Global Sovereign Ratings
Spain ends political gridlock, but tests lie ahead
On 29 October, 2016, Mariano Rajoy won a vote of confidence in the Spanish Congress that
paved the way for a Partido Popular (PP) minority government. Mariano Rajoy will serve as Prime
Minister for a second consecutive term. This ends a long period of political stalemate and averts
a third general election in the space of one year. DBRS views the formation of a fully-functioning
government after ten months of caretaker government as a positive development.
Despite the political gridlock, growth has held up so far and is expected to exceed 3% this year.
However, the still important macroeconomic imbalances remain key sources of concern. These
imbalances include: 1) high levels of public and private debt, 2) heavy reliance on external
funding, and 3) very high long-term unemployment. Moreover, the government needs to
introduce new measures worth 0.5% of GDP to comply with the European Commission fiscal
targets for 2017.
In DBRS’s view, a legitimate working government reduces uncertainty and makes a correction of
these imbalances more likely. However, the government faces the challenge of building
legislative consensus on a case-by-case basis. A divided Congress and the PP’s lack of majority
could hamper the government’s ability to pass legislation and could precipitate a snap election.
Nonetheless, the characteristics of the political framework provide some degree of stability to
the new government once it is sworn in.
PSOE’s abstention paved the way for a PP minority government
Summary:
 DBRS views the formation of a
fully-functioning government
after ten months of political
stalemate as a positive
development. However, the
minority government could face
significant obstacles to making
progress on structural reforms
during its term.
 The still high macroeconomic
imbalances underscore the
importance of proactively
addressing the country’s
medium-term challenges. Also,
new fiscal consolidation
measures need to be introduced
to meet its fiscal targets in 2017.
 The minority government could
experience difficulties
implementing its policy agenda,
which could raise concerns over
its durability. This could weaken
growth and undermine progress
in stabilising the public debt ratio.
The bipartisan politics that has characterized Spain since 1982, with the centre-right PP and
centre-left Partido Socialista Obrero Español (PSOE) alternating power, has led to stable
government configurations in the past. Nevertheless, more recently a fragmented political landscape has emerged, posing a significant
hurdle to the formation of a new government. The general elections that took place in December 2015 and in June 2016 both delivered
inconclusive results. Both PSOE and PP candidates failed to pass a confidence vote in March 2016 and in September 2016, respectively.
On 23 September, 2016, PSOE’s Federal Committee decided to abstain in the second round of Rajoy’s investiture vote. This decision
was the first step towards unblocking the Spanish political deadlock.
Sources: Ministry of Interior and DBRS.
After failing to obtain an absolute majority (i.e., 176 votes) in its first investiture attempt on 27 October, 2016, Mariano Rajoy won a
confidence vote by a simple majority in the second round. Mariano Rajoy obtained 170 votes in favour from the following parties:
Partido Popular (PP, 137), Ciudadanos (C’s, 32) and Coalición Canaria (CC, 1). DBRS expects these parties will form an informal coalition
Global Sovereign Ratings
November 1, 2016
Spain ends political gridlock, but tests lie ahead
DBRS.COM
2
in Congress, with the compromise agreed between PP and C’s in August 2016 (“150 Compromises to improve Spain”) as a roadmap.
The abstention of 68 PSOE’s lower house representatives (out of its 85 seats) allowed Rajoy’s candidacy to be passed.
Although imbalances are moderating, additional reforms would support further improvement
Medium-term challenges to growth potential and fiscal sustainability remain high. Despite Spain’s robust economic recovery and
progress in reducing its macroeconomic imbalances, the still high levels of public and private debt, its heavy reliance on external
funding, and very high long-term unemployment remain key sources of concern. Therefore, a continuation of the reform agenda in
the areas of labour market reform, pension reform, and public finances would likely help to raise potential growth and improve fiscal
sustainability.
Sources: Bank of Spain, INE, Spanish Treasury, Haver Analytics and DBRS.
The fiscal slippage in 2015 was significant. The general government fiscal deficit reached 5.1% of GDP, well above the 4.2% of GDP
target. The deviations in the regional governments and social security funds explain the overall deviation in 2015. The regional deficits
are expected to improve this year mainly due to the additional resources the regions will receive as part of the final settlement for
2014 financing system. Nonetheless, there is still considerable uncertainty around the implementation of the Stability Law. Therefore,
strengthening the preventive and corrective mechanisms outlined in the Stability Law could help rein in the regional deficits.
Moreover, the potential reform of the Regional Government Financing Law (LOFCA), which enhances fiscal responsibility and boosts
efficiency, could increase fiscal discipline and productivity in the public sector.
Despite past efforts to improve long-term sustainability of the system, the social security funds deficit is proving to be persistent.
Further measures to reform the pension system could help improve fiscal sustainability in the medium term. Another challenge is
very high unemployment. The rate of unemployment stood at 18.9% in Q3 2016. Labour market exclusion may eventually materialize
in lower productivity growth. PP’s compromise with Ciudadanos includes several potential measures to improve labour market
conditions, such as the introduction of simplified labour contracts and strengthening active labour market policies, among others.
