also experienced a major correction of the external deficit, which went
from 9% of GDP in 2007 to around 5.1% in the second quarter of 2010, and is expected
to decrease further down to 4% in 2011.
After a decade of sluggishness, job productivity has started to increase, not only due to
the effects of employment destruction, but out of efficiency gains as well. Likewise,
Spain’s inflation differential vis à vis the Eurozone has decreased to very moderate
levels (0.4 percentage points in October) if we take into account the raise on VAT last
July.
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A commitment to austerity
As you know, the crisis has deteriorated the state of public finances in Spain.
In 2009 public deficit reached a high of 11% of GDP; only two years before, the public
balance was positive.
So as to restore fiscal sustainability and strengthen external credibility, Spain has
embarked on an ambitious fiscal consolidation program.
It is the second most ambitious in Europe, to reduce public deficit to 6% of GDP in
2011, five GDP percentage points in two years.
The program has been very well received by different international institutions.
This year, according to the available data over the three first quarters of the year, the
Government deficit has decreased by 42%, indicating that the deficit forecast for 2010
(9.3%) will hold.
For 2011, the Government’s General Budget for 2011, now under discussion at the
Parliament, contains a 7.9% reduction of non-financial expenditure.
The actual effort is even bigger, as this number also contains an important increase in
the amounts of debt service; therefore, the reduction of other items goes as far as
15%.
The Spanish regional Government are also assuming their own effort and we have
established control mechanisms for them. For example, authorization for new debt is
conditioned on achieving deficit targets.
Besides, the regions will be asked to provide periodic and standardized information
about their budgetary execution.
But for many analysts the main source of uncertainty on our fiscal consolidation is the
path of the economic recovery.
The Government sees that recovery continuing over the fourth quarter of 2010 and
accelerating in 2011 at a GDP growth rate of 1.3%.
The OECD (0.9%), the European Commission (0.8%) and the IMF (0.7%) also see the
recovery speeding up in 2011, but with lower intensity.
You should take into account that they have not included in their forecast the effects
of the ambitious reform program the Government is implementing.
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Furthermore, the commitment is clear. Should any deviation from the established path
of fiscal consolidation occur, additional budgetary measures will be adopted, either on
expenditures or revenues.
So let me tell you how of this ambitious fiscal consolidation program, Spain has started
to implement a structural reform package, covering, among others, the financial sector
and the labour market.
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Financial system reform
The Spanish financial sector has resisted the crisis well, due to prudent supervision and
regulation and also due to its concentration on retail banking.
In fact, Basel III recognizes the work of Spanish authorities on the regulatory
framework considering counter-cyclical provisions.
However, the adverse developments in the international financial markets damaged
investors’ confidence in the strength of the Spanish banking sector, particularly for
saving banks (the Cajas) which had taken excessive risks associated to the real estate
bubble.
Last July, the Spanish government made a huge transparency effort, first promoting
the public release of the stress tests in Europe and second coverring almost the entire
Spanish financial system under particularly strict assumptions (such as a fall of real
estate prices of over 50%).
The results are clear: under the most stressed and highly unlikely scenario, only 4 small
to medium sized saving banks would not comply with minimum capital requirements,
and their capitalization needs would be lower than 0.2% of GDP.
Since July, when the results of the test where published, banks and saving banks have
raised on the markets about 30bn Euros of funding.
Also, Spanish banks’ recourse to ECB funding has fallen by half, from 130bn Euros to
68bn in October.
The Government has also established a Fund to support financial system restructuring
to reduce excess capacity in the banking system.
The number of savings banks has been reduced from 45 to 18, seeking public funds for
a total of 11,000 million euro. These public funds are conditional on 25% branch
closures and 18% employment reduction.
By December 31st, the new entities will have established their holding structure
centered on a bank and their new management team.
To complete the process the government has passed a new law for the saving banks,
so as to (i) improve its capitalization, allowing them to issue equity to private investors
and (ii) improve its management, avoiding political interference.
Labor market reform
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There is a wide consensus in Spain over the need to reduce the duality of the Spanish
labor market and increase its flexibility.
There is a lack of flexibility for firms to adapt to changing economic conditions.
We have recently passed a reform that increases the attractiveness of permanent
contracts, by reducing firing costs for new contracts and by simplifying requirements
for layoffs under technical, organizational and economic reasons.
The law has also put in place mechanisms to improve internal flexibility within firms,
such as an opting out clause for wage bargaining or flexible mechanism for workingtime adjustments.
Also, on March, if there is not any agreement between social agents, the Government
will seek to modify the current system of collective bargaining in order to loose its
rigidity at the firm level.
The actual intermediate level of bargaining (sectorial and provincial) is difficult to
adapt to specific situations of companies and workers.
Finally, the Government has presented a proposal for the reform of the pensions
system.
The reform is asked to ensure the system’s sustainability, given the ageing process that
we are facing, and to preserve solidarity between generations.
The Bill proposal is expected to be presented in the Parliament during the first quarter
of 2011.
Other reforms
There are several other reforms besides financial and labor in the pipeline to increase
the competitiveness of our economy and there is also a clear timetable for that.
The Law of Sustainable Economy, under discussion in the Parliament, includes a set of
measures like strong cost reduction in business creation, reducing administrative
burdens at local level and more independence of regulatory bodies.
The government will also adopt a new regulation on professional services which will
reduce entry barriers and enhance competition among professionals.
Spain’s potential for growth
So to conclude, we are confident of our growth potential that is still well above the one
at the Euro area average.
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Our workforce has never been as qualified: around 40% of the Spanish young hold a
University degree.
Education and R&D will continue priorities for next years public policies.
Our transportation infrastructure is outstanding, specially regarding high speed
railways.
Our companies are more international than ever: the 35 biggest Spanish listed
companies have grown their revenues coming from abroad by 13% over the first half
of 2010 (and the stock of Spanish IED abroad amounted more that 44% of our GDP).
These strengths, together with our determination to implement the ambitious
consolidation and reform programs that I have just described, make me confident on
the future of the Spanish economy and its prospects for growth in the future.
Thank you.
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