Moody’s And S&P Maintain Spain’s Credit Rating…
The credit rating agencies Moody’s and S&P Global have decided to maintain their respective sovereign ratings assigned to Spain, located at ‘Baa1‘ and ‘A‘, respectively, as both firms announced this Friday in separate statements.
However, the two agencies have reacted differently when it comes to the rating perspective. While Moody’s has also kept it unchanged, S&P has decided to revise it to ‘negative’ given the economic weakness caused by the crisis coupled with the possibility that an agreement will not be reached to approve Budgets for next year.
Moody’s explained that, although the Spanish economy has suffered the impact of the coronavirus pandemic, the support of the Government, combined with past efforts to reduce macroeconomic imbalances and regain competitiveness “should provide a robust economic recovery next year. ”
The firm believes that the ratio of public debt compared to gross domestic product (GDP) will stabilize around 120% “in the coming years.” Although it is an unprecedented level for the country, the metrics of debt affordability due to low interest rates and the lower recurrence to the financing of the bond markets “will mitigate the impact of higher debt on the fiscal strength of the country.” .
Moody‘s has decided not to modify the rating outlook because the short-term effects of the pandemic will not have a long-term effect on Spain’s productive capacity. However, Moody’s baseline scenario for these forecasts is that the health crisis can be managed without the need to resort to the “broad and severe” restrictions on mobility such as those applied in April and May.
Moody‘s estimates that Spain’s GDP will sink by 12.5% due to the country’s economy being dependent on tourism and the services sector, as well as the high number of small and medium-sized companies.
Another recovery lever, indicated by both agencies, is the European recovery fund of 750,000 million euros, of which Spain will receive a large part for being one of the most affected countries.
On the other hand, Moody’s assures that, although the deficit will reach 13% of GDP this year, in 2021 it will be much lower due to economic growth and the recovery of tax revenues. Despite this, the firm has pointed out that Spain continues to have among its challenges to tackle the high rate of structural unemployment, reduce the high percentage of temporary workers, raise productivity and solve the “high structural deficit” of Social Security.
“The key macroeconomic risks for Spain continue to be the high public debt, the increase in the dependency ratio, the pronounced duality of the labor market and the possible delays in the implementation of reforms that increase growth and budgetary consolidation,” added S&P .
As on other occasions, the rating agency has warned that it could lower the rating if the Government undertakes a repeal of structural reforms of the past, such as the labor reform.
In this sense, the firm has argued that the country has 26% of its workers with temporary contracts. Of all of them, only 14% manage to sign a permanent contract, compared to 30% in Portugal or 55% in the United Kingdom. “In light of this, proposals to reverse parts of the 2012 labor reform appear to be a risk to Spain’s economic flexibility, and could unintentionally exacerbate the ‘insider-outsider’ problem of the labor market,” S&P warned. .