Spain: Staff Report for the 2003 Article IV Consultation

Although not escaping the global slowdown, the Spanish economy has weathered it relatively well. The discussions focused on minimizing short-term risks and on identifying the structural reform priorities for the next government. However, household indebtedness has continued to rise rapidly, recently surpassing the EU average; the authorities viewed the related risks to growth as contained. The discussions also centered on issues of fiscal policy implementation. Although unemployment has been halved since the mid-1990s, it remains high and a number of rigidities persist.

Abstract

Although not escaping the global slowdown, the Spanish economy has weathered it relatively well. The discussions focused on minimizing short-term risks and on identifying the structural reform priorities for the next government. However, household indebtedness has continued to rise rapidly, recently surpassing the EU average; the authorities viewed the related risks to growth as contained. The discussions also centered on issues of fiscal policy implementation. Although unemployment has been halved since the mid-1990s, it remains high and a number of rigidities persist.

I. Economic Background

1. While not escaping the global slowdown, the Spanish economy has weathered it relatively well, thanks to the strength of domestic demand (Table 1). After several years of growth in excess of 4 percent, propelled also by the tailwinds of EMU participation, the expansion lost steam in 2001, and growth slowed to 2 percent in 2002. The slowdown reflected euro area weakness and the worldwide slump in tourism, with net exports exerting a drag on activity. But—in contrast to most other EU countries—domestic demand held up well, buoyed by private consumption, public infrastructure spending, and booming construction activity. Output growth thus remained well above the euro-area average, ensuring further real income convergence (Figure 1). In addition, reflecting improved flexibility in labor markets, employment continued expanding. Both these developments contrast with the experience during previous slowdowns, when growth would fall well below the euro-area average in the midst of sizable job losses (Figure 2). Productivity performance, however, has remained lackluster, partly reflecting the success in drawing new, lower-skilled entrants into employment.1 At the same time, household indebtedness has risen rapidly, amidst a continued housing price boom.

Table 1.

Spain: Main Economic Indicators, 1998-2004 1/

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Sources: IMF, World Economic Outlook and Information Notice System; and Fund staff estimates.

Figures for 2003-04 are Fund staff projections.

Change as percentage of previous year’s GDP.

Year-on-year percentage change.

Based on national definition, i.e., the labor force is defined as people older than 16.

As of October 2003.

Figure 1.
Figure 1.

Spain: Real Sector, 2000-03

Citation: IMF Staff Country Reports 2004, 089; 10.5089/9781451812060.002.A001

Sources: Bank of Spain; and Eurostat.
Figure 2.
Figure 2.

Spain: Cyclical Downturns, 2002 vs. 1993

Citation: IMF Staff Country Reports 2004, 089; 10.5089/9781451812060.002.A001

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

Selected Economic Indicators, 1997-2003

(Real growth rates in percent, unless otherwise noted)

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

Annual averages.

Year on year.

Contribution to growth.

uA01fig01

GDP Growth: Demand Decomposition 1/

(Percent change from previous year)

Citation: IMF Staff Country Reports 2004, 089; 10.5089/9781451812060.002.A001

1/ Bars correspond to years 2001–03; white and black bars correspond to Spain and EU respectively.

2. Inflation has declined since late 2002, but the cumulative inflation differential with the euro area has eroded competitiveness. From around 4 percent in late 2002, inflation declined to 2.7 percent by end-2003. In part, the deceleration in inflation reflected a favorable base effect in domestic energy prices, the end of supply disruptions associated with livestock disease, and the fading of the euro-changeover effects. As a result, the year average inflation differential with the euro area narrowed to 1 percentage point in 2003 (from 1¼ percentage points in 2002—Figure 3). The cumulative differential since EMU qualification in 1997, however, amounts to about 6 percentage points, contributing to a loss in competitiveness relative to other euro-area countries which is also revealed in a relatively faster rise in unit labor costs (Figure 4). Nevertheless, overall export market shares have held up well to date.

Figure 3.
Figure 3.

Spain: Headline and Core Inflation, 1997-2003

Citation: IMF Staff Country Reports 2004, 089; 10.5089/9781451812060.002.A001

Source: Eurostat.
Figure 4.
Figure 4.

Spain: Competitiveness and Exports, 1990-2003

Citation: IMF Staff Country Reports 2004, 089; 10.5089/9781451812060.002.A001

Sources: IMF, International Financial Statistics, Direction of Trade, and World Economic Outlook; Bank of Italy; 1ST AT; and Organization for Economic Cooperation and Development.1/ As measured by real growth of exports of goods and nonfactor services less growth of import demand in partner countries.

3. The general government is estimated to have recorded a small surplus in 2003, helping counter very easy monetary conditions. The strength of social security contributions is estimated to have raised the social security surplus to close to 1 percent of GDP in 2003, more than offsetting a small central government deficit (Table 2). Considerable uncertainty still surrounds the outcome for regional governments: assuming they balance their budgets as required under the BSL, the general government accounts would record a surplus of around ½ percent of GDP in 2003, entailing appreciable fiscal withdrawal. For its part, monetary policy is clearly accommodative, with short-term real interest rates in negative territory for over two years.

Table 2.

Spain: Fiscal Accounts, 1998-2004

(In percent of GDP)

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Sources: Cuentas Financieras, Bank of Spain; Intervention General de la Administration del Estado; and Fund staff projections.

Assumes territorial governments are in balance as required by the Budgetary Stability Law.

Excludes 0.1 percent of GDP received from the auction of mobile telephone licenses in 2000.

uA01fig02

Short-term Real Interest Rates

(In percent)

Citation: IMF Staff Country Reports 2004, 089; 10.5089/9781451812060.002.A001

4. The prevailing prospect is for a moderate but sustained recovery in the course of 2004, with a persistent inflation differential versus the euro area. Staff, official and Consensus projections do not differ markedly. The staff’s GDP growth forecast is slightly above that of the authorities for 2003 (2.4 versus 2.3 percent) and slightly below for 2004 (2.8 versus 3 percent). Such a performance—still projected to be largely driven by the strength of domestic demand, with a continued, albeit smaller, drag from net exports—would again appreciably outstrip that expected for the euro area. At the same time, in both staff and official projections, inflation would remain in the order of 2.7 percent in 2004 (as measured by the private consumption deflator in the latter case)—implying a differential of around 1 percentage point with respect to prevailing forecasts for euro area inflation. Inflationary pressures may also emanate from the recent pickup in contractual wage increases (notably in construction and services), and the increasing recourse to wage indexation clauses (see ¶27).

