EUROPEAN COMMISSION Brussels, 2.6.2021 SWD(2021) 404 final COMMISSION STAFF WORKING DOCUMENT In-Depth Review for Spain









































in accordance with Article 5 of Regulation (EU) No 1176/2011 on the prevention and correction of macroeconomic imbalances Accompanying the COMMUNICATION FROM THE COMMISSION TO THE EUROPEAN PARLIAMENT, THE COUNCIL, THE EUROPEAN CENTRAL BANK, THE EUROPEAN ECONOMIC AND SOCIAL COMMITTEE, THE COMMITTEE OF THE REGIONS AND THE EUROPEAN INVESTMENT BANK Economic policy coordination in 2021: overcoming COVID-19, supporting the recovery and modernising our economy {COM(2021) 500 final} - {SWD(2021) 401 final} - {SWD(2021) 402 final} - {SWD(2021) 403 final} - {SWD(2021) 405 final} - {SWD(2021) 406 final} - {SWD(2021) 407 final} - {SWD(2021) 408 final} - {SWD(2021) 409 final} - {SWD(2021) 410 final} - {SWD(2021) 411 final} - {SWD(2021) 412 final}



Contents Executive summary 1.Assessment of Macroeconomic Imbalances 2.Thematic Issue: External Position 3.Thematic Issue: Private Debt LIST OF Tables Table 1.1:Outward spillover heat map for Spain Table 1.2:Assessment of Macroeconomic Imbalances Matrix - Spain Table 1.3:Selected economic and financial indicators, Spain Table 2.1:Selected external indicators, Spain Table 3.1:Non-financial corporations debt indicators, Spain Table 3.2:Household Debt Indicators, Spain Table 3.3:Selected housing indicators, Spain LIST OF Graphs Graph 1.1: Decomposition of Net International Investment Position (NIIP) by sector, Spain Graph 1.2: Decomposition of debt by sector (consolidated)

Graph 2.1: Trade balance Graph 2.2: Decomposition of NIIP change Graph 2.3: Thematic Graphs: External position Graph 3.1: Thematic Graphs: Private debt Graph 3.2: Bank loans to households by type Graph 3.3: Thematic Graphs: Private debt LIST OF Boxes Box 1.1: Spillovers Spain Executive summary The 2021 Alert Mechanism Report concluded that an in-depth review should be undertaken for Spain to examine further the persistence of imbalances or their unwinding. In February 2020, under the previous annual cycle of surveillance under the Macroeconomic Imbalances Procedure, the Commission identified “macroeconomic imbalances” in Spain. These imbalances related to high external, public and private debt in a context of still high unemployment. The analysis shows that these vulnerabilities remain. It should be noted that the context of the assessment of vulnerabilities in this year’s in-depth review (IDR) for Spain is markedly different from last year. Also, the evolution of the COVID-19 pandemic, the strength of the recovery, and possible structural implications of the crisis are all still surrounded by high uncertainty, requiring caution in the assessment. In general, policy action over the past year focused on cushioning the impact of the COVID-19 shock and facilitating the recovery. This has added to indebtedness but should support adjustment in the medium-term. Looking forward, the Recovery and Resilience Plan provides an opportunity to address imbalances, investment and reforms needs. Main observations and findings of this IDR analysis are: ·This IDR is informed by the European Commission 2021 spring forecast, which expects a strong recovery in economic activity in Spain with the easing of the COVID-19 crisis. After the steep drop of 10.8% in 2020, real GDP is projected to increase by 5.9% this year and 6.8% next year, allowing the economy to recover its pre-pandemic level by the end of 2022. ·Spain’s net international investment position remains very negative. The stock of net external liabilities had gradually declined before the COVID-19 pandemic on the back of current account surpluses of about 2% of GDP in recent years, but it has remained large (84% of GDP by the end of 2020) and exceeded prudential and fundamental-based benchmarks. The reduction of Spain’s external net debtor position in terms of GDP came to a halt in the first half of 2020, mainly due to the contraction in GDP. The current account surplus declined to 0.7% of GDP in 2020, and is forecast to turn slightly negative in 2021 before turning positive again in 2022. ·Private sector deleveraging needs remain sizeable, despite a significant reduction of debt. Private sector debt, in consolidated terms, had been reduced from a peak of 204% of GDP in 2009 to 130.6% of GDP before the COVID-19 pandemic. The crisis led the private sector debt ratio of the non-financial private sector to increase to 147.4% in the last quarter of 2020, up by 17.1 pp. since the beginning of the year, well above prudential levels and fundamental-based benchmarks. The stock of debt accumulated by non-financial corporations accounted to 84.9% of GDP while total household liabilities amounted to 62.5% of GDP. The increase of private sector debt reflects both the increase of indebtedness in the corporate sector and, to a larger extent, the sizeable fall in GDP experienced by Spain throughout 2020. ·The COVID-19 pandemic led to an increase in the general government deficit by more than 8 percentage points to 11% of GDP. The increase was due to the combined effect of the fall in economic activity and the measures put in place to combat the virus and to preserve employment while supporting businesses and households. The