The rise in energy prices threatens to end a decade of surplus in the Spanish foreign sector

The prolonged golden decade of the Spanish foreign sector could come to an end during this financial year. Exporting companies have to deal with new turbulence in a more convulsive business cycle than imagined: rises in energy prices, logistics bottlenecks, alterations in value chains. And as a consequence of all this, an inflationary spiral unknown in more than 40 years in the high-income powers that grips economies over which the specter of stagflation hangs, as the third month of the war in Ukraine approaches.

The Spanish foreign sector, which once again lit the fuse for another recovery, may see a fruitful situation of export jumps, opening of markets and consolidation of the regular presence of companies with an international vocation altered. We must not forget that Spain has chained surpluses in its current account balance for a long decade after starring in the largest financing holes in the external balance in the first decade of this millennium. Sales exceeded the barrier of 300,000 million euros for the first time in history (exactly, 316,609) in 2021, the year in which the diversification of goods and services made in Spain was restored beyond European borders - their destination preferential-, and in which companies with more than 4 consecutive years of income from abroad were close to 60,000; specifically, 59,193 companies, according to the census of the Secretary of State for Commerce.

The scenario has darkened with inflation of 8.4% in April, which places the shopping basket and electricity and fuel payments well above wage increases, which are still moderate and contained. Or, put another way: inflation is imported and prices distort foreign accounting.

This is how they begin to glimpse it from various study services. CaixaBank's indicates that the Spanish trade balance has already intensified its deterioration between January and February, with an accumulated deficit of 10,775 million euros, almost four times more than in the same period last year. Its experts attribute it to the energy bill, which increased sharply in the bimonthly period -up to 6,985 million- "in a context of intense rebound in imports and their prices", although the balance of non-energy goods also scored a worsening, with a hole of 3,790 million, in contrast to the surplus of 260 million a year earlier.

BBVA emphasizes that the take-off of activity in Spain lost traction at the start of 2022. The vigor of GDP in the first quarter, according to the advance of National Accounts, was 0.3%, notably less than 2.2 % of the last installment of last year. Although they attribute this slight advance to external demand, which contributed 1.5 points and improved all expectations, as well as investment, which corrected the 2.3% drop in private consumption. Had they not behaved like this, "the economy would have fallen into contraction," they say.

While the quarterly report of the Bank of Spain warns about inflation, which is expected to rise to an annual average of 7.5%, since it will generate "adverse consequences on foreign competitiveness, activity and employment". Although it points to a certain transitory nature because the forecast is that prices "will moderate" to 2% in 2023 and 1.6% in 2024. This will not prevent it from diluting the current surplus accumulated since 2012, despite the oxygen that services, for the recovery of tourism, may supply the drop in sales of goods and merchandise.

Among other reasons, because global trade does not exude vigor either. It will grow 5%, according to the IMF, less than half of the 10.1% of last year, during which a third of the global population still endured confinements. For 2023, the Fund foresees another, softer landing, down to 4.4%. In other words, on the verge of paralysis since, in multilateral terminology, any rate close to 3.5% of world trade dynamism approaches a phase of economic recession.

The guideline, consequently, seems to revolve around the search for a formula that allows the foreign sector to go through 2022. A year that we will live dangerously, they admit, but that could boost, if the barrier is overcome, its status as a structural heading of the Spanish economy.

In the Exporters Club they admit the "undoubted consequences" of the war in the foreign sector. Spain - they say in this lobby of companies with an international vocation - acquired goods for more than 1,500 million euros from Ukraine -especially food, 62% of the total- and exported 682 million (chemical products, automobiles and machinery) in 2021, while it imported more than 6,000 million from Russia (of which fuels represented 80% of the total) and sold for a value of 2,200 million.

The direct damage will be reflected in "a drop in trade with both countries" and in the necessary substitution of grain, oil and gas in the face of shortages due to the effect of the war and sanctions. But there will also be indirect ones, such as cuts in the supply chain, a rise in energy prices and delays in international transport, with inflation that has reached double digits and that will reduce the competitiveness of exporting companies and, therefore, will reduce dynamism to GDP.

To weather the 2022 storm, the foreign sector -especially its SMEs- “must review their protocols and reinforce their contractual legal security to mitigate the effect of the sanctions on Russia” and deepen geographical diversification, to reduce risks and take advantage of market niches. business arising from the gap that Russia has left in some countries, such as Turkey, ”say club sources, who distance themselves from a hypothetical deglobalization. Quite the contrary, the military conflict and the pandemic reveal "how interconnected the world is and its high dependence" on trade, investment and geopolitics, although it will "shorten value chains and acquire more autonomy through the promotion of production local".

Raúl Mínguez, director of the Spanish Chamber Studies service, however, favors a "more moderate effect" of the war on Spain's foreign sector. Given that Russia represents 1.8% of our imports and 0.7% of exports and Ukraine 0.5% of our purchases and 0.2% of sales, according to 2021 data. In his opinion, the repercussion "is not due so much to the size of the economies involved, but to their role as main producers of some essential raw materials such as oil, natural gas, nickel, aluminium, palladium or cereals". In addition, this "new shock arises when the global supply chains have not yet been normalized after the outbreak of Covid-19", which aggravates the supply problems that an important part of the industrial fabric was already suffering.

Camera predictions speak of an export increase in 2022 of around 11.5% in year-on-year terms. Due to the still significant, although lower, growth in the EU and due to the consolidation of the depreciation of the euro against the dollar, which could last if the rate hikes are more aggressive in the US than in Europe -says Mínguez- and, therefore, give impetus to the foreign sector and improve the competitiveness of its goods.

At Cámara España, they trust in the resilience and transformational desire of foreign firms in the face of global instability and uncertainty that could paralyze certain investments. In short, in the commitment to internationalization, with 58% more regular companies in their foreign action than in 2011 and with greater competitive strengths in goods and services and in structural and price terms. "Reconverting and exploring outer space are two key levers to overcome the crisis with intelligent management of inflation."

The war will subtract trade flows - the WTO has just reduced them to 3% - but globalization "has no going back and is not going to stop, although it will be reconfigured." This is why Mínguez also joins the market diversification council at a time of resetting the international economic order, from which emerges "the need to guarantee destinations such as the sources of supply of raw materials or the relocation of at least a part of production to cushion excessive dependence on foreign countries in strategic sectors”. He also points to a shortening of value chains, their regionalization and new stock policies to have minimum reserves and inventories.

Antonio Merino, from the Repsol Research Department, explains that "with all the precautions and always depending on the evolution of world GDP and by region, we can be optimistic about the Spanish foreign sector in this phase of recovery and growth […] given our lower elasticity of imports compared to the EU since we incorporate less foreign value than they do in our purchases”. As well as in other "many variables" where a better performance is revealed with respect to its rivals in the euro area; for example, in terms of added value in exports, in the proportion of re-exported inputs or in the “no loss of competitiveness of the labor factor and in the advantageous effects of product market reforms.

In Merino's opinion, the expected recoveries in mobility in 2022 and in tourism point to a foreign sector that "will continue to contribute to growth" and to which he recommends understanding the initial loss that "the regulatory, fiscal and climate change policy of the last two years” should not be understood only as restrictive because continuing on its path “will increase the duration and intensity” of the current business cycle.

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