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Spain: Selected Issues

Author(s):
International Monetary Fund. European Dept.
Published Date:
January 2017
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Assessing Spain’s Competitiveness1

Three years of current account surpluses, in conjunction with positive GDP growth, are a remarkable achievement but vulnerabilities remain, including the large net external debt positions. Strong export growth, a rising global export market share, and a larger number of exporting firms reflect increased competitiveness. However, an important share of export growth is concentrated in large firms, and firms’ entry into exporting activities has slowed as domestic demand started recovering. Imports, while compressed since the crisis, continue to have a high income elasticity which is a source of vulnerability as the economic recovery continues. Simulations based on estimated trade equations point to risks for the needed external debt reduction from an external demand slowdown, oil price increases, and real appreciation. By sustaining competitiveness and increasing productivity and firm growth, labor and product market reform could support competitiveness and export growth. Together with continued fiscal consolidation, this would help to gradually reduce vulnerabilities from the highly negative net international investment position.

A. Introduction

1. Spain has a large net external debtor position which is a source of vulnerability, although there are mitigating factors. While private sector deleveraged since the crisis, fiscal deficits and valuation effects slowed down the reduction in the net international investment position (NIIP). As a consequence, Spain’s negative NIIP is still among the largest in Europe (90 percent of GDP) and its large share of debt is a source of vulnerabilities in the medium term. The low interest environment and the long debt maturity act as mitigating factors.

2. Spain has sustained external surpluses since the crisis. Since 2014, both the current account showed surpluses and the economy expanded strongly, a combination that it is historically exceptional. The surplus was sustained by regained competitiveness and export growth, low oil prices, and low interest rates. The staff’s baseline forecast envisages current account surpluses in the order of 1.8-2.0 percent of GDP over the medium term. While export dynamism contributed to trade balance surpluses, the high income elasticity of imports continues to be a source of vulnerability.

3. Structure of the paper. Section B discusses strengths and vulnerabilities in Spain’s current account and net international investment position. Section C presents an external debt sustainability analysis (DSA) that is extended to incorporate estimated export and import demand equations. Section D analyzes the performance of Spain’s exporting firms in more detail. Section E summarizes the findings and presents the conclusions.

B. Spain’s Current Account and Net International Investment Position: Strengths and Vulnerabilities

Current Account

4. Spain’s external surpluses of the past three years are an exceptional achievement. Only since the post-crisis recovery has Spain been able to sustain a combination of positive current account balances with positive real GDP growth. From 1990 to 2012, Spain had current account deficits every year. Thus, while significant progress has been made in improving the outlook for external sustainability, this also puts into historical context the formidable challenges to sustainably reduce external imbalances.

Growth and Current Account Balances, 1990-2016

(Percent)

Sources: IMF, World Economic Outlook and IMF staff estimates.

5. Structural, cyclical, and external factors all played a role in current account surpluses. Strong export dynamics on the back of better competitiveness, a large positive terms-of-trade shock—due to the fall in oil prices—, and low interest rates resulting from the Euro Area monetary policy, helped the recent improvement in the current account. The steady recovery in non-energy imports, growing above GDP, partially offset the strengthening of the external balance.

Current Account Components

(Percent of GDP)

Sources: Bank of Spain; and IMF, World Economic Outlook.

6. Better export competiveness has been reflected in a growing global export market share. Three factors—wage moderation, firms’ internationalization, and ECB monetary policy—helped competitiveness. First, in the run up to the 2008 financial crisis, export shares remained resilient despite a substantial deterioration in price competitiveness. After the crisis, however, wage moderation helped regain competitiveness and raise export shares. This increase in competitiveness had an important impact on export performance as confirmed by latest estimates (Box 1). As a result, from 2010–15, Spain’s relative price adjustment was among the largest among European peers, and its export share growth (relative to world’s imports) stood out compared to others. Second, both market diversification and the increase in firms’ internationalization played a role in the export share growth (see Section D). Lastly, the ECB’s expansionary monetary policy also contributed to Spain’s competitiveness. Since 2014, the euro depreciated by about 20 percent against the US dollar, having a direct effect on Spain’s exports to non-Euro Area countries. The euro depreciation also had an indirect positive effect for Spanish exports: as an important component of its trade with other Euro Area countries is linked through global value chains, the euro depreciation also increased these countries competitiveness and exports, increasing their demand for Spanish products. 2

Exports’ Market Share: Cumulative Growth 2010-15

(Percent)

Source: IMF DOTS.

