Spain: Policy m easures tow ards a sustained and balanced grow th path February, 2011
Highlights The reform s and m acroeconom ic developm ents in 2 0 1 0 and 2 0 1 1 are laying the foundations of a sound and rebalanced grow th for the Spanish econom y Two main questions: • Are reform s tackling the underlying problem s? Existing evidence on financial system reform, labour market reform, business environment & fiscal consolidation says so • Can Spain grow ? Spanish firms are competitive and have the potential to absorb resources and to enhance growth in the future 1
• Reform s are w orking • Fiscal consolidation • Future balanced grow th path • Funding and Debt Managem ent 2
Banking system restructuring • Creation of FROB to liquidate non-viable entities and to support restructuring process of viable ones (up to 33 billion with possibility of increasing up to 99 billion if needed). Conditional on cost cutting measures: 25% of branch closure and 15 to 18% of employment reduction on average • Regulatory reform of saving banks • Stress tests & transparency : Additional coverage and severity on European Stress Tests (July 2010) coupled with enhanced transparency on asset exposure (January 2011) • Saving banks restructuring process finalised : Saving banks have decreased in number from 45 to 17 in a 6-month process • New Plan to Strengthen Capital Base and Confidence 3
Cajas decreased in num ber from 4 5 to 1 7 in 6 m onths Restructuring process of Cajas % of total Total Financial New savings Supporting Entity Assets support institutional banks' Fund € Million € Million setting assets UNNIM 28,463 2.2% 380 FROB Merger DIADA 79,329 6.1% 1,250 FROB Merger CAJA ESPAÑA/ DUERO 46,351 3.7% 525 FROB Merger BANCA CIVICA/ CAJASOL- 77,174 6.0% 977 FROB IPS GUADALAJARA UNICAJA-JAEN 35,155 2.8% 0 Not requiring Merger NOVA CAIXA GALICIA 77,480 6.0% 1,162 FROB Merger CCM-CAJASTUR* 127,267 9.9% 5,268 FROB+ DGS IPS CAJASUR-BBK 48,726 3.8% 392 FROB Business transfer LA CAIXA-GIRONA 260,561 20.3% 0 Not requiring Merger CAJA MURCIA-GRANADA 72,105 5.6% 916 FROB IPS CAJAMADRID-BANCAJA 337,257 26.3% 4,465 FROB IPS CAI-BURGOS-BADAJOZ 20,807 1.6% 0 Not requiring IPS Total 1 ,2 1 0 ,6 7 5 9 4 .3 % 1 5 ,3 3 5 Source: Bank of Spain and FROB. * Includes €1,493 M from FROB and €3,775 M from DGS. 4
Recent m arket doubts require additional m easures • Additional transparency requirements by Bank of Spain: Financial institutions must offer to the market specific information on land, construction and residential m ortgage portfolios , in particular those related to the guarantees supporting loan to value and coverage to meet possible impairments 5
Recent Plan to Strengthen Financial Sector • Goals : - To restore credibility of our financial institutions - To facilitate funding of financial institutions • Measures : • Higher and faster implementation of Basel I I I : • Core capital 8 % relative to RWA 31 st Dec 2010 • Higher ratio for entities no listed , with sm all presence of private investors and are dependent upon w holesale funding m arkets • Entities that currently do not reach this higher standard m ust raise it by Fall 2 0 1 1 • The FROB w ill act as a backstop w ith som e conditions - purchasing shares under market conditions - limited time horizon (no more than 5 years) - Restricted to equity issued by a bank - Presentation of a restructuring plan - Compliance with good corporate practices 6
Labour m arket reform • Labour market reform: Approved on July 2 0 1 0 • Fostering perm anent and training contracts • Clarifying grounds for objective dism issals • I nternal flexibility at firm level: firms can opt out from conditions imposed by sector-specific collective bargaining agreements Labour m arket developem ents since Labour m arket reform . Hiring, dism isals and w age developm ents ( Year-on-year grow th rates) Pre- reform period Post-reform period May June July Aug Sep Oct Nov Dec -0.8 -8.3 -13.8 -2.7 -4.9 -6.3 0.8 8.6 Perm anent Hiring by type of Fom ento -5.4 -18 -17.3 41.5 35.1 56.1 80.5 136.5 7.3 2.7 0.7 7.7 3.4 -0.3 4.9 4.3 contract Tem porary Training 3.7 -7.4 -10.5 -2.7 14.5 20.6 46.0 -5.1 -18.9 -12.3 6.4 18.8 18.0 11.6 23.7 Objective reasons Dism issals -27.3 -26.3 -20.5 -12.8 -13.3 -26.8 -19.7 Disciplinary reasons 2 0 0 9 2 0 1 0 -Q1 2 0 1 0 -Q2 2 0 1 0 - Q3 2 0 1 0 -Q4 2.7 1.5 1.3 1.3 1.3 Collective agreem ents* W age 3.5 0.9 0.2 -1.8 Real w age developm ents 3.8 0.0 -0.4 -2.2 Real labour cost Source: Ministerio de Trabajo e Inmigración.* Agreed wage increase, cumulative over the year. 7
