Fitch: Limited Sovereign Risk Impact from Spain's New Government...

Fitch: Limited Sovereign Risk Impact from Spain's New Government
01 JUN 2018 12:31 PM ET


Fitch Ratings-London-01 June 2018: The change in Spain's government following today's no-confidence vote against the former Prime Minister Mariano Rajoy has a limited impact on Spain's sovereign credit profile, Fitch Ratings says. We do not expect marked near-term changes to economic and fiscal policy, nor for the new government to see out a full term, while the absence of any rise in support for populist and anti-euro parties limits risks to credit fundamentals after the next election.

The new Prime Minister, Pedro Sanchez, delivered the vote and gained the disparate support of the left-wing Podemos, Catalan pro-independence parties and the Basque Nationalist Party, despite his Socialist Party commanding just 84 (out of 350) parliamentary seats. We do not view the vote as representing majority support for a lasting Socialist Party government and do not expect significant reforms, with an early election on the cards.

In upgrading Spain in January to 'A-'/Stable from 'BBB+'/Positive we highlighted the "limited prospects of substantial new economic reform in this parliament" and that there were risks of an early election. The recent approval of the budget mitigates the impact of political uncertainty, as does the fact that Sanchez has said he will not seek to reverse it. Since our upgrade, Spain's general government deficit has performed in line with our expectation, at 3.1% of GDP in 2017, while our forecasts of a further cyclical reduction in the deficit to 2.4% in 2018 and 2.0% in 2019 remain largely consistent with fiscal performance this year and with the recently approved budget.

Furthermore, economic confidence is supported by strong GDP growth, up 3.0% year-on-year in 1Q18, and which has proved robust to earlier bouts of political uncertainty. Fitch forecasts a cyclical moderation in Spain's GDP growth from last year's 3.1% to 2.6% in 2018 and 2.3% in 2019.

While we expect an early election, the timing is unclear and will depend on how successful the new minority government is in securing support for its policy agenda and how this affects its public approval. At the next election, the fragmented political landscape means that different coalition options are possible and there is a possibility of a further period of unstable government. However, the absence of any increase in populist or Eurosceptic public support reduces risks of a marked change in overall macro and fiscal policy that weakens credit metrics. The only party that has made significant gains in the polls since the last election is the centrist Ciudadanos. At the same time, there is some upside potential that a more stable government will be formed that is better able to command majority support for economic reform after the next election.

Our next sovereign review of Spain is due on 13 July.

https://www.fitchratings.com/site/pr/10033222