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Investing.com -- In a recent review, S&P Global Ratings has affirmed Spain’s ’A/A-1’ credit ratings. The outlook remains stable, reflecting the balanced risks to economic growth and budgetary outcomes in the country over the next two years.
Spain’s economy is currently one of the fastest-growing in the eurozone and the OECD, with GDP growth averaging 1.5% per capita between 2022 and 2024. Despite the high government debt, which stands at around 100% of GDP, the country’s economic growth prospects are among the best in Europe. Factors such as net immigration, lower energy costs compared to European peers, and rising exports are expected to support growth of around 2% over the next four years.
However, the country faces risks from rising trade tensions and pressures to increase defense spending. The latter could potentially slow the pace of budgetary consolidation. Currently, defense spending in Spain is much lower than the NATO target of at least 2% of GDP, sitting at 1.3% of GDP.
On the other hand, private debt in Spain has been declining faster than government debt, and the country continues to operate current account surpluses. Spain’s unemployment rate, although high by OECD standards at 10.6%, has significantly improved from the 2015 level of 23.4%.
The stable outlook also takes into account the continued external deleveraging of Spain’s economy, which is set to continue over the next few years. This reduction in external debt reflects recurring current account surpluses and the deleveraging that has taken place since the sovereign debt crisis in the early 2010s.
In the next few years, S&P Global Ratings could lower Spain’s ratings if budgetary and balance of payments outcomes deteriorate, or raise the ratings if the country’s external position continues to strengthen or if the government debt-to-GDP ratio declines at a faster pace than currently expected.
Spain’s fragmented political landscape, however, limits reform impetus. The minority governing coalition led by Pedro Sanchez from the socialist party (PSOE) relies on a scattered group of seven political parties, six of them regional. This has led to failures to pass the budget in 2024 and 2025.
Despite these challenges, Spain’s economy appears resilient, with real GDP set to expand on average by 2% over 2025-2028. The execution of Next (LON:NXT) Generation EU funds is set to accelerate over 2025-2026, which will support economic growth.
Despite the high government debt-to-GDP ratio, it is forecasted to decline slowly to 96% by 2028, returning to its pre-pandemic level, from 100% in 2024. This trajectory is slower than that of other high-debt sovereigns in the eurozone such as Portugal, Greece, and Cyprus, but it compares favorably with that of France and Belgium.
The Spanish banking sector appears to be on a good footing. With medium-term inflation risks still present, the European Central Bank could cut rates further to 2% in 2025 if foreign and domestic factors were to jeopardize the ongoing recovery.
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