Real Exchange Rate: Cumulative Growth 2010-15

(Percent)

Source: IMF World Economic Outlook.

Box 1.Elasticities of Spanish Exports and Imports

Empirical estimates confirm that exports are sensitive to relative prices and external demand.

Using an error correction model, non-energy goods exports and services exports respond strongly to variations in the real effective exchange rate in unit labor costs terms (REER-ULC) both in the short and in the long run. The elasticity to foreign demand is also significant, highlighting the relevance of the global environment to support Spain’s export growth.

Imports are very sensitive to domestic demand and exports, but not the REER. In line with earlier findings (e.g., IMF, 2015), latest estimates show that non-energy goods and services imports are not elastic to the REER, while they depend strongly on domestic demand, with an income elasticity of about 1½. Moreover, there is evidence that goods exports also influence the path of imports, which is consistent with the presence of global value chains and a significant import content of exports in manufacturing industries.

Exports
Non-oil goodsServices
Error Correction Mechanism−0.43−0.19
Long term
Constant2.421.55
Foreign demand0.910.74
REERULC−0.63−0.42
Short Term
Δ Foreign demand0.701.96
Δ REER_ULC−0.24−0.07
Imports
Non oil goodsServices
Error Correction Mechanism−0.32−0.22
Long term
Constant−15.86−16.98
Domestic demand1.441.70
Exports0.450.36
Short term
Δ Domestic demand0.460.35
Δ Exports0.150.17
Estimation period:1995Q1-2015Q4
1/ Estimation of Error Correction Model in one step. Variables are in logarithms.

1 These results are in line with IMF (2015). Prades and Garcia (2015) findings are also similar, though they also explore the role of domestic demand in the export equation, which is omitted here.

7. The European Union (EU) is Spain’s largest trade partner. While the share of Spain’s exports to the EU declined 10 percentage points since the early 2000s, the EU remains the most important destination with 65 percent of Spain’s exports in 2015. As a result, about half of Spain’s nominal export growth in 2014 and 2015 is explained by exports to the EU. The share of exports with the UK is smaller than that with other large EU member states at about 3½ percent of GDP of which about a quarter is tourism. Thus, the direct impact of the UK exit from the EU is manageable. Moreover, even as exports to emerging markets have grown after the crisis, Spain still has a relatively low direct exposure to emerging markets growth slowdown.3

Contributions to Nominal Export Growth, by Destination

(Percent)

Source: Bank of Spain.

8. The export technological content has been stable and mostly concentrated in medium and high technology goods. About 45 percent of goods exports are goods with a medium-high technological content, with some recent growth in low technological content. Moreover, exports do not seem to have moved up in the productivity ladder, as the export composition remained roughly unchanged in the last decade. A move up the value-chain would require Spanish firms to step up their investment in intangibles such as research and development (R&D), training and advertising. The latest available data for investment in intangibles is from 2010 and show that Spain was one of the poorest performers in the EU-15.4

Goods Export Shares, by Technological Content

(Percent)

Source: OECD STAN Database.

9. The high income elasticity of imports continues to be a source of vulnerability for the trade balance. Since the recovery started, import volumes have grown strongly, though from low levels. For example, in 2015 imports expanded by over 5 percent in real terms, well above real GDP growth of 3.2 percent. Latest estimates put the income elasticity of imports at around 1½ (see Box 1).5 Thus, even though the baseline medium-term projection is one of sustained trade surpluses and gradual external sustainability improvements, the continued high import income elasticity could weigh on the size and sign of future trade balances.

