S&P is none too impressed with the Kingdom of Spain, but Fitch thinks the outlook for the country is, at the very least, ‘stable’.
The ratings agency today affirmed Spain’s triple-A rating, citing “the headroom which exists in the government’s balance sheet to absorb the fiscal shock associated with the forthcoming recession and measures to support the banking sector”.
Here’s the Fitch statement in full (emphasis ours):
Spain’s rating is supported by the government’s strong balance sheet which has sufficient tolerance to absorb an anticipated sharp rise in debt. The sharp ongoing adjustment in the property sector and a severe global recession will contribute to a decline in real GDP of at least 2% in 2009 and Fitch expects the unemployment rate to peak above 16%. Against this backdrop, Fitch expects the general government fiscal deficit to rise to 6% of GDP in 2009 as government revenues decline by over 12%. Measures to support the banking sector will also add to the government’s borrowing requirement, although Fitch currently judges the contingent liability from the banking sector to be smaller than in some other economies with ‘AAA’-rated sovereigns, including the UK.
The government’s relatively moderate debt-to-GDP ratio – estimated at 39.4% of GDP at end 2008 – is expected to rise to around 60% of GDP by end 2010. With this debt ratio, Spain will still rank well below other large ‘AAA’-rated countries including France (72.4%), Germany (65.6%) and the UK (68.0%) and close to the forecast ‘AAA’ median. Fitch anticipates that general government debt will stay below other large ‘AAA’-rated sovereigns in the medium- to long-term as Spain’s economy is expected to recover gradually in 2011 and the government will likely return to fiscal consolidation.
Spain’s membership of the euro area supports its rating, as it eliminates the risk of a currency crisis, while Spanish financial institutions’ access to European Central Bank liquidity facilities has also helped them manage the global bank funding squeeze. Fitch notes that rising female labour force participation, an increasing share of temporary employment and high immigration rates point to improvements in the flexibility of the Spanish labour market since the 1990s. In addition Spanish exporters have maintained their share of global markets in goods and services in recent years, suggesting that the relative strength of domestic demand – rather than underlying competitiveness concerns – has been the main factor behind the rise in the external current account deficit.