general government balance is projected at -7.6% of GDP in 2021. The general government debt-to-GDP ratio remains high. It rose by around 25 percentage points in 2020, to 120% of GDP due to the combined effect of the fall in economic activity and the fiscal measures. The debt ratio is forecasted to start declining gradually in 2021 and it is projected to reach 116.9% in 2022 as the recovery gains momentum. ·The fall in employment pushed the unemployment rate up to 15.5% in 2020. The unemployment rate is forecast to start falling in 2022. The severe impact of the crisis on labour intensive-sectors may still result in additional job losses, while further increases in unemployment cannot be ruled out once the short-time work schemes (ERTEs) are phased out (unless proper support is offered to concerned workers via effective active labour market policies). ·The banking sector has remained resilient, but some challenges may emerge going forward. The loan moratoria and the public guarantee schemes have prevented the deterioration in asset quality and facilitated the flow of credit to the economy. Banking sector capitalization has marginally improved, while the liquidity position of banks has also remained reassuring. While no significant cliff-edge effects are expected when loan moratoria expire fully, a more marked deterioration in asset quality is likely to emerge once support measures are phased out. Impacted by the increase in loan-loss provisions and by one-off measures adopted by several banks, banking sector profitability has remained under pressure. Banking sector consolidation has continued notwithstanding the difficult operating environment for banks. 1. Assessment of Macroeconomic Imbalances

Introduction In February 2020, over the previous annual cycle of surveillance under the Macroeconomic Imbalances Procedure, the Commission identified “macroeconomic imbalances” in Spain. These imbalances related to high external and internal debt, both public and private, in a context of still high unemployment and had cross-border relevance. The 2021 Alert Mechanism Report published in November 2020 concluded that a new in-depth review (IDR) should be undertaken for Spain with a view to assess the persistence or unwinding of imbalances. The context of the assessment of vulnerabilities this year is markedly different from last year's IDRs, which took place before the COVID-19 pandemic. The evolution of the pandemic, the strength of the recovery, and possible structural implications of the crisis are still surrounded by high uncertainty requiring caution in the assessment. Policy action over the past year focused on cushioning the impact of the COVID-19 shock and on facilitating the recovery. While this avoided deeper imbalances and will support adjustment in the medium-term through stronger fundamentals, it also has added to indebtedness. Follow-up to country-specific recommendations from 2019 and 2020, including those that are MIP-relevant, is taking place in the context of the assessment of the Recovery and Resilience Plans (RRPs). The analysis of policies in the present report was finalised before the formal submission of RRPs and does not draw on information included in RRPs. It is therefore without prejudice to the Commission’s assessment of RRPs, which is ongoing at the time of publication of this report. The assessment follows a similar structure as the IDRs that were included in Country Reports in recent annual cycles. This chapter presents the main findings for the assessment of imbalances, also summarised in the MIP assessment matrix. The assessment is backed by selected thematic chapters that look more at length at the external position and private debt developments. Spillovers and systemic cross-border implications of imbalances are also taken into account. In addition, also assessments of structural issues made in previous IDRs and in the context of fiscal assessments are considered if relevant. Macroeconomic context The severe outbreak of the COVID-19 pandemic in Spain and the strict lockdown measures taken in response to it resulted in an unprecedented decline of 10.8% of GDP in 2020. With the lifting of some restrictions in March, and the acceleration in the pace of vaccination, economic activity is set to begin growing over the second quarter and to continue more vigorously in the second half of the year. Growth is forecast at 5.9% in 2021 and 6.8% in 2022. As a result, Spain’s GDP is expected to return to its pre-pandemic level by the end of 2022. Potential growth is forecast to recover from the sharp drop in 2020 and reach 1.5% in 2022. The current account balance registered a surplus of 0.7% of GDP in 2020, but is forecast to turn slightly negative at -0.1% in 2021 before recovering to 0.3% in 2022. Unemployment is forecast to slightly increase in 2021 to 15.7% before starting to fall in 2022, when job creation is expected to reduce it to around 14.4% compared to 14.1% in 2019. HICP inflation was slightly negative in 2020, but should gradually increase to 1.4% in 2021 and 1.1% in 2022, driven by the gradual strengthening of demand as well as upward pressures from prices of electricity and fuels. The economic recovery is expected to be mainly driven by a rebound in domestic demand. Consumption