Spain: Greater Fiscal Risks in Spite of Sustained Commitment
This commentary discusses Spain's Stability Programme Update for the 2022-25 period in light of the heightened uncertainty and downside macroeconomic risks following Russia's invasion of Ukraine. The Stability Programme confirms the Spanish government's commitment to virtually the same fiscal consolidation path pledged a year ago, despite the deterioration in the macroeconomic environment. This is facilitated by the stronger-than-anticipated fiscal performance in 2021, supported by higher tax receipts. DBRS Morningstar, however, takes the view that the downside risks to this fiscal path are now greater, primarily reflecting the uncertainty surrounding the macroeconomic environment which is negatively affected by more persistent inflation.Key highlights include:
• Spain's strong baseline growth prospects are clouded by geopolitical and inflation risks.
• DBRS Morningstar views positively Spain's sustained commitment to repair its fiscal accounts despite the context of deteriorating growth and inflation.
• Nominal growth is helping to rebalance public finances, but a credible medium-term plan to tackle the structural deficit will remain key to rebuild fiscal space and to improve the country's credit profile.
“We see a prolongation of the geopolitical and energy crisis, which could further hamper economic growth and increase the need for extended/additional support measures, as the main risk for the fiscal trajectory in the short term,” said Javier Rouillet, Vice President at DBRS Morningstar. “Given the surge in inflation, keeping a lid on spending growth will continue to be crucial for Spain to sustainably improve its underlying fiscal position,” added Javier Rouillet.
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