Inflation and Contractual Wage Increases

(in percent)

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Source: Bank of Spain.

Data through September.

II. Report on the Discussions

5. The discussions focused on minimizing short-term risks and on identifying the structural reform priorities for the next government. Over a number of years, policy implementation in Spain has been largely congruent with the tenor of Fund advice (Box 1). The discussions were also marked by broad concurrence, and centered on the requirements imposed by emerging domestic risks and on the reforms needed to strengthen performance going forward. On the first count, the authorities viewed the ebullience of the housing market and rising household indebtedness as driven essentially by fundamental factors and expected a gradual and orderly adjustment. They nonetheless agreed that it was incumbent on policies to minimize any related risks, with the main short-term requirements seen to be continued fiscal restraint, flanked by firm financial sector oversight. On the structural front, the discussions emphasized the need for measures to reform the wage negotiation process, improve the working of the housing market, strengthen competition in sheltered sectors, and place the pension system on a sustainable long-term footing. In addition, staff put greater weight than the authorities on the contingent risks that could arise from the variety of financing arrangements for the large public investment effort, and the related importance of close monitoring and full transparency. Staff saw benefits in Spain undertaking a Financial Sector Assessment Program (FSAP) and a fiscal transparency ROSC, and the authorities have since agreed to both.

Spain: Policy Recommendations and Implementation

Policy implementation in Spain has for several years been largely in concert with Fund policy advice, and based on two main pillars: a stability-oriented fiscal policy and structural reforms in labor and product markets. Fiscal consolidation was pursued steadily, was largely expenditure-based, and avoided the procyclical responses that the Fund saw as a potential risk in case of a rigid implementation of the Budgetary Stability Law—in itself a very useful fiscal framework. However, the recommended strengthening of fiscal reporting and monitoring has fallen short of requirements, while comprehensive pension reform—key to long-term fiscal sustainability—has remained largely on the drawing board.

A series of structural reforms have appreciably improved the workings of labor and product markets. Political and institutional constraints have however stood in the way of two long-advocated measures: reform of the wage-setting system to secure greater wage differentiation, and of the land supply and zoning process to improve its responsiveness and transparency. In addition, growing regional responsibilities in several areas have limited the central government’s reach, inter alia complicating the implementation of competition policy along the lines recommended by the Fund.

Finally, despite encouragement in this direction, Spain has made no recourse to the Fund’s standards and codes initiatives. Recently, however, the authorities have advanced a formal request for a fiscal transparency ROSC and a FSAP; the latter had been pending since the last consultation.

A. Risks to the Outlook and Related Policies

With agreement on the baseline projection, the discussions dwelt on the main risks to this scenario arising from household indebtedness, the housing market boom, and losses in competitiveness.

6. Though household indebtedness has continued to rise rapidly, recently surpassing the EU average, the authorities viewed the related risks to growth as contained. First, they noted that much of the increase in indebtedness was associated with house purchases, and that—with real estate assets accounting for approximately ¾ of total household wealth—the acquisition of an appreciating asset had generated a significant counterbalancing wealth effect. Second, low mortgage interest rates and a lengthening of maturities had contained households’ debt servicing burden, while rising female workforce participation had led to an appreciable increase in the number of two-income households and a related strengthening of debt servicing capacity (Figure 5). Third, there had been hardly any recourse to mortgage equity withdrawal to finance consumption (as in the United States and the United Kingdom), despite the high share of owner-occupied dwellings. Against this background, banks’ stress tests indicated that debt servicing strains would arise only in the event of a very rapid rise in interest rates accompanied by worsening unemployment—a scenario generally viewed as unlikely in current circumstances (see further discussion in ¶21).

Figure 5.
Figure 5.

Spain: Housing Market, 1990-2003

Citation: IMF Staff Country Reports 2004, 089; 10.5089/9781451812060.002.A001

Source: Bank of Spain.
uA01fig03

Mortgage Credit Growth and Debt of Households

Citation: IMF Staff Country Reports 2004, 089; 10.5089/9781451812060.002.A001

Share of Owner-Occupied Dwellings

(In percent, most recent observation)

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Source: ECB, “Structural Factors in the EU Housing Markets”, 2003.

7. The authorities thus viewed the process of increased household indebtedness as a natural shift to the new (EMU-related) environment, although a leveling off in its pace was desirable. The latter point had been repeatedly made by the Bank of Spain in its public pronouncements, and the authorities had also taken measures designed to diminish risks in the mortgage market (¶22). Beyond such appeals, however, they felt that few policy levers would be effective in the face of very easy financing conditions. While concurring, staff saw some scope for a containment of demand through a phasing out of generous tax incentives for home ownership.2 The authorities were not ready to contemplate such a step, noting that any such change would need to be extremely gradual. They placed the emphasis rather on stimulating the limited supply of rental units, that has been declining since the early 1990’s. The authorities were hopeful that existing allowances in the personal income tax and the recently approved tax regimes for rental business activities would revive the rental market.3 In this context, they acknowledged that the legal framework for rental properties also needed to be improved.

Structure of Housing Market Occupancy

(In percent)

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Sources: Bank of Spain, and INE.

8. House prices continued to rise at double-digit rates for the fifth consecutive year in 2003, but the mission’s interlocutors saw the phenomenon as largely driven by market fundamentals. Both the authorities and market participants underscored a number of structural demand factors behind the house price boom, including demographic trends,4 large immigration flows, purchases of second homes, and nonresident demand. The latter’s rapid rise, particularly in coastal areas, was attributed to the growing attraction of Spain as a retirement destination for aging populations elsewhere in the euro area, spurred also by the absence (in EMU) of exchange rate risk for such purchasers. These factors, acknowledged also by staff, were seen as providing reasonable reassurance that the boom was unlikely to be a “bubble,” even though such calls were intrinsically difficult to make.

uA01fig04

Real Housing Price Indices, 1990-2003

(1995 = 100)

Citation: IMF Staff Country Reports 2004, 089; 10.5089/9781451812060.002.A001

Source: Bank of spain.