and investment are expected to strengthen, steered by improving economic conditions and lower uncertainty, as restrictions on economic activities are phased out. Part of the excess saving caused by the COVID-19 pandemic is expected to fade, spurring private consumption, but also boosting investment. As was the case with the downturn in 2020, the recovery is also expected to remain uneven across sectors. Manufacturing production is set to pick up faster, while sectors with high social-interaction, such as leisure and tourism-related activities, are set to recover at a slower pace. The implementation of the Recovery and Resilience Plan (RRP) is expected to play a decisive role, driving the rebound in the second half of 2021 and in 2022. The higher absorption of RRF funds envisaged in 2022, with potential crowding-in effects on private investment and a carry-over effect from 2021, are forecast to provide a noticeable boost to economic growth in 2022. The contribution of external demand to GDP growth is set to turn positive again in 2022, when tourism-related activities are likely to approach their 2019 level. Corporate liquidity has been enhanced by a programme of public guarantees for new bank loans and payment moratoria, among other measures. Nevertheless, impaired profitability could lead to the materialisation of corporate insolvencies with risks for productive capacity and employment. To limit these risks in the short term, in March 2021 the authorities adopted a further package of measures to support small and medium-sized firms. Imbalances and their gravity Spain’s net international investment position (NIIP) remains very negative. Although the stock of net external liabilities (79.6% of GDP in Q3-2019) had gradually declined, it remained large and exceeded prudential and fundamental-based benchmarks (Graph 1.1). The reduction of Spain’s external net debtor position in terms of GDP came to a halt in the first half of 2020, mainly due to the contraction in GDP. The current account surplus declined to 0.7% of GDP in 2020. The reduction in GDP has led Spain's net international investment position to deteriorate from -74% of GDP at the end of 2019 to -84% of GDP by end-2020, which remains above prudential and fundamental-based benchmarks. Still, it is around 20 percentage points below the peak reached during the financial crisis, and most of the external debt is held by the Government and the Central Bank, which reduces vulnerabilities. Graph 1.1:Decomposition of Net International Investment Position (NIIP) by sector, Spain Source: Eurostat Private sector deleveraging needs remain sizeable, despite a significant reduction of debt. Private sector debt, in consolidated terms, had been reduced to 130.6% of GDP in Q3-2019 (with household debt accounting for 57.4% of GDP and non-financial corporation debt for 73.2% of GDP). This is slightly below the MIP scoreboard threshold of 133%, but well above the prudential and fundamental-based benchmarks. The crisis caused by the COVID-19 pandemic led the private sector debt ratio of the non-financial private sector to increase to 147.4% in the last quarter of 2020, up by 4.1 pp. compared to the third and increased by 17.1 pp. since beginning of the year. The stock of debt held accumulated by non-financial corporations accounted to 84.9% while total household liabilities amounted to 62.5% in terms of GDP (Graph 1.2). The increase reflects both the increase of indebtedness in the corporate sector and, to a larger extent, the sizeable fall in GDP experienced by Spain throughout 2020. Both in the case of NFCs and households, debt ratios are lower than those recorded prior to the global financial crisis, and close or below average euro area levels. According to Commission estimates, both NFCs and households debt ratios remain above prudential levels and fundamental-based benchmarks. Graph 1.2:Decomposition of debt by sector (consolidated) Source: Eurostat The general government debt ratio decreased slightly further in 2019, but it remained high at 95.5% of GDP. In 2020, the COVID-19 pandemic led to an increase in the general government deficit by more than 8 percentage points to 11% of GDP due to the combined effect of the fall in economic activity and the measures put in place to combat the virus and to preserve employment while supporting businesses and households. On the positive side, tax revenue did not contract as much as expected. In addition, some expenditure savings were recorded as certain public services could not be provided during the lockdown. According to the European Commission 2021 spring forecast, the general government balance is projected at -7.6% of GDP in 2021. In the following year, as the economic recovery gains momentum while some of the crisis-related measures expire, the balance is projected to continue improving, to -5.2% of GDP. In 2021-22, the use of funding from NGEU should contribute to the reduction of the deficit. The government debt ratio reached 120% of GDP in 2020, but mitigating factors reduce the vulnerability of public finances. Given the large negative government balance, the fall in economic activity and the reclassification of SAREB into the government sector, the general government debt-to-GDP ratio rose by around 