Must-know: Spain’s economy

Spain’s economy

Spain enjoys one of the best credit ratings among the PIIGS (or Portugal, Ireland, Italy, Greece, and Spain) nations. Spain’s economy is currently rated Baa2, BBB, BBB+ from Moody’s, Standard & Poor’s (or S&P), and Fitch. Spain is rated as a lower medium grade in terms of its creditworthiness. The next potential rating upgrade for Spain’s rating is due in October for Moody’s and S&P. Fitch’s next rating decision is scheduled for November. A move to an A- grade should have a positive market impact for Spain. An upgrade is likely from Moody’s (MCO) because it has Spain as a positive outlook while S&P (MHFI) and Fitch have it as a stable outlook.

However, Spain’s potential rating upgrade rests largely on its debt ratio being brought to a declining trend within the forecast period, which ends in 2015.

Facts supporting Spain’s growth trajectory

Spain is doing well. According to an export performance Organization of Economic Co-operation and Development (or OECD) indicator, Spain has gained market share for the past 20 years. It’s even due for a rating upgrade assuming its public debt is managed well.

The Spanish economy is expected to grow at 1.7% this year—better than the contraction of 1.2% witnessed last year. Unemployment is also expected to show a declining trend. It’s expected to fall from 26.4% last year to 25.7% this year. It should fall to 24.6% by the end of 2015. Spain experienced the highest gross domestic product (or GDP) growth rate in more than six years in 2Q14, when the economy expanded at 0.6% quarter-over-quarter. The expansion was fueled by an increase in domestic demand. The increase in domestic demand increased economic activity.

The iShares MSCI Spain Capped ETF (EWP) primarily invests in large and mid-cap Spanish stocks. Two of its top three financial holdings—Banco Santander SA (BCDRF) and Banco Bilbao Vizcaya Argentaria SA (BBVA)—account for 33.88% of its total assets.

Certain key facts about the economic developments in Spain support the growth trajectory for this PIIGS nation, including:

• Spain has clocked its highest GDP growth rate in seven years
• Consumer confidence is signaling higher private consumption
• Unemployment expectations are at their lowest level since 2000
• Unit labor costs are around the Euro area average
• Private consumption is supported by positive real wage growth
• New orders suggest higher growth in fixed investments
• Structural reforms have strengthened the competitive advantage for export companies in Spain

The state of public debt in Spain

Although Spain’s public debt-to-GDP ratio has also grown by leaps and bounds since 2009, it hasn’t peaked. Among the other PIIGS nations, it has the smallest GDP ratio because it has remained below 100% of GDP. With Spain’s current debt situation better than the other PIIGS nations, let’s move to the next part in the series. We’ll analyze what makes the country worthwhile for investors.