Following the launch of its new sovereign rating methodology that considers both financial and non-financial factors, EthiFinance Ratings has upgraded Spain’s credit rating from „A-“ to „A“ with a stable outlook, due to the size and diversification of the economy, which shows resilience to recent shocks, along with the favorable external sector position and the country’s solid social and governance profile, characterized by a high level of social welfare and human development.
The analysis forecasts that the Spanish economy will continue its growth path in 2024 and 2025, at 2.4% and 2%, respectively, as well as the progressive reduction of the deficit, which would remain at 3.6% in 2024 and fall to 2.9% in 2025, and public debt (105.5% and 104.8%). Additionally, inflation is expected to stabilize around 3% (3.1%) by the end of 2024 and fall to 2.3% in 2025.
Within the macroeconomic environment, the report highlights that “the key drivers of Spanish growth have been both external and domestic demand, particularly from public and household consumption” and points out that the implementation of the Recovery, Transformation, and Resilience Plan (RTRP) could stimulate the growth of the Spanish economy in 2024 and 2025, which is also boosted by the strength of domestic demand and the resilience of the labor market.
Moreover, the agency highlights the strength of the Spanish banking sector, with a CET1 capitalization ratio of 12.7% and a NPL ratio around 3.5%, despite the decade of low-interest rates preceding the changes made by the European Central Bank in monetary policy to contain inflation. In fact, EthiFinance Ratings expects inflation to approach the 2% target set by the monetary authority by the end of 2025.
EthiFinance Ratings underscores the high unemployment rate, which is expected to remain above 11% until 2025 according to European Commission forecasts, and the high dependency ratio, which puts downward pressure on Spain’s credit quality. In this regard, the report notes that “aging population could lead to heightened fiscal challenges, driven by rising expenditure on pensions and healthcare, as well as reduced economic productivity” which could negatively impact the ability to meet its financial obligations.
On the other hand, the report highlights the progressive improvement of public finances, although it continues to be one of the main constraints on the rating. Indicators show a trend of deficit correction, which would close 2025 (2.9%) below the 3% limit set by the European Union in the new fiscal rules, while public debt would continue to decline. Additionally, “the sustainability ratio remains manageable, and is expected to hover around 6% of current revenues for the 2024-25 period, buoyed by robust revenues” according to the analysis.
Finally, the assessment of non-financial factors is notable, although the report highlights the persistence of constraining factors, such as political uncertainty and parliamentary fragmentation following the 2023 general elections. In environmental matters, the report highlights the high level of CO2 emissions (5.5 metric tons per capita in 2022), environmental risks offset by the high level of environmental protection.
The analysis emphasizes the strong performance of social policies, which receive the highest rating thanks to “the presence of an efficiently functioning welfare state and substantial economic development, contributing to elevated social well-being and human development”, with medium-term challenges that the country cannot overlook, such as the high poverty rate, the challenge of birth rates, and/or population aging.