9. At the same time, there was recognition of some overvaluation and of the risks inherent in a persistence of the process. Bank of Spain analysis (albeit not universally shared) placed house prices at between 8 and 20 percent above their long-run equilibrium level. The authorities pointed to emerging evidence of a gradual easing of house price pressures, including the lengthening of the period that housing units remain on the market. Since the mission, house price increases have indeed moderated slightly. The authorities also expected the vigorous supply response to contribute to contain price pressures, with the annual increase in total dwellings doubling since the turn of the decade (to some 600,000 in 2002). Staff again pointed to the long-standing need to lift the constraints on the supply of developable land.5 The authorities, while welcoming the mission’s call for a nonpartisan pact on this issue, placed at least equal importance on improving the urban zoning process, viewed as slow and opaque.

uA01fig05

Total Dwellings 1/

Citation: IMF Staff Country Reports 2004, 089; 10.5089/9781451812060.002.A001

1/ As of June 2003, total dwellings amount to 21.9 millions, an increase of roughly 318 thousands from December 2002.2/ Annual average.

10. Finally, staff pointed to the risks of slipping competitiveness, with the effects of the persistent inflation and cost differential reflected in declining export margins. The authorities countered that export margins remained comfortable—as evidenced by exporters’ surveys—and that market shares had held up comparatively well. They agreed, nonetheless, that recent trends could not continue indefinitely without eventually impinging upon export performance, and viewed further euro strength as an appreciable risk.6 Looking further ahead, they felt that a reform of the wage-setting system would be key to ensuring the economy’s competitiveness over time (see ¶26). The mission also discussed the challenges posed by EU enlargement to Eastern European countries whose work force is both relatively well trained and low cost (Box 2; and Selected Issues paper). The authorities expressed confidence that overall this process would entail more opportunities than costs, acknowledging, nonetheless, that some sectors could face comparatively greater adjustment difficulties—a factor that further highlighted the importance of reforms to increase the economy’s flexibility.

Export Margins

(Year-on-year rate of change)

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Source: Bank of Spain.

Assumes a common unit labor cost for the economy.

Wages and Schooling 1/

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Sources: ILO, Eurostat, and the European Economy Group.

Data refer to the manufacturing sector, wage and schooling data are respectively for 2000 and 1999.

EU Enlargement and Spain: More Opportunities than Challenges

A background study analyzes the challenges and opportunities for Spain arising from EU enlargement. These are grouped in four areas: international trade, foreign direct investment (FDI), EU structural funds, and migration. A series of estimates—based on a gravity model for international trade—suggest that there is substantial scope for increased trading opportunities between present EU member countries (including Spain) and the group of accession countries. Moreover, the empirical evidence—based on reduced-form models—suggests that, overall, Spain’s exports are not likely to be adversely affected by enlargement, although their composition may vary. In particular, the evidence suggests that a decline in exports of machinery and transportation equipment is possible. Further, the study suggests that Spain’s FDI flows are also unlikely to vary much as a result of enlargement. In contrast, enlargement will—by lowering the average EU income level—significantly reduce Spain’s allocation of EU structural funds over the medium term, with a particularly strong impact for some regions. Lastly, immigration to Spain from accession countries is also set to increase (from a small base), but mass immigration flows associated with enlargement appear unlikely.

The study was presented in two seminars during the consultation, with audiences generally agreeing with the conclusions. There was, nonetheless, a widespread sentiment that the impact of enlargement should not be overstated: trade between the EU and accession countries has already been largely liberalized, and evaluating comparative advantage solely on the basis of countries’ productive structure could be misleading. Indeed, the resilience of Spain’s export market shares was attributed largely to quality differentials. Some more technical aspects of the study were also questioned, particularly the long-run implications of the study’s dynamic model as enlargement could involve a regime change. Finally, interest was expressed in an analysis identifying which sectors of the Spanish economy were likely to benefit from enlargement.

B. Fiscal Policy

The near-term stance

11. There was agreement that Spain’s sustained fiscal adjustment was a cornerstone of its current performance that needed to be preserved. The authorities viewed Spain’s experience since 1996 as a good example of growth-enhancing consolidation, with a deficit reduction of 5½ percentage points of GDP (or 4¼ percentage points in structural terms) accompanied by annual average growth of about 3¼ percent (Box 3). The adjustment, while undoubtedly aided by the EMU-related decline in interest rates, also relied on cuts in noninterest current expenditure which paved the way for credible tax relief, and an ensuing virtuous circle of economic growth and buoyant revenue performance. In light of this experience, the authorities saw considerable benefits in close observance of a disciplining fiscal framework, be it the Budgetary Stability Law (BSL) in Spain or the Stability and Growth Pact (SGP) at euro-area level.

How was the Budget Balanced?

Spain’s fiscal adjustment, aided by EMU qualification, largely meets the requirements of successful consolidation. Persistent fiscal imbalances—with deficits averaging 5 percent of GDP in the early 1990s—have given way to a “close to balance or surplus” outcome since 2001. While EMU participation clearly played an important role in facilitating fiscal adjustment, Spain’s fiscal consolidation experience since 1996 scores well on the broader requirements for successful, and expansionary, fiscal corrections. The adjustment is estimated to have been largely structural in nature, and the economy grew vigorously even in the midst of fiscal retrenchment. The pace of underlying adjustment averaged about ½ of a percentage point of GDP per year and—in contrast with experience elsewhere—took place during both the upswing and downswing.

The adjustment was based mostly on structural expenditure cuts, with reductions in primary current spending, as part of the effort to meet the Maastricht criteria, leading also to substantial interest savings.1 All in all, structural expenditures fell by about 3¼ percentage points of GDP from 1996–2003, accounting for the bulk of the Consolidation. First, a major component of the budget—the wage bill—was reduced appreciably. Although this partly reflected a wage freeze (a generally unsustainable avenue), civil service employment was also trimmed. Second, social security and welfare transfers were brought down through reforms that reduced their generosity on a permanent basis (with, for example, an increase in the number of years used to compute the pensionable base salary). Third, capital spending was safeguarded, with budgeted amounts remaining roughly unchanged (though off-budget operations increased; ¶14) Finally, EMU qualification was itself a crucial ingredient, leading to a virtuous circle—oft noted in the literature on expansionary fiscal adjustments—whereby an initial consolidation reduces interest rates, lowers debt servicing costs, sustains economic activity, and paves the way for further consolidation.

Spain: General Government Accounts 1/

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In percent of GDP.

Nontax revenue fell as profitable public enterprises were privatized, and Bank of Spain profits—boosted by extraordinary profits associated with exchange rate operations prior to EMU—declined with the ad option of the euro and following Eurostat guidelines were excluded from public sector revenues.

Refers to annual average in “Adjustment” columns.

