With the worst moments of the economic crisis and the eurozone debt problem seemingly past, some European countries are beginning to see improvements in their economies and labor markets. Among the most notable recoveries is Spain, where economists, investors, business executives and politicians are beginning to pay attention to the positive signs coming from Madrid.
One of the people who have shined a spotlight on Spain in recent weeks is Emilio Botin, president of Banco Santander, the largest financial institution in Spain and one of the largest in the European Union. “This is a great time because money is arriving for everyone: for the stock exchange, to address the public debt and [in the form of] direct investments,” Botin said at an October 17 press conference in New York. “In recent months, there has been a drastic change in the perception of our country. There is a confidence in Spain that you cannot imagine.”
A few days later, news of a major business deal bolstered Botin’s words. Bill Gates, co-founder of Microsoft, acquired a 6% ownership of Fomento de Construcciones y Contratas (FCC), the Spanish construction and services firm, at a cost of 113.5 million euros, or $148.4 million. In the process, Gates became the second largest shareholder in the construction firm, following Esther Koplowitz, who controls a 53.9% share. Numerous media outlets have interpreted this deal as a sign of growing confidence in Spain and its companies. Others view it as an isolated deal that resulted from the friendly relationship between Gates and Koplowitz.
“The worst has passed in two respects: The yield on the government bond is down, and the economy is coming out of recession,” notes Mauro F. Guillen, a Wharton management professor and director of the Lauder Institute. “Much of the turnaround is based on the ‘internal’ devaluation,” resulting from declining wages and enhanced productivity, adds Guillen. Moreover, “the export sector is responding quite well.”
“The worst has passed in two respects: The yield on the government bond is down, and the economy is coming out of recession.” –Mauro F. Guillen
According to Rafael Bonete, professor of applied economics at the University of Salamanca, Spain is most likely no longer a location that has little to offer foreign investors. However, Bonete notes that it is too early to say whether Spain will once again be an attractive location for foreign capital. “Foreign investors who have a desire to remain [in Spain] know about the country’s large number of weaknesses: the [financial] delinquencies, the [high rate of] unemployment, the shortage of bank financing [and] the increase in the public-sector debt….”
Juan Ramon Rallo, professor at King Juan Carlos University and director of the Instituto Juan de Mariana, agrees. “Spain is becoming a destination to consider, with its [progress in] cost containment, the non-suspension of its short-term payments and the overabundance of global liquidity,” Rallo says. “This is a time when investors are investing in any sort of asset, however risky that may be.”
Indeed, many investors are taking their chances on assets that are available for very low prices. Guillen cautions that Spain’s “domestic market continues [to be] depressed, and [the rate of] unemployment is high. Given that the economy is not expected to grow faster than 2% for the foreseeable future, unemployment will remain high for several years.”
Renewed Foreign Investment
Certainly, the statistical data support the idea that there is a strong flow of money arriving in Spain. According to Spain’s Ministry of Economy and Finance, foreign direct investment in the country doubled during the first eight months of the year, reaching the level of 19.4 billion euros, compared with nine billion euros during the same period in 2012.
“In August, it was reported that direct investment in Spain doubled from the previous year, and there is [widespread] hope that the fall and winter will bring [even] more marked improvements,” notes Santiago Carbo-Valverde, economics professor at Bangor University in the United Kingdom and a researcher at Funcas, the federation of Spanish savings banks. “Asset sales and the [lowering] in asset prices help that trend, along with the climate of greater financial stability and the revival of long term hopes for a recovery in [the value of] these investments.”
But Alexis Ortega, director of Finagentes Gestion, a financial consultancy, is much more doubtful about Spain’s ability to attract big investors. In his view, the real reason why so much foreign capital is coming into Spain is simply the current economic situation, in which the world’s big central banks are flooding the money markets. Nowadays, liquidity is leaving those countries that have lower interest rates, such as the United States and Japan, in search of higher returns in those markets with higher rates, including the eurozone.