25 percentage points in 2020, to 120% of GDP. The Commission 2021 spring forecast projects the ratio to start declining gradually in 2021 and it is projected to reach 116.9% in 2022 as the recovery gains momentum. Following the recession and fiscal support measures, Spain’s gross financing needs, estimated at around 25% of GDP in 2020 and 2021, are larger than prior to the crisis. However, market conditions for financing debt have remained favourable, with comfortable demand for both long and short-term government securities. Yields on 10-year bonds are very low by historical standards, and spreads against the 10-year German bund remain contained. Consequently, expenditure on interest has fallen over the past 7 years to levels not seen since 2010, despite the fact that the total debt stock has doubled since that time. In 2020, interest rate expenditure was 2.3% of GDP. Unemployment had fallen rapidly before the COVID-19 pandemic, but it remained high at 13.8% in Q4-2019. Long-term and, especially, youth unemployment has also fallen steeply since 2013, but more than 30% of the active population under 25 was still without a job in Q4‑2019. This rate increased above 40% in Q4-2020. Moreover, the share of employees in temporary contracts (26.42% in Q4-2019) was significant. High labour market duality has a negative impact on potential growth, productivity, and social cohesion, and which, in turn, hampers the correction of imbalances. In response to the COVID-19 crisis short-term work schemes (ERTEs) were put in place and will remain in place at least until the end of May 2021, though now more targeted to the firms or sectors than at the beginning of the crisis. In addition, several measures were taken to protect the self-employed by means of tax deferrals and benefits for suspension of activity. These schemes have contributed to contain job losses but not to avoid them altogether. Hence, the fall in employment pushed the unemployment rate up to 15.5% on average in 2020 (16.2% in the fourth quarter). Job destruction has affected to a large extent employees on temporary contracts, whose share of total employees dropped to 22.4% in Q2-2020, before rising again to 24.7% in Q4-2020. The unemployment rate is forecast to keep increasing slightly in 2021 since the severe impact of the COVID-19 crisis on labour intensive-sectors may still result in additional job losses and high unemployment. The unemployment rate is expected to drop to 14.4% in 2022. The Spanish economy could be a source of spill-over effects to the rest of the EU. This stems from its relatively large size and its level of integration with other Member States, especially those with which Spain has significant trade links, such as Portugal, and financial and/or banking linkages, such as Luxembourg (see Table 1.1). Box 1.1 provides a quantitative assessment of cross-border impact of declined Spanish demand in 2020. It shows rather heterogeneous impact across the Member States, with Portugal being the most adversely affected. Table 1.1:Outward spillover heat map for Spain Source: IMF, OECD, TiVa, BIS and Commission services Evolution, prospects, and policy responses

Spain’s current account surplus is forecast to remain lower than in the past. The COVID-19 pandemic has had a negative impact on both the goods and services balance, but in particular it led to a sharp drop in tourism with a drop in revenue of up to 80% in some regions. The current account is expected to turn slightly negative in 2021 for the first time in several years. It should recover and become slightly positive again in 2022 at 0.3% of GDP. The current account balance required to stabilise the NIIP above -35% is estimated at -0.1% of GDP in 2020. The current account norm explained by fundamentals is estimated to be 1.4% in 2020 and the cyclically adjusted current account balance is estimated at -0.9% in 2020. Private sector deleveraging needs remain for both corporations and households. Due to the COVID-19 pandemic, the private sector debt ratio increased from 130.3% at the beginning of 2020 to 147.4% in the last quarter of 2020. The NFCs’ debt amounted to 84.9% while total household liabilities totalled 62.5% in terms of GDP. This upward evolution reflects both the increase of indebtedness in the corporate sector, but also to a larger extent, the sizeable fall in GDP experienced by Spain in 2020. With the recovery, GDP growth should contribute to a significant deleveraging of the private sector. The latest debt sustainability analysis confirms that the country faces high risk in the medium-term. ( ) Due to the COVID-19 crisis measures, public debt has increased and is forecast to increase further going forward, and Spain’s gross financing needs, estimated at around 25% of GDP in 2020 and 2021, are larger than prior to the crisis. However, the public debt to GDP ratio is forecast to fall with the recovery, to 116.9% of GDP in 2022, compared to 120% in 2020. Furthermore, asset purchases by the Eurosystem on the secondary market are expected to continue to stabilise the sovereign debt market. In addition, the government debt profile mitigates vulnerabilities. Its average maturity has lengthened over time, and is projected to reach 8 years this year. Longer maturities make it likely