Increased revenue collection, which has been resilient, also aided consolidation. Vigorous economic growth boosted corporate tax and VAT collections, more than offsetting cuts in personal income tax rates. The rise in revenues proved to be resilient to the cycle, with tax collection remaining buoyant also during the recent economic slowdown. This partly reflects the emergence of underground activity and the regularization of illegal immigrants, and a related strong increase in social security affiliations.

1 Evidence for OECD countries suggests that expenditure-based adjustments are more durable (and less likely to reduce economic growth) than revenue-based adjustments.

12. The 2004 budget’s “zero deficit” target would imply fiscal loosening; staff argued rather for fiscal restraint. Given the estimated 2003 surplus, the mission noted that a balanced budget outcome in 2004 would entail a structural deterioration of up to ½ percentage point of GDP. The authorities considered that firm observance of the BSL’s framework—centered on a binding central government expenditure ceiling and a contingency fund for unforeseen eventualities—and the full play of automatic stabilizers would likely deliver a continued surplus. Given very easy monetary conditions and the domestic risks discussed above, staff saw merit in a more proactive approach to ensure a restrictive fiscal stance. It thus advocated (i) containing central government spending to below the budget ceiling (by, for example, exploiting the scope provided by a new law on public subsidies to rationalize and reduce such expenditures); (ii) actively pursuing greater cost efficiency and savings in health care, now fully devolved to all the regions (addressing, for example, the high demand for prescription drugs and the recognized abuses of prolonged sick leave); and (iii) firmly safeguarding the contingency fund for truly exceptional circumstances. In response to staff’s suggestion to formally change the 2004 budget target, the authorities expressed reluctance out of concern that it could generate undesirable pressures on the “use of the surplus.”7 Although the fiscal framework was clear on the matter (with fiscal over-performance to be set aside as a priority to reduce public debt or increase the social security reserve fund), pressures had already surfaced for generalized cuts in social security contributions and/or increased social spending. While staff agreed that such pressures should be resisted, it was also necessary to prepare the public to the notion that, with growth resuming with greater vigor, a nominal surplus was required to avoid eroding the underlying fiscal position.

Implementation issues: transparency and monitoring

13. The discussions also centered on issues of fiscal policy implementation, seen by staff to be key to the longer-term success of the BSL’s framework. Two requirements appeared most prominent: first, a close tracking and the fullest transparency possible of all contingent liabilities arising from the large public investment effort, and, second, improved monitoring of regional budget execution in a highly decentralized environment. In this light, staff saw merit in Spain undertaking a fiscal transparency ROSC, which the authorities have since requested.

14. Staff noted that the widening range of financing modalities for public investment had rendered the assessment of the potential fiscal impact of these operations significantly more complex. Historically, the bulk of public investment had been carried out by the central government and was thus captured in the standard budget documents. Since the mid-1990s, however, it had been increasingly executed through alternative modalities, including by public enterprises and public entities that are not part of the general government (such as those established to build and manage the railway infrastructure and water works), and that have been financed through loans (some with public sector guarantees) and capital injections. Recourse to public-private partnerships (PPPs) has also expanded.

Spain: Public Investment (ESA-95) and Central Government Off-Budget Public Investment 1/

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Sources: 2003 budget and IGAE.

In percent of GDP.

Includes Gestor de Infraestructuras Ferroviarias (railways), Sociedades Estatates de Agua (water), de Gestion Inmobiliaha (land management), y de Modernization y Construccidn de Regadios (irrigation), RENFE (railways), AENA (airports), Puertos del Estado (harbours) and roads.

An estimate of the total gross investment of the NFPS, including public entities, can be obtained by adding to this item the ESA-95 public investment of the general government (net of the capital transfers from the central government to national NFPE).

15. The authorities felt that present budget documentation, along with full observance of Eurostat guidelines, ensured adequate transparency in this area. They noted that, following the developments described above, budget documentation had been expanded to include a broad coverage of the central government’s investment effort (esfuerzo inversor, which included capital transfers and investment carried out by state-owned enterprises), that all central government guarantees were fully recorded, and that fiscal accounting and reporting practices complied with Eurostat guidelines. Furthermore, a recently approved law on public concessions (Ley de Concesiones) provided an updated framework that regulated PPPs and their operation.8

16. Staff, while welcoming these steps, considered that closer tracking and fuller disclosure remained needed to control the fiscal risks associated with public investment activities. This was notably the case with regard to PPPs, a potentially useful vehicle which could however entail substantial and difficult-to-assess risks for the public finances, and where effective processes that ensured an adequate transfer of risks to the private sector were thus essential. In the absence of agreed international accounting standards in this area, staff encouraged the authorities to adopt evolving best practices, including comprehensive and timely disclosure of the terms and conditions of private partnerships, that would allow as accurate as possible an assessment of future contractual obligations and government liabilities (explicit or implicit) associated with such projects.9 Staff also expressed concern about the growing use by the regions of public sector entities and PPPs to carry out investment, noting that tracking and transparency issues were likely more severe at lower levels of government, as were risks that such off-budget modalities could serve to circumvent BSL deficit constraints.

uA01fig06

Share of Central Government in General Government Expenditure

Citation: IMF Staff Country Reports 2004, 089; 10.5089/9781451812060.002.A001

17. There was agreement on the importance, in a highly devolved fiscal environment, of regional reporting systems that produce timely data. The authorities noted that the pace of decentralization of public spending had increased dramatically in the past three years. Indeed, with the complete devolution of health spending to the regional governments, Spain had become one of the most fiscally decentralized economies in Europe. The authorities concurred on the importance of timely information on regional budget execution, and to this end an agreement requiring quarterly reporting had been concluded with the regions in early 2003. But implementation issues persisted, so that the 2003 outcome for the regional budgets would not be known until February 2004. The authorities were committed to secure further progress on this front, which staff noted should include timely public release of the information gathered.

Share of Expenditure by Level of Government

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Sources: Government Finance Statistics Yearbook 2001; Ministry of Economics, and Fund staff estimates.

