By: Sebastian Mariz, Managing Director of Influence Spain
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Political stability
With only two months left until the regional and municipal elections of May, the Prime Minister, and his socialist party are facing several hurdles and drawbacks which could damage the results they hope to achieve then. The most important, and potentially the most detrimental to the PM’s reputation, and that of his party, is the clash with his junior partner over changes to the recently adopted law on sexual abuse and rape. Changes which the PM has had to negotiate with the opposition conservative party, and which his junior partner, who sponsored the original text, is adamantly opposed to and which will require parliamentary support, from the opposition, to be adopted. Although the situation is not expected to break the coalition government, it has forced the PM to position himself and his party closer to the center, allowing his junior partner to maintain ownership of the far left, radical feminism and LGTBQ rights.
In addition to this clash with his junior partner, a new corruption scandal has erupted in the Canary Islands which involves socialist members of parliament. The corruption scandal is expected to damage the PM’s goal of getting his current Health Minister elected as the new Premier of the islands, and may have negative implications in other regions where he hopes to win.
The PM’s cabinet has also come under some heat from the European Parliament over the lack of transparency in spending EU recovery and resilience funds. The delegation of Members of the European Parliament visiting Spain, found no indications of mis-spending or corruption, but did reprimand the Ministry of Finance and members of the parliament, for their lack of transparency in granting funds and in selecting projects to be financed. They also advised the Government to improve actions to ensure co-governance with the regional governments in spending funds.
These drawbacks have had a noticeable impact on all election polls, with the opposition conservative party gaining a very comfortable lead and the socialist party trailing further behind than in any other previous polls. According to these polls, if general elections were to be held today, the conservative popular party would win between 135 and 145 seats in Parliament and the socialists between 90 and 110. The far-right Vox would win third place, with between 42 and 45 seats and the far-left Podemos would obtain between 24 and 28 seats. If these results were confirmed in the general elections at the end of the year, popular party leader, Nuñez Feijoó would be able to form a coalition government with Vox, the Basque nationalist party and a splintering of smaller regionalist parties, whereas Pedro Sanchez would be unable to repeat the grand coalition, currently running the country.
Changes to voter tendencies and polling results continue to fluctuate, and over the coming weeks are expected to reflect voter reactions to the motion for a vote of no-confidence against the Prime Minister and his coalition Government, tabled by Vox. Although the motion will not be adopted and a vote of no-confidence will not take place, the Prime Minister wants to use this parliamentary initiative, by the opposition, as an opportunity to increase his criticism of the opposition, warn voters of the risks of voting for the far-right, and to communicate to moderate voters the measures adopted by his Government to reduce the burden from inflation, generate jobs and improve social services. Whether or not the failed motion has had a greater impact on extreme voters or more moderates, will be seen in the polling results that will be published at the end of March.
GDP
Economic data published by the National Statistics Institute, the INE, for the last quarter of 2022 and the first month of 2023, have allowed the Bank of Spain to issue new more optimistic macroeconomic projections for 2023. The last quarter of the year registered timid growth of 0.2%, with similar figures expected for the first quarter of this year. On the basis of this data, the Bank of Spain has increased macroeconomic growth projections for this year to 1.6%, 0.1 percentage points higher that the predictions made in December. Inflationary figures are also expected to moderate and finish the year at 4.75%, 0.15 percentage points lower than the 4.9% projected in December. The main reasons for this moderation of inflationary pressures on prices are the labour agreements to moderate salary hikes, lower VAT on certain foodstuffs, a stabilization of gas and oil prices and an easing of the supply chain disruptions registered in 2022.
The Bank of Spain has also indicated that national statistics show companies posting higher margins than during the worst of the pandemic and returning to levels registered in 2019. The Bank of Spain expects most companies and households to have sufficient financial muscle, to resist the higher interest rates expected for the remainder of the year, but has also warned that the most vulnerable households and companies may face a financial burden from higher rates that could lead to a growing number of mortgage foreclosures and bankruptcies.
A rise in interest rates to 5.5% is also expected to cool down the Spanish housing market, leaving 17% of potential homebuyers without a mortgage. Data on the number of mortgages signed in 2022, show a strong housing market and the number of new mortgages increasing by 10.2%, the highest figure in 12 years, but 13 percentage points lower than the growth registered in 2021. The average mortgage in Spain is for 145,000 euros and the total mortgages sold by banks currently sits at 67.4 billion euros. The regions of Andalucía, Catalonia and Madrid have registered the largest number of new mortgages.
High inflation, higher interest rates and the weak growth registered in the last quarter of the year have had a marked impact on the risk premium paid on Spanish Treasury bonds. This risk premium is the spread between a 10-year Spanish Treasury bond, and the benchmark, the 10-year German bond. The German bond is currently paying 2.52% and the Spanish bond 3.61%. The higher risk premium on Spanish Treasury bonds increases the cost of financing for the Spanish Government, and is expected to continue to hover around the 100 base point mark for the upcoming months, after having fallen below 100 in the first half of 2022. Political instability resulting from the two elections which will take place this year, is also having an impact on the risk premium. This squeeze on liquidity, in the public coffers, is somewhat offset by the extraordinary taxes on profits in the banking and utilities sectors, which kicked in at the beginning of the year and have already generated 1.45 billion euros in tax income for the Government. The total amount for 2022 ,which will be liquidated in the summer, is expected to reach 3 billion euros.
Energy transition/Renewable energies
The German/Spanish entente on European Union energy related matters has broken, with Germany opposing the Spanish Energy minister’s proposal to end the electricity spot market and replace it with fixed prices for nuclear and hydro power, bilateral contracts for difference (CFDs) for renewable energies and capacity contracts for gas. These contracts would be signed following auctions held by a national regulator.
The German proposal sent to the European Commission and co-signed by Denmark, Estonia, Latvia, Luxembourg and the Netherlands calls for temporary measures to reduce price oscillations from the gas supply crisis, while maintaining spot markets. They believe that these markets have worked well over the past 20 years and have maintained stable electricity prices over this period of time, only registering price hikes over the last year, due to the exceptional gas crisis caused by the war in the Ukraine. They also believe that any energy market reform must first undergo an in-depth and thorough regulatory and economic impact assessment before being made, and not be proposed in the midst of a, energy crisis.
The German position, which clashes with the Spanish proposal and with the statements made by the President of the European Commission, Ursula Von der Leyen in June of last year, is also contrary to the proposals made by France. Like Spain, France also calls for more intervention on the market and for more reliance on power purchasing agreements (PPAs), but does not go as far as Spain, in calling for an end to the spot market.
Several Spanish utility companies, including Iberdrola and Endesa and the Spanish electricity market regulator, the OMIE, have publicly supported the German position and have also voiced their opposition to the Spanish Government’s proposals. They believe more needs to be done to increase production from renewables, reduce dependence on foreign gas and the need to promote greater electrical interconnection between European countries.
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