that interest payments would remain contained by historical standards throughout the projection period even under more adverse conditions. Unemployment is set to gradually decline as the recovery picks up. The unemployment rate stopped its rapid decline from previous years and increased, to 15.5% in 2020. This increase will not be reversed in 2021, since the severe impact of the COVID-19 crisis on labour intensive-sectors may still result in additional job losses and high unemployment, while further increases cannot be ruled out once ERTEs are phased out. The unemployment rate is forecast to increase to 15.7% in 2021 and to start decreasing afterwards, to 14.4% in 2022. Gross wages and salaries per employee declined by 4.2% in 2020, but are forecast to increase afterwards, with the growth rate increasing to 2% in 2022. Overall assessment After significant progress in reducing imbalances in previous years, the COVID-19 crisis has led to an increase in debt ratios, to a substantial extent due to the decline in GDP. Vulnerabilities linked to external, private sector and government debt remain. The negative impact of the COVID-19 pandemic on tourism has been very significant and will also be felt in 2021, where the current account is expected to turn negative for the first time in recent years. Government debt increased substantially in 2020 and, on account of high government deficits, is forecast to continue increase again this year and next. Private debt in percent of GDP increased due to the drop in GDP, but also due to a higher indebtedness of the corporate sector. Up until the COVID-19 pandemic, policy action to reduce the stock of imbalances was limited across most policy areas. Notably, measures to reduce labour market segmentation by fighting the abuse of temporary contracts were not very effective; limited progress was made in the area of fiscal governance, and on reforms aimed at reducing skills mismatches, fostering research and innovation and improving the business environment. Complex administrative procedures and regulatory restrictions imposed on service providers continue to weigh on business environment. Furthermore, the relinking of pensions to inflation risks worsening long-term fiscal sustainability, unless the planned offsetting measures are sufficiently ambitious. The outbreak of the COVID-19 pandemic led the authorities to implement policies cushioning the economic impact of the pandemic and fiscal consolidation efforts were suspended with the activation of the general escape clause of the Stability and Growth Pact. The implementation of policy measures in the Recovery and Resilience Plan can prove decisive in mitigating some outstanding vulnerabilities of the Spanish economy and steering a reduction of the existing imbalances. The economic impact of the RRF funds on the Spanish economy will be significant, particularly from 2022, when strong demand effects and possible carry-over effects from 2021 should be accompanied by a gradual contribution from the supply side. The Spanish authorities estimate that the fully-fledged implementation of the Recovery and Resilience Plan’s measures will increase economic output by 2 percentage points on average per year. Sustained GDP growth will be a driver of the needed deleveraging process both in the private and public sector. In addition, measures may go some way towards addressing persistent labour market segmentation. Actions aimed at the upskilling of the labour force can enhance the country’s competitiveness, producing positive spillovers and enhancing Spain’s external position. The commitment to the industry-services ecosystem, and the boost to entrepreneurship will account for an estimated improvement of 0.2 percentage points in the long-term growth rate of exports, according to Spanish authorities. On the unemployment front, the Spanish Government estimates the RRP can generate up to 800 000 new jobs and push the unemployment rate below the pre-crisis levels by 2023. Box 1.1: Spillovers Spain The pandemic recessions in EU Member States also reflected faltering cross-border demand from trade partners. The drop in Spanish aggregate demand due to the pandemic and the containment measures played a significant role in the output declines of its closest partners. In the recovery, cross-border spillovers may undo their negative impact of 2020, yet the uncertain timing and extent of the recovery make a forward-looking assessment difficult. As a first step, this box thus aims to take stock of the heterogeneous spillovers of Spanish demand to other Member States’ value added in 2020. It quantifies cross-border effects applying latest production data to input-output estimates. ( I ) This allows for synthesising supply chain effects, e.g. detailing how Spanish consumption from domestic providers affected those providers’ foreign suppliers, and their suppliers in turn. While these results allow for country-specific sectorial detail, note that they reflect partial equilibrium effects in the goods and services market only – they do not include any second-round effects on foreign wage income, interest rates, prices etc., which may be stronger. Graph 1a shows the overall cross-border impact of the heterogeneous final demand changes during 2020, and