Assumes that all health spending managed by the central government, which represented 1.7 percent of GDP was transferred to the regions

Long-term fiscal sustainability10

18. While a medium-term fiscal surplus appears at hand, comprehensive pension reform—the other element required to ensure long-term fiscal sustainability—has continued to be postponed. Although long-term population projections are plagued by the usual uncertainties (exacerbated in Spain by the prominent role of immigration), available studies consistently indicate that, while Spain’s demographic shock occurs later than elsewhere in Europe (peaking after 2020), it is relatively more pronounced (with age-related expenditure increases roughly 60 percent larger than the EU average excluding Spain). The authorities confirmed their intention of maintaining a small fiscal surplus over the medium term.11 They also pointed to the growing endowments to the social security reserve fund, in excess of earlier targets. However, following initial steps in 1997, progress on pension reform in the context of the relevant tripartite commission (Pacto de Toledo) had stalled.

19. Staff stressed that net debt reduction, while welcome, was not a substitute for pension reform, which needed to regain momentum in the next legislature. The authorities, while concurring with the thrust of the staff’s recommendation, countered staffs critique of the Pacto de Toledo process by stressing the importance of the related agreement not to raise pension reform as an electoral issue, thereby keeping this key question out of the political arena. They also noted that the recent renewal of the Pacto had reaffirmed the relevance of the original recommendations made in 1997 (Table 4), thus pointing the way forward. Staff advised that emphasis be placed on gradually raising the effective retirement age, via stronger incentives to forego early retirement, and on strengthening the link between contributions and benefits, reviving an earlier proposal to raise the period used to compute the pensionable base salary from 15 years to the entire work life.

Table 3.

Spain: Updated Stability Program, 2002–07

(In percent of GDP, unless otherwise indicated)

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Source: Actualization del Programa de Estabilidad, Espafña 2003–07.

On an ESA95 basis.

Table 4.

Spain: Main Recommendations of the Pacto de Toledo 1/

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Sources: Informs sobre la Ponencia para el Analisis de los Problemas Estructurales del Sistema de Seguridad Socialy de las Principales Reformas que deberan acometerse.

The Toledo Pact is a set of recommendations for the reform of the pension system, presented by a parliamentary commission for the first time in March 1995, which provides for a progressive consensual approach to pension reform and regular reviews.

Additional recommendations made are as follows: (i) strengthening benefits for part-time and time-bound contracts; (ii) promoting the conciliation of professional and family obligations for women; (iii) assessing and restructuring the social protection of dependent people (survivors, handicapped and elderly people, etc.); (iv) fighting social and professional discrimination of handicapped people; and (v) guaranteeing that immigrants fully enjoy benefits and observe obligations of the social security system.

C. Banking Sector Developments12

20. After a trying two years—with substantial declines in profits associated with investments in some Latin American countries—the banking sector staged a come-back in 2003. Earnings of Spain’s two major banks (Santander Central Hispano—SCH, and Banco Bilbao Vizcaya Argentaria—BBVA) were severely affected by developments in Argentina and some other Latin American countries in 2002; though these banks remained profitable, their profits declined by some 27 and 9½ percent respectively. With the situation in Latin America stabilizing, the banking system experienced a marked turnaround in 2003. Profits in the five major banking groups (including SCH and BBVA) recovered strongly, on the back of a sharp increase in domestic business, with stock market valuations also improving and exhibiting lower volatility (Figure 6). Both the authorities and market participants viewed the banking system’s Latin American difficulties to be now largely over.

Figure 6.
Figure 6.

Spanish, European and U.S. Bank Stock Indices, 2000-03

(100=December 31, 2000)

Citation: IMF Staff Country Reports 2004, 089; 10.5089/9781451812060.002.A001

Sources: Bloomberg and Datastream.

21. Supervisors’ attention had turned to domestic risks in the mortgage market, which they viewed as manageable. Total mortgage credit has been growing rapidly (by 22¾ percent in the 12 months to October 2003) and is mainly at variable interest rates. The authorities nonetheless thought the risks remained contained:

  • Banks’ starting position was strong, with a very low incidence of doubtful assets, which were in any case highly provisioned. The Bank of Spain also closely monitored forward-looking indicators of potential debt-servicing difficulties, and these remained reassuring.

  • With credit expansion driven primarily by mortgage lending—typically with a loan-to-value ratio of 80 percent, and much lower for second homes—rather than consumer lending, banks’ risks were judged to be comparatively well covered. It was however recognized that the valuation of these assets could suffer under conditions of generalized stress.

  • Although the securitized portion of banks’ mortgage portfolio remained small (under 5 percent), it was increasing rapidly, thus contributing to reduce bank exposure.

Mortgage Credit and Interest Rate Modality

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Source: Economic Bulletin, Bank of Spain, July-August 2003.

Deposit Institutions: Doubtful Credit and Provisioning

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Source: Bank of Spain

All assets and guarantees, excluding those not requiring provisions: exposure to general government, trading portfolio and covered country-risk exposures.

In sum, both the supervisory authorities and market participants noted that stress tests indicated that—under most plausible scenarios—an increase in interest rates would not have a potent effect on households’ ability to repay nor on deposit institutions’ nonperforming loans. As noted above ¶6), difficulties emerged only in the event of a rapid, steep rise in interest rates (in the order of 4–5 percentage points over a relatively short time span) accompanied by a deteriorating employment situation, a scenario that was generally viewed as improbable in the near term. Stress tests involving a decline in housing prices also did not reveal systemic difficulties

22. There was nonetheless concurrence on the need for continued vigilance over mortgage market developments, with staff probing other possible policy responses. The authorities felt that the Bank of Spain’s prudential controls on mortgage lending were operating adequately and that any further tightening of such controls would be unjustified and could have adverse side-effects on financial intermediation. They placed the emphasis rather on continued vigilance, accompanied by moral suasion, to ensure that credit institutions exercised adequate caution and had in place effective credit approval and monitoring processes—which was viewed to be generally the case. Staff enquired about the reasons for the overwhelming predominance of variable rate mortgages, at a time when interest rates could be seen as bottoming out. The consensus (official and market) view was that the phenomenon was essentially market-driven, reflecting the attractiveness of very low variable rates, rather than any institutional or regulatory feature that constrained the supply or raised the cost of fixed-rate lending. Indeed, several credit institutions had launched an active campaign to promote fixed-rate loans in the course of 2003, but had met with virtually no demand. For their part, the authorities had actively sought to raise the public’s awareness of potential interest rate risks, and had taken measures to reduce the cost of mortgage refinancing.13 Banks had also been required to offer the option of an interest rate cap as protection against future interest rate increases—again meeting with scant demand. All in all, it was felt that demand for fixed-rate loans would emerge only once the interest rate cycle had begun to turn.

