Saturday, November 26, 2011

Spain's Equity Story

By Rui Li

Recently i read the equity story of Spain country. I found this article very useful and would like to share it with you. Here is the summary of it.

Spain, well positioned despite adjustments

Over the last 50 years, Spanish history is a narrative of social and economic success, comparable to progress in post-war Japan or Germany. Indeed, between 1960 and 2010 Spain tripled its economic weight in Europe (EU-15) and managed to come out stronger than it went into the crises of the nineteen seventies, eighties and nineties.

Nonetheless, the present profound crisis has unveiled a series of cumulative imbalances in its economy, including high private sector debt, a large current account deficit, overvaluation of real estate assets and labour market inflexibility. The crisis has also raised national budget deficits, although less than in neighbouring countries, and mined the strength of the banking system. While of limited magnitude, this latter effect has brought to light the need for change in a financial system characterised by duality.

The challenge is to heighten the competitiveness of the national economy with measures that generate investor confidence. Three important elements will contribute to reaching that objective. Firstly, Spain has considerable strength on which to base improvements in its competitiveness. Secondly, its economic
imbalances are being corrected. Lastly, the reforms undertaken in areas such as finance, labour and the consolidation and sustainability of public accounts are among the most ambitious world-wide.
As a result of those reforms and the adjustments introduced, Spain’s market image has changed for the better in recent months, as attested by investor behaviour, and the country has succeeded in clearly decoupling the perception of its economy from the situation prevailing in other peripheral nations (Ireland,
Greece and Portugal).

Spain can draw from its strengths to face the new era

The Spanish economy has sizeable strengths on which to base the growth of its activity and productivity in the years to come.
• It is well positioned internationally.
•  It is one of Europe’s foremost markets, both in terms of GDP per capita (the fourth largest European economy) and size (fifth largest EU economy in terms of GDP).
•   It has leading companies in key industries whose wide diversity in high growth markets generates stable profits and the flexibility needed to cushion shocks.
•  It has a dense infrastructure network, the outcome of 20 years of hefty investment.
Real foreign investment indisputably provides a good measure of the country’s appeal. Moreover, Spanish companies’ international presence on high growth markets has ushered in key economic change.

Foreign investment has continued to flow into Spain

It ranks seventh on the list of world-wide investment targets, and as a percentage of GDP, these inflows double the amounts hosted by countries such as Germany or Italy. Foreign multinationals generate 10% of the country’s employment and added value. Three key factors make the Spanish economy attractive for investors: its infrastructure network, its high percentage of university graduates and its status as a strategic enclave. Spanish companies’ international leadership in key industriesSpain has not only succeeded in attracting foreign investment, but has been an active foreign investor. As a percentage of GDP, it is the third largest foreign investor world-wide, doubling Italian and U.S. rates and quadrupling Japan’s. Spain invests more in Latin America than all but one other country.It continues to strengthen its lead in industries such as renewable energies, logistics, transport, tourism and automobile manufacture, and has significant growth potential in industries of the future such as biotechnology, the environment, water treatment, ICT and aerospace. In addition, R&D+I investment in recent years has favoured development not only in the aforementioned industries, but in high technology and added value businesses such as e-health and e-government.

Structural reform underway

This reform is imperative to recover investor confi dence. Analysts are now decoupling Spain from the group of peripheral economies in light of its structural strengths and the reforms in progress.

Banking sector restructuring: building a more solvent systemAlthough the process initiated has yet to be concluded, the reforms undertaken have strengthened the financial system and aff orded it greater transparency. These measures will favour lending, although an upturn in this regard is limited by lower demand in an environment of economic adjustment. At the same time, the reform will enable these strengthened institutions to access international markets under reasonable terms.

Fiscal consolidation: stabilisation of the budget defi cit and sovereign debtSpain was in a healthy position prior to the crisis. After the crisis, a strict fiscal adjustment programme had to be implemented, thanks to which the deficit was slashed by nearly half from 2009 to 2011. This reduction, quantified as fi ve per cent of GDP, was attained by raising revenues, upping the VAT, cutting back on spending and reversing certain discretional measures adopted at the beginning of the crisis. In 2013, Spain’s defi cit will revert to levels consistent with the European Stability and Growth Pact (3% of GDP), according the offi  cial forecast. Pension reform should also contribute to the long-term sustainability of public accounts.

As the IMF notes, the Spanish economy has obvious growth potential that can be intensified by progressing in areas such as fi scaldiscipline, fortifi cation of the domestic market and reduction of administrative formalities. The beneficial effects of recent reforms that have yet to be felt and the country’s high quality production resources further contribute to that potential. This will call for ongoing correction of the pre-crisis imbalances and continuation of the reforms undertaken.

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