highlights the Spanish contribution therein. Overall, 1.2 pp of the 2020 EU output decline can be attributed to cross-border demand effects, with Spanish demand accounting for over 0.1 pp thereof. Yet small open service-intensive economies were hit stronger than the average. In contrast, RoEU demand spillovers accounted for only 0.3 pp of the Polish output slump. The importance of Spanish demand varies significantly across partners, with particular relevance for neighbouring Portugal. Namely, one third of the VA impact in Portugal due to intra-EU demand changes is driven by a reduction in Spanish demand, whereas this share is almost negligible for the Baltics. Graph 1b highlights the heterogeneous effects of the pandemic by zooming in on the Spanish contribution by sector (the dark-blue bar in Graph 1a). ( II ) The most relevant are indirect spillovers, which captures supply chain interlinkages. ( III ) Such indirect cross-border spillovers account for a major part of the total impact of Spanish demand on the RoEU output loss. The decline in Spanish tourists accounted for the bulk of Spanish demand spillovers to Croatia or Malta, Bulgaria, and neighbouring Portugal. Demand changes for non-tourist services had relatively small impact. Changes in the final demand for industry products had an impact on Portugal, France, Czechia and Slovakia in particular. Table 1.2:Assessment of Macroeconomic Imbalances Matrix - Spain (Continued on the next page) Table (continued) Source: European Commission Services Table 1.3:Selected economic and financial indicators, Spain Source: Eurostat and ECB as of 2021-05-05, where available; European Commission for forecast figures (Spring forecast 2021) 2. Thematic Issue: External Position Prior to the outbreak of the COVID-19 pandemic, Spain’s external net debtor position narrowed steadily. Notably, high nominal GDP growth and continued external surpluses drove a slow but persistent narrowing of Spain's negative net international investment position (NIIP) to 74% of GDP at the end of 2019. Despite the impact of the COVID-19 pandemic and the large drop in tourism-related activities, Spain’s current account surplus remained positive at 0.7% of GDP in 2020. It is forecast to turn slightly negative in 2021 (-0.1% of GDP) before turning positive again in 2022 (0.3% of GDP). The surplus is the result of a positive balance in services, which more than offsets the trade deficit in goods (see Graph 2.1). The large import of energy products accounts as the main factor underlying the negative trade balance in goods. Overall, the level of both exports and imports dropped in 2020, against a background of declining global growth due to the crisis and the sharp drop in tourism. Although the contribution of net exports to growth was negative in 2020, it is expected to turn positive again in 2021 and 2022.

Graph 2.1:Trade balance Source: Eurostat The reduction of Spain’s external net debtor position in terms of GDP came to a halt in the first half of 2020, mainly due to the sharp contraction in GDP. The reduction in the level of economic output led Spain's NIIP to worsen to -84% of GDP by end-2020, which remains below prudential and fundamental-based benchmarks, but still 7 percentage points above the trough reached during the financial crisis (Table 2.1). In 2020, the net borrowing position of the government widened substantially, partly offset by a considerable increase in household savings (Graph 2.3(b)). Graph 2.2:Decomposition of NIIP change Source: Eurostat The composition of Spain’s external liabilities in terms of instruments and maturity mitigates some of the vulnerabilities. The NIIP excluding non-defaultable instruments (NENDI), which accounts for the riskiest categories of external liabilities ( ), stood at -53% of GDP in 2020, above the prudential threshold of -58%. The reduction of the NENDI since 2011 (by 25 p.p of GDP), has been faster than that of the NIIP (a decline of 14 p.p). This broadly reflects an improvement in the net foreign direct investment (FDI) position due to sizeable foreign investment inflows, which help mitigating the overall degree of vulnerability (Graph 2.2; Graph 2.3(c)). Moreover, a sizeable part of external debt – slightly over 40% in 2020 Q4 – is composed of central bank liabilities stemming from monetary operations of the Eurosystem (Graph 5), entailing substantial lower refinancing risk than that of the debt held by the private sector. In addition, the structure of government debt - displaying an increasingly longer average maturity of 8 years at the end of 2020- contributes to reducing the overall risk profile. Reducing decisively Spain´s large external liabilities would require maintaining large current account surpluses for a sustained period of time. Spain’s NIIP is still far from a level that could be considered prudential (‑58% of GDP in 2020) or in line with fundamentals (-22% of GDP) (Table 2.1). The measures that will be implemented in the Spanish Recovery and Resilience Program to raise competitiveness by improving labour market skills and through investment in research and innovation will also help strengthening the external position. These measures will also help a reduction of imported energy through the promotion of renewable energy.



