Current Account Surplus Here To Stay

BMI View: Spain's current account will post a surplus of 0.8% of GDP in 2013, as subdued domestic demand continues to restrict import growth and improving labour market competitiveness supports export growth going forward. Robust tourism receipts will ensure that there is a sizeable goods and services surplus in H213, although weak external demand and a modest recovery in domestic demand through 2014 will prevent the current account surplus from growing more significantly over the next few quarters.

We expect Spain's current account to post an annual surplus in 201 3, its first positive reading in over 20 years , as subdued domestic weighs on import growth and export s benefit from improving labour market competitiveness. Recently released data from the National Bank of Spain (BDE) has shown that this trend is already playing out, with the country's current account deficit shrinking by 74.6% year-on-year (y-o-y) to EUR3.2bn in Q113, from EUR13.6 bn in Q1 12. We expect to see this trend continue over the next few quarters, with better-than-expected export and tourism data prompting us to upgrade our current account forecasts to 0.8% of GDP in 2013 and 1.4% in 2014, from 0.4% and 0.8% previously.

The main factor that will drive Sp ain's current account into surplus is the country's rapidly rebalancing merchandise trade deficit, whic h shrunk by 72.5% y-o-y in Q113 to EUR2.5bn. Weak domestic demand has been one of the main contributors to this trend, with stubbornly high unemployment (27.2% in April), stagnant wage growth and the government's fiscal austerity programme weighing on consumer spending, restricting demand for imported goods. While we believe Spain's economy should begin improving modestly in 2014 (see 'Growth Outlook Bleak, But Economy Bottoming' , May 16) , which should prove supportive of imports, the severity of the country's economic downturn and fall in disposable incomes leads us to believe that import growth is unlikely to pick-up significantly anytime soon.

Surplus Here To Stay
Spain - Current Account, EURbn

BMI View: Spain's current account will post a surplus of 0.8% of GDP in 2013, as subdued domestic demand continues to restrict import growth and improving labour market competitiveness supports export growth going forward. Robust tourism receipts will ensure that there is a sizeable goods and services surplus in H213, although weak external demand and a modest recovery in domestic demand through 2014 will prevent the current account surplus from growing more significantly over the next few quarters.

We expect Spain's current account to post an annual surplus in 201 3, its first positive reading in over 20 years , as subdued domestic weighs on import growth and export s benefit from improving labour market competitiveness. Recently released data from the National Bank of Spain (BDE) has shown that this trend is already playing out, with the country's current account deficit shrinking by 74.6% year-on-year (y-o-y) to EUR3.2bn in Q113, from EUR13.6 bn in Q1 12. We expect to see this trend continue over the next few quarters, with better-than-expected export and tourism data prompting us to upgrade our current account forecasts to 0.8% of GDP in 2013 and 1.4% in 2014, from 0.4% and 0.8% previously.

Surplus Here To Stay
Spain - Current Account, EURbn

The main factor that will drive Sp ain's current account into surplus is the country's rapidly rebalancing merchandise trade deficit, whic h shrunk by 72.5% y-o-y in Q113 to EUR2.5bn. Weak domestic demand has been one of the main contributors to this trend, with stubbornly high unemployment (27.2% in April), stagnant wage growth and the government's fiscal austerity programme weighing on consumer spending, restricting demand for imported goods. While we believe Spain's economy should begin improving modestly in 2014 (see 'Growth Outlook Bleak, But Economy Bottoming' , May 16) , which should prove supportive of imports, the severity of the country's economic downturn and fall in disposable incomes leads us to believe that import growth is unlikely to pick-up significantly anytime soon.

Although the rebalancing of Spain's merchandise trade deficit has been sub-optimal over the past few years ( i.e. driven by weak domestic demand rather than strong exports ) , we now see improving export performance contributing more significantly towards the narrowing current account deficit going forward . There are signs that this view is already playing out, with goods exports growing by 8.5% y-o-y in the first four months of 2013 , compared to a 4.6 % y-o-y contraction in goods imports in the same period.

