“We do not expect Spain to recover everything lost to the crisis before 2022”

Antonio Madera is the head of sovereign and sub-sovereign ratings of Axesor Rating. In this interview with OKDIARIO, this person in charge of the country’s first rating agency, analyzes the current situation of the Spanish economy, which is facing an unprecedented historical crisis due to confinement and the coronavirus that could sink GDP to levels never seen since the Civil War.

What will be the growth forecasts that Spain will face in the second quarter of 2020, both in GDP, unemployment and consumption? Will it be the worst quarter of the crisis?

Above all, it should be borne in mind that we are in an environment dominated by uncertainty, in which perspectives on the duration of social distancing measures continue to be the main variable. The recently published data by the INE in relation to the economic activity of the first quarter of 2020 show the depth of the economic shock unleashed by the Covid-19, with a fall in GDP of 5.2% that has surprised the consensus of analysts for its hardness.

It is for this reason that we expect to see a contraction in the economy in this second quarter, which could even reach 20% year-on-year, as this period has registered the greatest effect of the approved containment measures, especially due to its great incidence on the activity associated with the service sector and manufacturing, the latter seriously affected by the limitation of activity to what is classified as purely essential. In fact, and although there are still few known indicators, the published labor market data points in this direction. Being retail, electricity consumption and purchasing managers, among others, the most affected.

“We expect to see a contraction in the economy in this second quarter that could even reach 20% year-on-year”

However, we expect an asymmetric V scenario, with a progressive recovery from the third quarter, which, however, will not avoid ending the year with negative growth of 10.8%, with a drop in household consumption of more than 8% and a contraction of gross capital formation of almost 25%. With all this, we expect the unemployment rate to rise to 19.9% ​​at the end of the year.

In which quarter and year do you calculate that Spain will recover all that was lost during the coronavirus crisis? That is, when will the level of wealth that was in the fourth quarter of 2019 return?

It is still too early to be able to state exactly what will be the quarter in which Spain will return to the starting situation. Above all, taking into account that this economic shock is the result of a health emergency for which there is still no preventive treatment -so the risk of a scenario in W is latent-. However, we do not expect it to occur before 2022, since the forecasts that we are considering for next year, and always under the uncertainty scenario discussed, point to a recovery in GDP of 6.9%, mainly supported by the boost of national demand. And although the effect of the demand impounded during these weeks of confinement will be positive to prop up the recovery of the next quarters, we do not expect a significant contribution given that by their very nature many of these expenses cannot be applied to the phenomenon of embalming ( for example, consumption in a restaurant), so that the service sector will be the most affected by this situation, and within it the activities related to hospitality, commerce and leisure, for which we expect a contraction that could reach 30 % in year-on-year terms.

«The risk of a scenario in W is latent»

On the other hand, is Spain going to take longer to recover than other countries?

We have recently learned about the PMI for the services sector for the month of April, of particular importance for countries like Spain where the weight of this sector reaches almost 70% of GDP. The indicator, one of the few known for the month of April, shows an unprecedented collapse from the expansion zone that it registered in February, to the minimum of seven points, a true reflection of the severity of this shock. Added to this are the negative prospects for the tourism sector, a sector on which almost 15% of national production rests. It is for all these reasons that we hope that the countries most dependent on these branches of activity, including Spain, Italy and France, will experience the slowest recovery.

“Spain, Italy and France will be the countries experiencing the slowest recovery”

Do you foresee a rating downgrade for Spain as a consequence of the increase in the deficit or the debt? How far will the deficit and debt go?

At the beginning of April we published our last report on the rating in Spain in which we confirmed the A rating, although with a change in trend from “stable” to “under observation” based on the uncertain economic scenario in which we find ourselves today.

These credit opinions are made “through the cycle”. In other words, an opinion on a medium-term horizon that takes into account cyclical events and that we review every six months, and for whose issuance we take into account information regarding economic, social, foreign sector and public finance performance, in addition to context of monetary policy and the situation of the financial system. Although it is true that we expect to see a significant deterioration in public finances -with deficit forecasts that could exceed 9.5% this year and 6.3% next year-, the ultra-expansive monetary policy applied by the ECB, the mechanisms recently approved by the Eurogroup, in addition to the presence of a more robust financial sector compared to the 2008 crisis to lead the channeling of credit to all branches of activity, is avoiding situations of financial stress that could end up triggering a shock of liquidity. Proof of this are the last placements made by the Treasury or the Community of Madrid, among others. For all these reasons, as of today, we do not contemplate a drop in Spain’s rating, although we do not rule it out either, all based on how the uncertainties that currently surround the economic scenario in which we operate end up materializing.

“Today, we do not contemplate a drop in the rating of Spain, although we do not rule it out either”

How will sovereign risk be transferred to company financing?

Undoubtedly, the rising cost of financing at the sovereign level will have a direct transfer to corporate financing due to the increase in the risk premium demanded by investors, which, in the end, will end up affecting to a greater extent those companies with lower levels of profitability to assume these extra costs. in its financing. However, we positively value the various measures put in place to avoid liquidity tensions and facilitate access to financing, including guarantees of € 4 billion for promissory note issues, due to the important role we believe they will play in maintaining the costs of controlled financing.