Table 2.1:Selected external indicators, Spain Source: (a) Eurostat, (b) Ameco, (c) European Commission calculations



Graph 2.3:Thematic Graphs: External position Source: European Commission Services 3. Thematic Issue: Private Debt Situation entering the COVID-19 crisis Up until the end of 2019, the stock of private debt was on a declining trend, largely supported by the constant GDP growth- albeit deleveraging needs persisted. Private debt dropped from above 200% in 2010 to 129.8% of GDP in consolidated terms at the end of 2019. Following the outbreak of the COVID-19 pandemic and the implementation of diverse support measures aimed at mitigating its impact, the private sector debt ratio accelerated. The debt accumulated by the non-financial private sector increased to 147.4% in the last quarter of 2020, up by 4.1 pp. compared to the third and increased by 17.1 pp. since beginning of the year. This upward evolution reflects both the increase of indebtedness in the corporate sector and, to a larger extent, the sizeable fall in GDP experienced by Spain in 2020. The NFCs’ debt amounted to 84.9% while total household liabilities totalled 62.5% in terms of GDP. Both NFC and household debt ratios are significantly lower than those recorded prior to the global financial crisis, and in line or slightly below the euro area average. However, according to the Commission estimates, debt to GDP ratios of both NFCs and households remained above prudential levels and fundamental-based benchmarks (Graph 3.1). Notably, the NFC debt level stands about 30 pps and 25 pps above the prudential threshold and the fundamental benchmark, respectively. Graph 3.1:Thematic Graphs: Private debt Source: European Commission Services Policy measures support borrowers and corporates

The Spanish authorities have implemented several measures to support borrowers and corporates since the beginning of the COVID-19 pandemic. The subsequent legislative and non-legislative payment moratoria adopted between March and July 2020 have played a crucial role in providing a temporary breathing space for borrowers and their banks. Such loan moratoria have recently been extended as the deadline for borrowers to apply for both legislative and non-legislative moratoria has been set to 31 March 2021. In addition, two public guarantee programs managed by the public development bank (Instituto de Crédito Oficial, ICO) to cover liquidity and investment needs for corporations and self-employed individuals, as well as specific measures relating to the tourism sector and the public transport of goods were deployed. Such guarantee programs have been extensively used by the corporate sector as according to ICO, bank funding backed by government guarantees represented around 40% of total new loans to non-financial corporations between April and December 2020. This percentage reached 60% in the case of SMEs. Throughout the first quarter of 2021, Spain has put forward an additional package of measures aimed at further supporting the flow of credit to the economy. On 12 March, the government adopted new measures amounting to EUR 11 billion to help viable corporations whose financial situation has deteriorated as a result of the COVID-19 pandemic. This amount is broken down into EUR 7 billion for non-reimbursable aid to self-employed and firms in these sectors, EUR 3 billion to restructure the state-guaranteed loans granted by ICO and EUR 1 billion for a Recapitalisation Fund. The Bank of Spain recently indicated the need for sustained support to the corporate sector, which under the baseline scenario is estimated to be between 11bn and 20bn and susceptible to sizeable increase if worse-than projected macroeconomic conditions materialise. Going forward, private debt developments may be less favourable than in recent years Moving forward it will be vital to assess how firms will be emerging from the crisis. Excessive corporate indebtedness could hamper investment in the coming years or lead to insolvency situations affecting those corporates particularly stressed by the impact of the COVID-19 pandemic. Against this backdrop, the value of public guarantees have registered a sizeable increase, thereby accentuating the risk related to the materialisation of contingent liabilities, which shall be closely monitored in the near future, especially if macroeconomic fundamentals turn out being weaker than predicted under the current baseline scenario. On the back of the government support schemes granted to mitigate the impact of the COVID-19 pandemic, banks have increased lending to the economy. Lending to the private sector turned positive in April 2020 – for the first time since April 2011. Total lending to the private sector (excluding interbank lending) increased by 3.2% y-o-y in December 2020. Credit activity has been mainly supported by the expansion of lending to non-financial corporations, which went up by 8.4 % y-o-y in December 2020. This was the highest growth rate registered since lending to corporates entered again positive territory in April 2020. This development has been driven to a large extent by new loans to corporates (Graph 3.3.d). A significant share of these new loans granted to corporates are backed by guarantees of the ICO. The loans guaranteed by ICO made up roughly 40% of total new loans granted to corporates between April and December 2020. In contrast to lending to corporates, lending to households has continued on the downward trend observed since June 2019 (Table 