Import Volume Growth

(Percent)

Source: IMF, World Economic Outlook.

10. Spain’s trade balance benefited significantly from lower oil prices. Spain has one of the largest energy trade deficits (as percent of GDP) in Europe, so the fall in oil prices in 2015 implied a larger positive terms-of-trade shock than for its peers. The fall in the oil price (of about 47 percent) gave an impulse to economic activity and also improved the trade balance by about €20 billion (2 percent of GDP). However, while oil prices are forecasted to remain below last decade’s average, the price volatility and uncertainty is a risk factor for the future trade balance.

Impact of Terms-of-Trade Shock from Oil Prices in 2015

(Percent of GDP)

Sources: IMF World Economic Outlook and IMF staff calculations.

11. Low interest rates have helped the income balance. Record low interest rates have reduced Spain’s external interest payments on its large level of gross external debt. At the same time, the remuneration of the increasingly diversified external asset portfolio has fallen less sharply, thus also improving Spain’s net income payments.

Effective Return Rates on Assets and Liabilities 1/

(Percent)

Sources: Bank of Spain; IMF, World Economic Outlook; and IMF staff calculations.

1/ Estimated as the ratio of current income to previous period asset holdings.

Net International Investment Position (NIIP)

12. Despite three years of current account surpluses the NIIP debtor position is still very large and its structure heavily reliant on debt, though there are mitigating factors. Spain has one of the largest negative NIIP position in Europe (about 90 percent of GDP at end-2015) and also has one of the highest net external debts ratios (88 percent of GDP at end-2015). Thus, the direct investment (equity) component of the NIIP is small compared to peers and provides little risk mitigation. However, the maturity structure is relatively favorable with only 9 percent of the portfolio investment falling due in the next twelve months. At the same time, the support by monetary policy through purchases of Spanish assets also acts as an additional and powerful mitigating factor against rollover and interest rate risks.

Net International Investment Position, 2015

(Percent of GDP)

Source: Eurostat.

13. While private sector deleveraging contributed to the net external debt reduction, this was partially offset by growing public debt. In the run up to the 2008 crisis, households and corporations were behind the current account deficits, while the public sector was a net saver that partially compensated. After the crisis, this pattern reversed and the private sector generated net savings, and the public sector ran deficits. As a result of this, between 2010 and 2015, the consolidated public sector NIIP (the sum of general government and the central bank) went from -17 to -54 percent of GDP. The private sector reduced its NIIP from -71 to -36 percent of GDP during this period.

Savings and Investment

(Percent of GDP, four quarters moving average)

Source: Haver Analytics.

Net International Investment Position by Institutional Sector

(Percent of GDP)

Source: Bank of Spain.

14. Valuation effects also have slowed the reduction in the NIIP. In the last decade valuation effects have been large and volatile, averaging about of -3 percent of GDP annually, when excluding the 2012 crisis year. From 2013-15, they have worsened the NIIP by more than 5 percent of GDP per year. Without valuation effects, the negative NIIP position would have been 17.5 percent of GDP smaller in 2015. Higher values of Spain’s liabilities reflect regained investor confidence and the ECB’s asset purchases. However, in 2015 the NIIP also suffered from a lower valuation of Spain’s foreign assets, especially direct investment, amounting to a valuation loss of about 3 percent of GDP.

Spain: Net International Investment Position and Valuation Changes

Sources: Bank of Spain; and IMF staff calculations.

C. An Extended External Debt Sustainability Analysis

15. Drawing on the estimated trade equations allows to expand the analysis of various shocks to Spain’s external debt sustainability. The standard external DSA is limited to relatively simple assumptions (comparable across a wide range of countries) to project a medium-term path of external debt. Taking the baseline projections for the non-interest current account, interest payments, debt stocks, GDP growth, and exchange rates, the external DSA computes the implied debt-to-GDP ratio. Basic scenarios can be computed by adding ad-hoc or historical-based shocks to this projections with the resulting debt-to-GDP ratios. Using exports and import elasticities from the error correction mechanism equations allows to simulate the behavioral response of the trade balance to shocks, both in the short and long run, and to estimate the debt-creating impact. Taking export and import deflators as given, scenarios can be constructed by adding shocks to the estimated determinants of export and import volumes.6 This also allows to create scenarios for changes in oil prices, real effective exchange rate, domestic or external demand, which are not directly included in the standard external DSA.7