23. The mission enquired about progress in strengthening governance in the savings bank sector. The authorities noted that the Spanish cajas de ahorro distinguish themselves from similar institutions in some other countries for the strength of their financial profile, economic results, and regional franchises. Analysts concur that the cajas’ focus on retail business, mainly (but not only) in their geographical areas of origin, has allowed them to play a dynamic role in increasing competition and diversification of the Spanish financial system. At the same time, it was recognized that the structure and goals of the cajas as not-for-profit foundations with links to local governments raised delicate governance issues. These had been addressed, at least in part, by the Ley Financiera of 2002, which had introduced improvements in the cajas’ governing bodies and a new financing instrument (cuotas participativas),14 which was inter alia intended to strengthen market discipline over the management of individual savings banks. However, no such instruments had as yet been issued, as their regulations were still being developed. Market participants generally downplayed expectations about the cuotas’ potential role, noting that—compared to subordinated debt—they were a relatively costly and complex way to raise capital (requiring a difficult evaluation of the current “market value” of a caja). In this area, the authorities also noted that a new Transparency Law applied to savings banks as well, requiring them to produce annual “good governance” reports ¶31). Staff welcomed these efforts, and stressed the need for continued vigilance to avoid all instances—real or perceived—of external influence over the cajas.

24. At the time of the last consultation, the Board welcomed Spain’s intention to participate in the FSAP. During the mission, the authorities declared their readiness to formally request such participation, which they have since done.

D. Labor and Product Markets

Labor markets

25. Although unemployment has been halved since the mid-1990’s, it remains high and a number of rigidities persist. Earlier reforms have significantly increased the flexibility of the labor market, allowing for vigorous employment creation and a sharp decline in unemployment—to however a still high rate of 11¼ percent. The authorities noted that this performance did not yet reflect the hoped-for positive impact of the end-2002 changes to the unemployment benefits system, designed to promote active job search and greater geographical mobility; staff pressed for early, concrete progress in the reform’s implementation. The discussions focused on deficiencies in the wage-setting process, the adverse effects of indexation clauses, and the rigidity of open-ended contracts.

26. The authorities placed particular importance on a reform of the collective wage bargaining system. Collective wage agreements signed at the sectoral level cover the bulk of workers, with firm-level agreements representing only a small fraction of the total.15 Such an “intermediate” collective bargaining system does not allow the wage-setting process to reflect the financial and productivity conditions of individual firms as would be the case in a decentralized system, nor does it internalize economy-wide considerations in the manner of a fully centralized system. The result is a marked homogeneity in wage increases across regions and a high degree of wage compression across skill levels, reducing job opportunities for low-skill workers, blunting incentives for human capital accumulation, and discouraging labor mobility. Although reforms of the wage bargaining framework have been proposed periodically, they have regularly foundered in the face of trade union opposition and scant interest also on the part of the employers’ federation. The authorities (and staff) nonetheless felt that a renewed effort, in concertation with the social partners, should be made in the next legislature.

Collective Bargaining and Wage Increases

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Sources: Bank of Spain and Labor Ministry.

27. The increasingly widespread recourse to wage indexation clauses has contributed to the persistence of inflation shocks. The temporary upward spike in inflation at end-2002 had, for example, led to second-round effects through the play of such backward-looking clauses. The authorities stressed that safeguarding competitiveness required changes to this system. Staff agreed, but also thought that a phasing out of wage indexation would likely require a reference value for wage negotiations that was seen to be a realistic reflection of expected inflation. The persistent overshooting of this reference value (set at 2 percent in recent years) since 1999 had been accompanied by a sharp rise in the share of indexed contracts. In this connection, the authorities clarified that the reference value adopted by the social partners in their negotiations could not be traced to an official inflation “objective.” Indeed, consistently with participation in EMU, no such objective was set (other than the assumption used in the budget to revalue pensions and some other benefits); in any event, the authorities felt that any official designation of a reference value for wage negotiations would simply reinforce the social partners’ proclivity to focus such negotiations on price rather than productivity developments.

uA01fig07

Wage Indexation and Deviation from the Inflation

Reference Value

Citation: IMF Staff Country Reports 2004, 089; 10.5089/9781451812060.002.A001

28. The continued rigidity and high dismissal costs of open-ended contracts were seen by staff to underlie the widespread use of fixed-term contracts in Spain. With fixed-term contracts accounting for about 28 percent of employment, Spain is an outlier in Europe. Despite having a similar degree of labor market rigidity as Austria and Italy (as proxied by the OECD’s measurement of employment protection legislation, EPL), its share of fixed-term contracts is significantly more than 15 percentage points versus Italy and Austria. The mission’s interlocutors offered different interpretations, including the prominent role of the construction sector (where two-thirds of workers are on fixed-term contracts), the widespread recourse to subcontracting in various sectors, the increasing use of fixed-term contracts as a probation period for first-time job seekers, and the practice of stringing along successive fixed-term contracts.16 But there was general (albeit not universal) agreement that the root cause of the phenomenon lay in the wedge in dismissal costs between fixed-term and open-ended contracts; as such, staff noted, it was simply a market response to an institutional rigidity. Indeed, the creation in 1997 of a low-cost open-ended contract (contrato de fomento), with lower dismissal costs and reduced social security contributions, had led to a decline in the share of fixed-term contracts and pointed the way for future reform.

uA01fig08

Labor Market Rigidity and Ratio of Fixed-term Contracts

Citation: IMF Staff Country Reports 2004, 089; 10.5089/9781451812060.002.A001

Product markets

29. Competition in network industries has improved, but the authorities recognized the need for proactive enforcement of competition policy in sectors where concentration remains high. The authorities noted that continued progress under the ambitious

30. liberalization plan initiated in 2000 had strengthened competition in key product markets. Prices in most sectors had declined markedly and were below the euro-area average (Figure 7). Key recent achievements were the full liberalization of the electricity and gas markets as from January 1, 2003 (with provider choice extended to all retail consumers), and progress in increasing the number of gasoline distribution points and enhancing pricing transparency, with the emergence of somewhat greater (but still limited) price differentiation. The authorities countered staff’s contention that incumbents continued to enjoy a large and often dominant market share in key network industries by pointing to the increase in the number of operators to levels that compared well with other main European countries. They had nonetheless been proactive in addressing cases of price-fixing or other noncompetitive behavior, and favored a vigorous enforcement of competition law. In this context, the Competition Tribunal (Tribunal de Defensa de la Competencia) had been endowed with a new, fully autonomous statute and increased resources.