Boosting employment, reducing exclusion in the labour market and lowering long-term unemployment could result in improved
potential growth, estimated at 0.5% in 20161.
Reduction in uncertainty likely to help economy, but new government has obstacles to overcome
DBRS views the formation of a government after ten months of political stalemate as positive. The formation of a PP minority
government reduces uncertainty over the direction of economic policy. However, the minority government could face significant
obstacles to implement its policy agenda during its term.
PP’s past endorsement of structural reforms and the fact that the PP remains the largest party in Congress limit the threat that the
reforms introduced in recent years are reversed. Our baseline scenario is that additional budget measures will be approved and the
1
Source: “Effective Action Report, 2017 Draft Budgetary Plan”, Ministry of Finance, October 2016.
Global Sovereign Ratings
November 1, 2016
Spain ends political gridlock, but tests lie ahead
DBRS.COM
3
fiscal target broadly met. However, the lack of a PP majority in Congress could hinder the introduction of new reforms and require the
PP to compromise in its budget initiatives. In this sense, DBRS will continue to monitor the new government’s ability to build legislative
consensus on a case-by-case basis.
The reduction in policy uncertainty could have a positive impact on consumption and investment decisions. Admittedly, the political
deadlock hitherto has not dented growth materially. This could be attributed in part to PP’s improvement in the polls, which may have
reduced the markets’ and economic agents’ perception of the policy uncertainty. Thus, the impact of the finalisation of the political
gridlock on the economy may not be of significant magnitude at this juncture. DBRS considers that a successful implementation of
additional measures to raise potential output and strengthen fiscal consolidation could lead to an additional boost in confidence,
consumption and investment.
The 2017 budget is likely to be the first test for the minority government
Shortly after being sworn in, the new government will face its first governance test. The new government is expected to attempt to
pass a budget law for next year and implement consolidation measures worth 0.5% of GDP for next year. Spain’s caretaker government
previously rolled over the 2016 budget for next year to meet a European Commission (EC) deadline to submit a spending plan by 15
October, 2016. Under the rolled-over budget, the government deficit would reach 3.6% of GDP in 2017, 0.5pp higher than the EC’s
Excessive Deficit Procedure fiscal target (3.1% of GDP in 2017). Therefore, additional measures are needed. The approval of the 2017
budget law will constitute the first test for the government’s capacity to navigate its political term and will set the precedent for further
discussions.
Even with its minority positon, the government has some leverage
The political framework provides some degree of stability to the minority government, which may provide it with the leverage to
implement its reform agenda. If the new government struggles to achieve progress on its agenda, however, doubts may emerge over
its durability.
Spain: Poll Results
50
(average monthly results )
45
40
35
30
25
20
15
10
5
0
Apr-14
May-14
Jun-14
Jul-14
Aug-14
Sep-14
Oct-14
Nov-14
Dec-14
Jan-15
Feb-15
Mar-15
Apr-15
May-15
Jun-15
Jul-15
Aug-15
Sep-15
Oct-15
Nov-15
Dec-15
Jan-16
Feb-16
Mar-16
Apr-16
May-16
Jun-16
Jul-16
Aug-16
Sep-16
Oct-16
First, the requirements for a no-confidence vote in the Spanish
political system make it more difficult for the opposition parties
to bring down a government without proposing a viable
alternative candidate. In other words, in order for a vote of noconfidence (constructive) to be successful, it has to include a
prospective successor supported by an absolute majority in
Congress. Given the current fragmentation of the Spanish
Congress and lack of a cross-party consensus among the
opposition parties, a “constructive vote of no-confidence”
appears to be a low probability event.
Second, Rajoy could force early elections starting in May 2017.
PP
PSOE
IU
UPyD
CiU
Amaiur
PNV
ERC
DBRS expects that the likelihood of such an action would
Ciudadanos
Podemos
Unidos Podemos
depend in part on the ability of the new government to advance
Source: Metroscopia, Celeste-Tel, CIS, NC-Report, GESOP, Simple Lógica, PSOE,
the implementation of its economic programme. According to
Sigma-2, PP, DYM, Invymark, My Word, GET, IAOCE, Dys, JM&A, Encuestamos,
the latest polls, a PP-Ciudadanos coalition could obtain a
TNS Demoscopia, Deimos Statistics, A&M, Sondaxe, DBRS.
majority government, if new elections were held. Moreover,
PSOE’s popularity has been declining significantly in the polls, and the party has been surpassed by Unidos Podemos in the left-wing
political space. If this trend were to continue in the coming months, the possibility of snap elections could act as a deterrent to a PSOE
blocking stance in Congress.
Global Sovereign Ratings
November 1, 2016
Spain ends political gridlock, but tests lie ahead
DBRS.COM
4
Javier Rouillet
Assistant Vice President - Global Sovereign Ratings
+44 20 7855 6686
[email protected]
Nichola James
Co-Head of Sovereign Ratings - Global Sovereign Ratings
+44 (20) 3356 1527
[email protected]
Fergus McCormick
Chief Economist - Co-Head of Sovereign Ratings, Global Sovereign Ratings
+1 212 806 3211
[email protected]
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November 1, 2016