16. Simulations show that the projected trade balance surplus over the medium term is subject to risks. The biggest risk arises from a slowdown in trading partners growth:

  • In a baseline scenario that assumes broadly unchanged competitiveness position and broadly unchanged trade partners’ growth, in the medium run the trade surplus is projected at 2.9-3.1 percent of GDP (current account surplus of 1.8-2.0 percent of GDP) and external debt at 142 percent of GDP.

  • In a scenario in which the Euro appreciates against the USD by 30 percent, the REER-ULC would appreciate by 8 percent, slowing down export growth and reducing the trade balance to about ½ percent of GDP in the medium term. External deleveraging would be smaller than in the baseline, as external debt would be 149 percent of GDP in 2021 (8 pps above the baseline). Other factors, such as a reversal of the wage moderation, could also weigh on relative prices and external imbalances.

  • In a scenario in which the oil price reverts to its 2001–15 average of US$ 66 in 2017 would reduce the trade balance to 1.4 percent of GDP, and external debt to 152 percent of GDP by 2021.

  • Should external demand decelerate by 1 percentage point every year in the projection period, export growth would slow down, reducing the trade balance to 1.7 percent of GDP and implying external debt of 152 percent of GDP in the medium term.

  • In a scenario that combines all negative shocks (Euro appreciation, oil price increase, and external demand deceleration) the trade balance would be hit much more severely, resulting in a deficit of about 1½ percent of GDP which would imply an external debt of 157 percent of GDP.8

17. The materialization of negative shocks could decelerate the projected reduction of the external debt. Taken individually, each of the negative shocks to the trade balance would raise debt in the medium run compared to the baseline, but the debt ratio would still be below the 2015 level. However, a combined scenario in which oil prices increase, there is a loss in competitiveness, and trade partners’ demand slowing would weaken Spain’s external position by adding 13 percent of GDP to Spain’s external debt in 2021 compared to the baseline which is barely below the 2015 debt ratio.

External Debt: Scenarios under Various Shocks

(Percent of GDP)

Sources: IMF World Economic Outlook and IMF staff calculations.

D. A Closer Look at Spain’s Resilient Export Performance

18. Large firms’ exports have played a key role in Spain’s strong overall export performance. In 2015, the largest 100 exporters (about 0.2 percent of all exporting firms) accounted for 42 percent of total exports, while the largest 5,000 exporters (about 10 percent of all exporting firms) accounted for about 90 percent of total exports. This high export concentration is explained by the high atomization in Spanish firms: the average Spanish firm size is a fraction compared to that of many other advanced economies. Thus, atomization limits export capacity as firm size is the largest single determinant for Spanish firms to start exporting (Cardoso and others, 2012).

Export Share and Number of Exporting Firms, 2015

(By annual exports)

Source: ICEX.

19. Export concentration varies significantly between destinations. Differences in export shares concentration can be an indirect evidence of the presence of varying fixed costs of exporting. Distance to markets increases the cost to export. Thus, farthermost markets (i.e. non-EU countries) are typically served by fewer (and more productive) firms, making goods exports to non-EU destinations even more concentrated.

Manufactured Goods: Share of Exports by Destination

(Percent) 1/

Source: Agencia Tributaria Espanola.

1/ Export shares per firm group are calculated in marginal increments.