Figure 7.
Figure 7.

Power and Telecommunication Prices, 1994-2003

Citation: IMF Staff Country Reports 2004, 089; 10.5089/9781451812060.002.A001

Source: Eurostat.

31. The obstacles to effective competition arising from initiatives by the regions in retail trade and distribution were of particular concern. An in-depth report by the Competition Tribunal had exposed the extent to which a host of restrictive norms taken by regional and local authorities stifled competition in retailing. Such norms ranged from overlapping and discretionary licensing requirements to outright prohibitions on the establishment of large-scale outlets (in 10 of the 17 regions). The authorities fully agreed with staff on the adverse effects of such norms, but—short of action where there were possible constitutional breaches—the central government could not intervene in a matter of regional competency. In this light, the authorities welcomed the mission’s efforts, in its contacts with regional authorities and political representatives, to draw attention to the cost of such barriers for the concerned regions themselves, in terms ultimately of their relative attractiveness for investors, consumer welfare, and economic performance (Box 4).

Legal Barriers to Retail Distribution by Region

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Note. The seven barriers correspond respectively to: (1) definition of the large retail establishment based its location; (2) multiple often arbitrary criteria used in the determining whether an establishment is large; (3) considering an establishment is large when 25 percent of its ownership is a large firm; (4) discriminatory treatment for discount establishments; (5) limits on establishment and transfer of ownership of small firms; (6) requiring a financial viability plan for commercial establishments; and (7) outrigh bans on large retail establisments.Source: Tribunal de Defensa de la Competencia.

A Tentative Assessment of the Costs of Regional Restrictions

Available data confirm that limiting competition harms local consumers via higher than average inflation. Although, in principle, restrictions should be reflected in price level rather than inflation rate differentials, in the case at hand it appears that the process of imposing barriers has fueled a protracted “price level effect” reflected in the data as higher inflation. Indeed, a number of barriers above (below) the regional average is associated with above (below) average inflation in 13 of the 17 regions. Also, barriers create an unfriendly environment that can divert investment from the region, lowering employment opportunities. Evidence for lower employment, however, does not immediately emerge from simple visual inspection of the raw data.

uA01fig09

Regional Restrictions and Economic Performance

(Deviation from regional average, 1995-2001)

Citation: IMF Staff Country Reports 2004, 089; 10.5089/9781451812060.002.A001

Source: Tribunal de Defense de la Competencia; Eurostat; and INE.

Regression analysis, however, confirms the adverse effects of anticompetitive policies on both inflation and employment. Panel regression was used to provide a closer look at the data for the 17 regions from 1995–2001, and quantify the costs of restrictive norms. An AR(1) model—accounting for both regional idiosyncratic effects and common time trends—was extended by adding an index of the anticompetitive barriers of the regions (see text table in ¶30). Estimates for inflation (π) and the log of employment (e) follow:

πi,t=γi+κt+0.006×πi,t-1+0.096*×Barrieri+μi,tπ,rADJ2=0.89
ei,t=γi+κt+0.695*×ei,t-1-0.031*×Barrieri+μi,tε,γADJ2=0.99

with statistical significance at 1 percent indicated by *. The results suggest that, on average, imposing one of the seven types of barriers identified in the Competition Tribunal’s report increases inflation and lowers employment in the long-run respectively by 0.1 percentage point and 10 percent; the costs are much higher for the most restrictive regions (Baleares, Cataluña, Navarra, and País Vasco).

uA01fig10

Impact of Retail Barriers

Citation: IMF Staff Country Reports 2004, 089; 10.5089/9781451812060.002.A001

32. The authorities reported on various initiatives to improve corporate governance and modernize the business environment. Among these, they noted in particular a new Transparency Law, approved in July 2003, that increases the minimum information that listed companies must provide, including the requirement to publish governance guidelines and an annual report on corporate governance, and adopt internal regulations for the operation of their board and management that adhere to good governance principles. Since the mission, the authorities have brought forward the implementation of some of these requirements. In other areas, a new bankruptcy law modernized procedures that were viewed as archaic, providing effective protection for the firm and orderly procedures that ensured equal treatment for debtors. Finally, a new company law significantly simplified administrative procedures to establish a new firm.

E. Other Issues

33. The authorities pointed to two concrete steps in 2003 reflecting their commitment to counter money laundering (AML) and the financing of terrorism (CFT). First, Spain’s AML framework was strengthened by the adoption, in July 2003, of new provisions fully implementing the 2001 EU Directive. The provisions extend the definition of money laundering offenses to cover all serious offenses; prescribe customer due diligence and suspicious transaction reporting duties for lawyers, notaries, auditors, and accountants; and require financial institutions and other reporting entities to adopt “reasonable measures” to verify their customers’ professional or economic activities. Second, a comprehensive CFT law was adopted in May 2003, establishing a Commission for the Oversight of Terrorist Financing, which is empowered to block or freeze a wide range of assets and transactions when “the transaction, movement or operation is performed for the purpose, or on the occasion of perpetrating terrorist activities, or for contributing to the goals pursued by terrorist groups or organizations.”

34. In the trade area, the authorities maintained cautious optimism about prospects for the Doha round. They viewed the outcome of the Cancun Ministerial Conference as a regrettable setback that should not, however, imperil the round’s prospects. The time should be used to garner political support and ensure that the round reflects the interests of all countries within a balanced agreement. While taking the view that agriculture should not become the sole focus of attention, and pointing to the positive aspects of the EU agreement on reform of the Common Agricultural Policy (CAP), they acknowledged a need for flexibility on the issue. Staff noted that Spain, as a large beneficiary of CAP transfers,17 could play a key role in working toward the elimination of remaining distortions. Finally, in response to staff questions about a possible drift to bilateralism or regionalism, the authorities noted that such accords were not necessarily negative, provided they were not viewed as alternatives to a multilateral approach.

35. Provisional figures for 2003 indicate a slight increase in Spain’s ODA to a level equivalent to about 0.3 percent of GNP. Spain has been an active partner in the Fund’s poverty reduction efforts, contributing to the PRGF and HIPC initiatives.

III. Staff Appraisal

36. Spain’s economic performance during the latest slowdown is testimony to the rewards of sound policies. While European economies languished, growth in Spain proved resilient and rich in job creation. Real convergence continued, in marked contrast to previous slowdowns. Although EMU participation and the related decline in interest rates played a key role in this performance, a stability-oriented fiscal policy (in observance of the Stability and Growth Pact and of Spain’s own Budgetary Stability Law), centered on expenditure-based fiscal consolidation that created scope for tax relief, and the pursuit of structural reforms were also essential ingredients.