Additional labour m arket reform s • Unem ploym ent rate is still very high (20.3% in 2010-Q4) and low ering it must be the focus of our effort • Additional measures already implemented: • Private placem ent offices : effective interaction between private and public employment agencies • Active Policies : Activation strategies, Labour Market enhancing individual employment orientation plans and formation • More to be done: To be approved in March • Collective bargaining : fostering collective agreements at the firm level to increase flexibility 8
Product m arket reform s • According to OECD Spain has pursued a substantial reduction of product m arket regulation in the last decade • Nowadays Spain is well situated compared to other OECD countries Product Market Regulation I ndex ( 6: more restrictive, 0: less restrictive ) 3.0 2.5 2.0 1.5 1.0 0.5 0.0 France Germany Australia Spain Canada United United Kingdom States 1998 2003 2008 Source: OECD. 9
Additional Product m arket reform s • Some pools of m arket rigidities still remain in the economy … w hich the governm ent is already tackling Most analysts point to… Reduction program : target reduction 3 0 % by 2 0 12 and 5 0 % by 2 0 2 0 Red tape Tim e to incorporate shortened to betw een 1 to 5 days ( for m ost lim ited liability com panies) from an Business creation average of 3 3 . ( approved) Am bitious transposition of Service Directive and rem oval of local licenses ( approved) Perm its and licenses Liberalizing access regulation, foster com petition and m obility ( Draft of the Professional Services Law by Professional services Spring 2 0 1 1 ) 10
• Reform s are w orking • Fiscal consolidation • Future balanced grow th path • Funding and Debt Managem ent 11
Our com m itm ent: achieving a fiscal deficit of 3 % in 2 0 1 3 • More than 60% of total fiscal adjustment delivered in first 2 years • Deficit targets robust to: • Implementation risks, through stronger control mechanisms • Negative growth surprises, as the targets are unconditional on macroeconomic performance GENERAL GOVERNMENT BALANCE COMMI TMENTS BY UNI T ( % of GDP) 2 0 0 9 2 0 1 0 2 0 1 1 2 0 1 2 2 0 1 3 General Governm ent Budget Balance -1 1 .1 -9 .3 -6 .0 -4 .4 -3 .0 - Central Government -9.3 -5.9 -2.3 -3.2 -2.1 (-6.7) (-4.8) - Autonomous Communities -2.0 -3.1 -3.3 -1.3 -1.1 (-2.4) (-1.3) - Local Governments -0.6 -0.6 -0.8 -0.3 -0.2 (-0.4) (-0.3) - Social Security 0.8 0.2 0.4 0.4 0.4 Source: National Accounts and Ministerio de Economía y Hacienda. In brackets: net of internal transfers among Public Administration units . 12
I n 2 0 1 0 General Governm ent w ill deliver • According to National Accounts, budget deficit in 2 0 1 0 for the Central Governm ent will be 5 .1 % . This gives a 0.8% saving to finance potential deviations of other levels of government • Information on Social Security is partial, but if any deficit arises it will be small: • Budget execution of the social security system ended up with a 0.2% surplus • Preliminary information on the public employment office shows a 0.3% deficit in National Account terms • Some regional governments might deviate from the initial objectives but overall deficit should not be very distant from the target: • Until 2010-Q3 all regions but 2 (6% of GDP) had fulfilled the commitment 13
Monitoring Autonom ous Com m unities • All regions require authorisation of debt issuance depending on the compliance of the previous year target and the presentation of a rebalancing plan (table below) • For the first time in 2010, the authorisation for new issuance was given in three stages (initial 0.75% of GDP, additional 1.20% with proper budgetary execution in the first semester, final 0.45% with compliance) Requirem ent of authorisation OBJECTI VE OF DEBT I SSUES AND LONG TERM SHORT TERM BUDGETARY FOREI GN OPERATI ONS OPERATI ONS STABI LI TY CURRENCY Com pliance Yes No No ( Madrid, La Rioja, Galicia) Non-com pliance Yes Yes No w ith rebalancing plan ( Rest) Non-com pliance Yes Yes Yes w ithout rebalancing plan 14
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