20. On average, Spanish firms are not particularly reliant on selling abroad. When compared to non-exporting peers both the average large and SME Spanish exporting firm have a relatively low turnover from exports.9

21. Larger exporters have been more productive and resilient to macroeconomic shocks. Larger firms tend to have higher productivity growth, so their unit labor costs typically rise less than for smaller and less productive firms. This explains why Spanish exports were resilient in the run-up to the crisis when the real effective exchange rate appreciated significantly.10 The literature named this combination of resilient export shares and an appreciating real effective exchange rate (in unit labor cost terms) the “Spanish Paradox” (Antras and others, 2010). Also, more productive firms are more likely to exhibit a higher increase or a lower decline in their average export growth rates. Altomonte and others (2015) find that export growth during the current account adjustment in European deficit countries was mostly driven by the export growth of the most productive firms. The less productive firms, on the contrary, were not able to grow in the exports market.

Exports to Turnover Ratio

(Percent)

Source: OECD Entrepreneurship at a Glance 2015.

22. After the crisis, Spain’s export growth is linked to the rise in the number of (mostly large) exporting firms. The number of exporting firms rose by some 50 percent between 2011 and 2015. About 70 percent of total export growth since 2011 is explained by the number of firms that export more than €50 million per year (an increase of 107 companies in this category). A reason behind this strong export performance is that Spanish firms increased their competitiveness thanks to structural reforms and wage moderation. But also the collapse in domestic demand may have forced Spanish firms to seek sales abroad.

Export Value Growth: All Exporting Firms

(Percent) 1/

Citation: 2017, 24; 10.5089/9781475572766.002.A002

1/ The sum of the growth rate in average exported value per firm and the growth rate of the number of exporters equals the growth rate of total exported values.

Export Value Growth: Regular Exporters

(Percent) 1/2/

Citation: 2017, 24; 10.5089/9781475572766.002.A002

Source: ICEX.

1/ The sum of the growth rate in average exported value per firm and the growth rate of the number of exporters equals the growth rate of total exported values.

2/ For each year, regular exporters are defined as firms that have exported at least in the last 4 periods.

23. Firms that started to export after the crisis tended to remain exporting, but the recovery in domestic demand may have slowed down this process. The increase in regular exporters (those that have exported for at least four consecutive years) reflects that many firms that started exporting after 2011 are still exporting. This factor can be seen as a structural improvement, especially given the fixed costs firms have to incur in order to enter foreign markets. Therefore, firms that started exporting continue to export, but as domestic demand recovers, there may be no additional incentives for a significant number of newer entrants to export activity.11

24. Future dynamism in firm internationalization hinges on pursuing an ambitious reform agenda. Further progress in labor and product market reform would increase firm competitiveness and would ease entry into exporting activities by removing obstacles to firm growth. These reforms would not only attain the objective of supporting external competitiveness and reducing external imbalances, but would also foster employment creation (see chapter I of Selected Issues paper).

E. Conclusion

25. While Spain has sustained a commendable external adjustment, the large and negative NIIP remains to be a source of vulnerability. Since 2014, the current account stayed in surplus while at the same time the economy recovered strongly, thanks to regained competitiveness and export growth, low oil prices, and low interest rates. However, both the overall NIIP debtor position and the net external debt are among the largest when compared to peers. With the private sector having deleveraged significantly already, the slow reduction in the NIIP is attributable to growing public debt and valuation effects. As both private and public indebtedness with the rest of the world are still high, negative shocks from international financial markets could be transmitted to the domestic economy through higher interest burden.12

26. Empirical estimates show that exports are sensitive to relative prices and external demand, while imports are very sensitive to domestic demand and exports. Regained competitiveness played a role in post-crisis export dynamism. In spite being compressed since the crisis, import growth associated to the economic recovery is a source of risk for the external surplus.

27. Since the crisis the number of exporting firms grew substantially with the bulk of exports attributable to large firms. After the crisis many more firms started exporting seeking new markets to compensate for a collapsing domestic demand. Even though many of those continue to export (and thus becoming “regular” exporters), dynamism in new exporters has become more subdued with the recovering economy. In terms of export shares by firm size, large and more productive firms account for an important part of Spain’s exports. These firms remained competitive before the crisis and explain a large share of post-crisis export growth.