3.2). Lending to households decreased by 1.2% y-o-y in December 2020, in a context of a substantial increase of the household savings rate (Table 3.2). The rebound in lending fostered by the public support schemes also reversed the deleveraging trend in the banking sector observed since 2012. The domestic assets of Spanish banks increased by 10% in February 2021 compared with February 2020, reaching EUR 2.05 trillion. Meanwhile, the total assets of the Spanish banking sector (including the assets of foreign subsidiaries and branches) perked up by 5.9% to EUR 2.89 trillion during the same period. The total volume of loans increased during this same period by EUR 156 billion, out of which roughly EUR 120.8 billion are loans guaranteed by the ICO (2). For the first quarter of 2021, Spanish banks expect credit standards to tighten further for loans to non-financial corporations, while remaining unchanged for loans to households. The pace of NPL reduction has significantly slowed down and NPLs may start to increase again once support measures will be phased out. Yet, thanks to borrower relief measures coupled with the public guarantee schemes, which have prevented a deterioration in asset quality, the NPL ratio at system level decreased to 4.6% at the end of 2020, down from 4.8% reported at end-2019. From a sectoral breakdown, the construction sector emerged as the area displaying the highest, although declining, share of NPLs. Real estate activities and productive activities have also followed on a downward path, while loans to households have registered the lowest level of impairment, with a NPL ratio of 4.3% at the end of September 2020. In addition, similarly to other banking sector across the EU, Spanish banks reported a marked increase in Stage 2 loans (according to IFRS 9) in the second half of 2020. According to the latest data published by the European Banking Authority (EBA), the share of loans classified as Stage 2 in the total loans covered by EBA-compliant moratoria went up to 26% at the end of 2020, 10 p.p higher than at end of June 2020. The loan moratoria have alleviated the impact of the COVID-19 pandemic on both banks and borrowers, in particular the most vulnerable ones. However, although no significant cliff edge effects are expected when moratoria expire, a more marked deterioration in asset quality is likely to emerge in 2022. The COVID-19 crisis moderated house price growth The lockdown measures weighed on activity and prices in the housing market, with a heterogeneous impact in local rental markets. Until end-2019, house prices had been on an upward path for six years and the valuation gap was closing at the national level, yet with considerable divergences across regions (Table 3.3). The lengthy stoppage to economic activity in the first quarter of 2021 accentuated the setback of investment in housing and the slowdown in property prices experienced in the fourth quarter of 2020, when the growth rate fell to 1.5% y-o-y, the lowest since the first quarter of 2015 (Graph 3.3.c). The drop in dwelling prices going into the first quarter of 2021 has been more pronounced in the second-hand segment as demand for new properties showed greater dynamism, possibly reflecting a shift in household preferences arising as a result of the COVID-19 pandemic. Graph 3.2:Bank loans to households by type Source: ECB BSI The latest Bank Lending Survey reported a slight tightening of credit standards for housing loans to households, despite the fact that the average interest rate on mortgages constituted on dwellings over the first months of 2021, set to 2.5%, was in line with the last quarter of 2020. This reflects primarily the perception by banks of a deteriorating general economic outlook and the increasing borrowers’ credit risk. It also noted a modest decline in demand for housing, which is projected to reverse in the second quarter. In addition, within this scenario, the reduced financing cost associated with the prospect of a prolonged looser monetary policy in the euro area could make housing investment more attractive and affordable for households and investors, thereby accelerating the recovery of the housing sector. The slowdown to economic activity in 2020 exacerbated housing supply constraints, adding a source of upward pressure on prices. Furthermore, the gradual pick up of tourism-related activities could contribute to lifting prices for the remainder of 2021, particularly in those areas where holiday accommodation constitutes an important driver of residential properties. A rebound of activity in the housing market is therefore expected when the current containment measures are eased and pent-up demand built during lockdown period is absorbed. Such momentum could be spurred in response to more favourable future income expectations of households, now undermined by a weak labour market outlook, despite the income support measures put in place by the government. Graph 3.3:Thematic Graphs: Private debt Source: European Commission Services

Table 3.1:Non-financial corporations debt indicators, Spain Source: (a) Eurostat, (b) Ameco, (c) European Commission calculations, (d) ECB Table 3.2:Household Debt Indicators, Spain Source: (a) Eurostat, (b) Ameco, (c) European Commission calculations, (d) ECB Table 3.3:Selected housing indicators, Spain Source: (a) Eurostat, (b) Eurostat, OECD, ECB, BIS, Ameco, national sources, European Commission calculations, (c) European Commission calculations, (d) ECB, Ameco (e) Ameco (f) ECB