37. Sustaining this performance will, however, require containing some emerging risks. First, the strength of domestic demand, along with insufficient competition in certain markets, has sustained a persistent inflation differential with the euro area. In turn, shortcomings in the wage-setting process have transmitted this differential to labor costs, eroding competitiveness. Second, recent growth has been accompanied by a rapid rise in household indebtedness amidst buoyant housing prices. While these trends are driven by some structural demand factors and the related risks do not appear imminent, the longer the underlying processes continue unabated, the greater the potential for an adverse fall-out. It is the task of policies to minimize this risk and facilitate a soft landing. Furthermore, with the impulse from EMU participation waning and competition from the accession countries intensifying, further structural reforms will be needed to enhance the economy’s flexibility and supply side response.

38. With monetary conditions in Spain being overly easy, fiscal policy must maintain an appropriately restrictive stance. It has commendably done so in recent years, leading to an estimated general government surplus in 2003. On the heels of this result, the budgeted “zero deficit” for 2004 implies an untimely stimulus. The framework provided by the BSL—notably the ceiling on central government expenditure—and the play of automatic stabilizers will likely generate a better-than-targeted result. But budget execution should go further, actively seeking expenditure savings wherever feasible, so as to contain central government expenditures to below the budget ceiling. At the same time, the contingency fund should be carefully safeguarded for truly exceptional eventualities. And progress is urgently needed toward more timely monitoring of the execution of regional budgets, to ensure that the autonomous communities contribute to the desirable restrictive fiscal stance, especially in light of the full devolution of health care spending since 2003.

39. Public sector infrastructure spending has supported both short- and longer-term growth, but its expansion calls for strengthened monitoring of associated fiscal commitments and risks. The budget documents have been helpfully expanded to include information on investment carried out by state-owned nonfinancial enterprises and entities, and the accounting of such operations is in line with Eurostat guidelines. But this does not suffice. Loans, capital injections, and guarantees to these enterprises and entities constitute a potential, and at times difficult to assess, fiscal risk. Moreover, the reliance on private sector participation—in itself a useful instrument, increasingly used throughout Europe—can also obscure the public sector’s liabilities in the projects concerned and requires clarity over the division of risks between the public and private sectors. As the assumption of contingent liabilities increases with the recourse to these modalities, including by the regions, so does the need for close monitoring and control of all possible future calls on the public purse. Spain’s recent request for a fiscal transparency ROSC is welcome.

40. While fiscal adjustment has been significant, the achievement of longer-term fiscal sustain ability also requires substantive pension reform. Fiscal consolidation is clearly an essential ingredient in dealing with the future costs of aging, and has contributed importantly to reducing public sector debt and raising the social security reserve fund. But net debt reduction is not a substitute for pension reform, and the latter will need to figure prominently in the new government’s agenda. The recently renewed Pacto de Toledo provides a useful framework that should be promptly translated into a specific set of measures, centered on gradually raising the effective retirement age and strengthening the link between contributions and benefits.

41. Safeguarding external competitiveness requires a wage-setting process that ensures greater productivity-based wage differentiation. There is a need to move away from a system that generates a high homogeneity of wage increases and that is heavily focused on an inflation reference value and with insufficient attention to relative productivity. This feature is reinforced by the extensive use of indexation clauses. Such practices are at odds with successful performance in EMU. Discussions on this issue with the social partners should be resumed at the earliest opportunity. In the related process of social concertation, it would be useful also to further reduce the rigidity of open-ended contracts, which lies behind the high incidence of fixed-term employment.

42. In product markets, the main issues remain the degree of effective competition in network industries, the restrictive norms burdening retail distribution, and the constraints on the supply of developable land. In key network industries, the fruits of earlier liberalization are evident, with consumers benefiting directly from increased competition and resulting lower prices, but a further strengthening of competition remains needed in certain markets. In retail distribution, the harmful restrictive barriers instituted by regional governments should be rolled back, in the ultimate interest of local consumers and the regions’ own economic performance. Finally, there has long been a patent need—now further highlighted by developments in the housing market—to improve the supply of developable land. Although the constraints arising from the present system are widely acknowledged, the issue’s links to municipality financing have stood in the way of change. Reform will thus likely need a nonpartisan pact on the issue, which should be decisively pursued in the new legislature, and include also the promotion of greater transparency in the urban zoning process. In the housing market more generally, the very generous tax relief favoring home ownership is distortionary, weighs on the budget, and merits revision.

43. In the banking sector, the proactive supervisory approach that contributed to the resilience to developments in some Latin American countries needs now to help guard against emerging domestic risks. The speed and extent of the turnaround in the financial health of banks in 2003 has been pronounced, and the Spanish banking system continues to exhibit high levels of solvency, profitability, and efficiency. But the rapid expansion of credit and household indebtedness raises new concerns. In this context, the Bank of Spain’s proactive supervisory approach and the authorities’ efforts to raise the public’s awareness of potential interest rate risks and to reduce the costs of mortgage refinancing are well placed. Both Spain and the international community stand to derive useful lessons from the conduct of a Financial Sector Assessment Program (FSAP), and the authorities’ recent request in this sense is welcome.

44. Spain is encouraged to build on the increase in ODA in 2003 and progress further toward the 0.7 percent of GNP benchmark. Spain’s support for trade liberalization vis-à-vis the least developed countries is welcome, and the authorities are encouraged to work actively toward the success of the Doha round, including through the needed flexibility on agricultural trade issues.

45. Spain’s data are adequate for effective surveillance, although the quality of productivity data and the frequency and timeliness of regional fiscal data need to be improved (Appendix II). The authorities are also encouraged to extend the best practice of pre-announced release calendars to all key data (including, for example, the fiscal accounts and external trade statistics).

46. It is recommended that the next consultation be held on the standard 12-month cycle.

Table 5.

Spain: Indicators of External and Financial Vulnerability, 1999-2003 1/

(In percent of GDP, unless otherwise indicated)

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Sources: Bank of Spain, Economic Bulletin and Statistical Bulletin: data provided by the authorities; and IMF, International Financial Statistics.

The interpretation of some indicators is affected by the launch of monetary union in 1999.

Reserves and foreign liabilities refer to the Bank of Spain, both before and after EMU.