28. Addressing Spain’s large net external debtor position together with internal imbalances requires steady and continued policy and reform efforts. Preserving both the current account surplus together with a dynamic economy should be a policy priority as it would gradually reduce vulnerabilities that arise from the external sector. On the fiscal side, this implies strengthening the public sector balance sheet and gradually reducing the fiscal deficit so as to increase external resilience. On the structural side, it implies further enhancing competitiveness, productivity growth, and employment. In particular, product market reforms that reduce barriers to firm growth and firm internationalization would also foster external competitiveness and resilience against negative shocks. Policies targeted to increase firms’ international competitiveness (such as fostering R&D and innovation in general) would also contribute to continue reducing Spain’s domestic and external imbalances.

References

    AltomonteC.T.Sono and H.Vandenbussche2013Firm-level Productivity and Exporting: Diagnosing the Role of Financial ConstraintsProduct Market Review (2013).

    AntràsP.R.Segura-Cayuela and D.Rodriguez-Rodriguez2010Firms in International Trade (with an application to Spain)SERIEs Invited Lecture at the XXXV Simposio de la Asociación Española de Economía.

    Bank of Spain2014The Recent Behavior of Imports and their DeterminantsEconomic Bulletin April 2014 Quarterly Reporto on the Spanish Economy (Madrid).

    Crespo RodríguezA.G.Pérez-Quirós and R.Segura Cayuela2012Competitiveness Indicators: The Importance of an Efficient Allocation of ResourcesEconomic BulletinJAN (2012).

    CrespoAranzazu and R.Segura-Cayuela2014Understanding CompetitivenessEuropean University Institute Working Papers 2014/20 (Italy).

    Correa-LópezM. and R.Domenech2012La Internacionalicion de la Empresa EspanolaBBVA Research WP 12/30. Available via the Internet: http://goo.gl/F4OybC.

    HospidoL. and E.Moreno-Galbis2015The Spanish Productivity Puzzle in the Great RecessionBank of Spain Working Paper 1501 (Madrid: Bank of Spain).

    International Monetary Fund (IMF)2015Spain—Article IV Consultation IMF Country Report 15/232 (Washington).

    VerscheldeM.M.DumontG.Rayp and B.Merleved2014European Competitiveness-A Semiparametric Stochastic Metafrontier Analysis at the Firm LevelECB Working Paper 1701 (Frankfurt: European Central Bank).

    PradesE. and C.Garcia2015Actualizacion de la function de las exportaciones espanolas de bienesBoletin Economico Banco de EspanaApril2015.

    VidonE.2011Spain’s External Sustainability“ in Spain—Selected Issues Paper IMF Country Report 11/216 (Washington: International Monetary Fund).

    XifreRamon2014The Competitiveness of the Spanish Ecoomy, a Bird’s Eye View of the Four Largest Euro Area EconomiesIESE Research Paper D/1088 (Barcelona: IESE Business School).

Prepared by Federico Grinberg.

An example of this are the German-Spanish car manufacturing production chains.

See box on spillovers from Latin America in the Staff Report.

See first chapter of the Selected Issues paper.

See also IMF (2015) for an alternative estimation of imports’ income elasticities.

This is done by disaggregating exports and imports into goods (energy and non-energy) and services to account for different elasticities.

See Appendix IV in Staff Report for assumptions and forecasts of key underlying variables for the external DSA.

Note that this scenario would include negative demand and supply shocks.

Of course, there could be relevant differences in the firms’ distribution of the export to turnover ratio.

In aggregate price indicators for the whole economy, such as the unit labor costs or consumer price index, the different performance of large exporting companies was not fully reflected due to aggregation and dispersion bias (Altomonte and others, 2012).

The negative role of domestic demand in export growth is consistent with the findings at aggregate level in Prades and Garcia (2014). They find evidence at the aggregate level that the domestic demand contraction may have played a role in goods exports dynamism.

The ECB Public Sector Purchase Program (PSPP) is a mitigating factor as it has provided stable demand for Spain’s public sector liabilities. See Annex II in Staff Report for a more detailed analysis on the macro-financial linkages between domestic institutional sectors and the rest of the world.

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