“There remains a great deal to do, and important problems have yet to be resolved.”– Alexis Ortega
“That is the reason why capital is coming to Spain; not because the government [of Spain] has made all the necessary economic reforms,” Ortega notes. “There remains a great deal to do, and important problems have yet to be resolved.” For example, he asks, “What will happen with all the money that is arriving now, once the U.S. [Federal Reserve Board] begins to withdraw its economic support measures?”
According to Jose Luis Martínez, a strategist at Citi in Spain, the investments that are presently arriving in the country are “basically financial” and are “probably” disinvestments from the United States and the emerging nations. “Those investments that coming into Spain are targeting the banking sector as a priority, but also its public debt and some offerings of private fixed debt.” He adds that small and mid-size Spanish companies can offer good investment opportunities for foreign capital, but that such firms need to make themselves well-known overseas beforehand. “There are big opportunities, even if many details remain unknown at the moment.”
Rallo says the Spanish sectors that can benefit the most from the arrival of foreign capital are the ones that are “most leveraged and in need of capital,” adding that “the banks are a classic example. However, for the same reasons, if capital once again leaves [Spain], then [the banks] will suffer the most damage.”
Carbo-Valverde notes that “the arrival of foreign investment is providing a somewhat faster correction for [the depressed] real estate asset market than in the past.” Generally speaking, he says, “In any sector, those companies that are sound businesses but have debt problems are the firms attracting the greatest interest.” However, Ortega points out that “the best business opportunities in Spain can be found in those companies that have figured how out to diversify their business well, and are very oriented toward international trade and exporting.”
In recent months, Spain seems to have gone from being the prototype of a country battered by the global economic crisis to an example for others to follow when it comes to overcoming economic hardships. In September, Morgan Stanley distributed a report titled, “A New Spain.” In October, Nick Gartside, director of the fixed income business at JP Morgan, said in an interview with Citywire in the U.K. that Spain could become “the big success story of Europe.” Last month, Deutsche Bank also praised the country, noting that [Spain] “was being Germanized.”
International investors have taken note and seem to have positioned themselves accordingly. On October 30, the National Statistics Institute confirmed that the economy had left behind nine consecutive quarters of recession, and registered growth of 0.1% between July and September. In addition, during that same period, the number of unemployed workers in Spain declined by 72,800 to 5,904,700. That left 25.98% of the active population without work, compared with 26.26% during the second quarter.
Given all that, is it clear that Spain’s economy has entered a new period of recovery? “We will have to wait and see what happens during the next two quarters in order to determine if this really is a period of recovery, or whether we are dealing with a temporary change, which is quite likely,” Bonete says. According to Carbo-Valverde, “The inflection point may have been reached, but work remains to be done in order for employment and credit to recover in an environment of less uncertainty and greater investor confidence.” In his view, “that will take quite a lot of effort.” Beyond that, he says that “the recovery will require growth rates that are somewhat higher than those that are being managed today, and that could arrive in 2015.”
“This weak recovery could wind up leading to another recession, or it could become something more substantial. We will find out by around next summer.” –Rafael Bonete
Bonete anticipates that what happens going forward depends on what the government does to control the public sector deficit, and what happens in the European Union and in the rest of the world. “It is very likely that, unless events occur that demonstrate the weakness of some country [or other] in the eurozone, there will finally be a weak recovery [in Spain],” Bonete predicts. “This weak recovery could wind up leading to another recession, or it could become something more substantial. We will find out by around next summer.”
Carbo-Valverde forecasts a gradual improvement over the medium term, compatible with fiscal efforts and a reduction in the private sector debt. Over the long term, if there are no surprises, he foresees growth [in Spain] of above 1%. “There may be some room for positive surprises in 2014, but there are also many underlying risks that still exist in the international and European institutional situation, and they could affect Spain.”
One of the big questions now, he says, is whether “labor reform and the recovery in [Spain's] competitiveness could make it possible for Spain to generate [a significant number of] jobs while, at the same time, recording economic growth rates below those rates that were required to do so prior to the [economic] crisis.”