Exports Outperforming
Spain - Goods, % chg y-o-y

Fa lling wages, the government's labour reforms and a reorientation of exports towards higher growth markets will dri ve merchandise export growth further over the next few quarters, reaching by 6.2% by end- 2013 according to our forecast s . Lower wages are driving down the costs of production in Spain's key manufacturing export industries (predominantly car parts, electricals, machinery , textiles and chemicals), while reforms implemented by Mari an o Rajoy's administration have eased firing laws and have capped the country's jobless benefits. We believe t he impact of these changes contributed towards intermediate goods exports (which account for 51.2% of total exports) growing by 13.1% y-o-y in Q113, and by 55.9% from 2008 to 2012. However, it is important to note that weak demand from EU countries will prevent a more significant widening of the current account surplus going forward.

Into Surplus
Spain - Goods and Services, EURbn

Indeed, a lthough Spain is gradually re-orienting its exports away from the EU and towards emerging markets, with the share of export s destined for EU countries falling from 71.1% in 2006 to 61.2% in April 2013, we believe the s till-significant reliance on eurozone demand will ensure that export growth remains below-potential. Furthermore, we believe the reluctance of Germany to accommodate internal trade rebalancing within the eurozone (see 'Rebalancing: Eurozone Risks Shifting From One Equilibrium To Another', July 3) could lead Spain to become increasingly reliant on its largest trade partner, France, for external demand, which would restrict export growth given France's bleak growth outlook .

Tourism Recovering
Spain - Services, % chg y-o-y (LHS), and Tourist Receipts (RHS)

On the services side, Spain's robust tourism sector will play a central role in pushing the current account into surplus i n 2013 and 2014 . Travel receipts were up 1.9% y-o-y to EUR7.8bn in Q113 (accou nting for 33.9% of total income from service exports), and tourist arrivals were up 3.2% y-o-y in the first five months of the year, with low prices and rising political instability elsewhere (such as in Egypt ) making Spain an increasingly attractive tourist destination . With seasonal tourist receipts typically peaking from July to September, we ex pect the tourism sector to be the main driver of a wider goods and services surplus in Q313. W e forecast services exports to grow by 3.6% in 2013, which should ensure that the services sector continues acting as a net contributor to the current account for some time to come.

Expanding
Spain - Current Account

As we have highlighted over the past few quarters, a major factor precluding a more severe correction in Spain's external accounts is the income account , which remain s firmly in the red, coming in at -EUR3.9bn in Q113. Given the country's large stock of external debt, which came in at EUR1.8trn in Q113 , we note that sustained outgoing interest payments will keep the income account heavily in deficit for the foreseeable future.

Financial Account

G iven that Spain's membership of the euro limi t s the central bank's use of FX reserves to help finance the country's current account deficit, Spain has been dependent on inflows from the eurosystem and in particular the European Cen tral Bank (ECB) to fund its current account deficit . However, w ith the country's current account likely to post surpluses over the next few years, we believe the country should become less dependent on ECB funding going forward.

Other Investment Easing
Spain - Financial Account, EURbn

This view has been playing out, with other investment inflows easing significantly over the past few months (see above chart) , falling from EUR35.6bn in December 2012 to EUR2.4bn in May 2013. However, despite Mariano Rajoy's centre-right administration implementing a variety of reforms aimed at making the country increasingly attractive for f oreign direct investment (FDI), we have not yet seen a significant pick-up in FDI , implying that a sustainable recovery remains some way off.

Risks To Outlook

The main risk to our current account foreca st is for weaker exte rnal demand from Spain's main trading partners over the next few quarters. Having factored a modest eurozone recovery into our current account forecast for 2013 and 2014, another downturn in regional demand could prompt us to downgrade our forecast . Nevertheless, we believe a retu rn to current account deficits would be highly unlikely even in this scenario, as it would jeopardise any recovery in Spanish domestic demand.

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Sector: Country Risk
Geography: Spain, Spain, Spain, Spain
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