Political instability and the economic slowdown have become the two main axes on which the mood of investors revolves. But not in regards to Spain. The unexpected arrival to power of Pedro Sánchez in June of last year or the difficulties he faces to get ahead Budgets that should have presented last September have not managed to muddy so far the vision towards Spain of investors, focused on glimpsing if the global economy is simply slowing down or going into recession and avoiding large-scale political risks such as trade tension between the United States and China or the Brexit.
Thus, the presentation of the public accounts for 2019 this past Monday has not made a dent in the Spanish market, despite the fact that they raise uncertainties about the forecast of income and that, If the necessary political support for its approval is not achieved, the call for early elections would be very likely.
Spain has managed to shake off the label of problematic country in which to invest. Not just by elimination, compared to Italy, the other great economy of the European periphery with which it has rivaled to attract capital. But for their own merits so appreciated by investors as having completed the cleanup of their financial system, have committed to fiscal consolidation despite changes of government and not have political movements with the ability to change the status quo.
The high unemployment rate or the deep inequality that has left the legacy of the crisis does not dislodge Spain from the group of countries that will grow the most this year, more than the rest of the large economies of the euro zone in an environment of economic decline generalized
Neither the Budgets nor possible early elections weigh in the minds of investors
Spanish sovereign debt managed to distance itself from the harsh punishment suffered last year by the Italian because of the budgetary challenge that his government launched before Brussels, without the weakness of the government of Pedro Sánchez -which has not yet reached enough support for any major reform- or the problematic of the Catalan independence movement are reasons for real concern in the market.
"Spain is off the radar of international investors in terms of political risk, as evidenced by the stability of the debt differential in full Italian political storm ", defends Roberto Ruiz-Scholtes, director of strategy of UBS Private Banking in Spain. The Spanish risk premium is currently at 108 basis points, slightly below the 117.6 that closed 2018 and around the 100 points in which it was trading with the arrival of Sánchez to power.
The American giant of investment banking Goldman Sachs overweight Spanish equities this year, in which it sees one of the most attractive valuations of developed markets, and also leaves in the background the possible political risk. "There is a high probability of new elections in Spain in view of the fragmented coalition that supports the Socialist Party and that the Catalan independence movement will also make headlines," acknowledges Goldman Sachs. However, none of these two fronts of political instability will have a material impact on the Spanish stock market, according to the US bank.
"We have not observed concern towards Spain as a result of the presentation of the Budgets. They worry us more internally than out there, "they admit in the capital market department of a foreign bank. The managers do analyze in any case aspects such as the increase that the minimum wage can have in the creation of employment – the Bank of Spain calculates that it can put at risk up to 150,000 jobs – or the degree of deviation of public deficit with which it can finish the year with respect to the target of 1.3%. "The deviation would have to be very notable to generate tension among investors," they say from an investment bank.
The priority, fiscal discipline
"The proposed adjustments to corporate and income taxes are relatively minor and should have little influence on business or financial investment decisions. In the long term, it is more relevant for investors to have a stable legal and fiscal framework and a tax system harmonized with other EU countries, "adds Ruiz-Scholtes.
Experts agree that the priority when analyzing Spain in terms of investment is in fiscal discipline. The head of sovereign risk of Standard & Poor's, Marko Mrsnik, recognized this week that the aspect most valued by the agency is the commitment to reduce the deficit, which would not be questioned with the Budgets. "What is most important to us is the clear path of deficit reduction in Spain, the measures go to that line," insisted Mrsnik, for whom a more loose deficit target – up to 2.1% at the end of 2019 that the agency came to expect with respect to the previous Government objective of 1.8% – it would even be compatible with a rating increase.
The focus is on the risk of global recession and commercial war. The Spanish risk premium does not accuse the policy
Managers and bankers doubt that the Budgets presented on Monday reach the political support necessary to move forward. But, even if they are approved, their net effect is quite neutral in fiscal terms, as AIReF pointed out this week. "Whether approved or not, Brussels and most analysts expect the public deficit to exceed 2% this year due to the sharp increase in spending on pensions and salaries of public employees," they add from UBS.
In Barclays they warn that "Spain is likely to deviate, with a lot of margin, from the government's deficit targets, which could translate into a fall in risk appetite and in higher returns required to the Spanish debt. The British bank also points out that the increase in corporate tax can pose a competitive disadvantage and lower attractiveness for investors and shows its concern about the high public debt. But despite appreciating an increase in political and fiscal uncertainty in Spain, Barclays also recognizes that "the situation in Spain does not seem to be a major concern for investors at this time."
Jesús Sáez, head of Natixis debt markets in Spain, also recognizes that investors are not penalizing Spain because of the policy, at least for the time being. "And it will be this way as long as there are other more general areas of concern such as the Brexit, the commercial war and, above all, the evolution of future rates in relation to the global macro-economic situation," he says.