ECONOMY: Exports lead a slow recovery

17 June 1994

AT last, there is a glimmer of hope for the Spanish economy. Last year unemployment was soaring, gross domestic product (GDP) shrinking and many companies contracting as competition in Europe intensified. But economists in Spain are unanimous that GDP is now rising, although projected growth of 1 per cent will only make up what was lost last year. Exports are leading the recovery.

Finance Ministry trade figures show that Spanish exports grew by 36 per cent in March from the same month a year earlier, while the trade deficit shrank by 17 per cent. Imports are increasing relatively slowly because Spanish consumer demand is still soft.

'Without doubt, the positive economic aspect is trade. A spectacular rise in Spanish exports will be the only factor pushing GDP into positive growth this year,' says Juan Iranzo, chief economist at Instituto de Estudios Economicos, a Madrid-based think-tank.

Tourist boom

More good news is expected from tourism this year. The authorities are promoting the country heavily, confident that instability in the former Yugoslavia, rising prices elsewhere in Europe and the sure attraction of Spain's climate will ensure a tourist boom. The trump card in drawing more tourists is the current weakness of the peseta, trailing at £1=Pta 205 and DM 1=Pta 82. Tourism accounts for more than 8 per cent of GDP. Visitor numbers and tourism receipts have been rising steadily and tourist income reached $19,000 million in 1993 compared with $15,000 million in 1988.

The export-led improvement in the trade balance is testimony to both a competitive currency and a concerted effort to expand the export horizon. The Enagas project and Cepsa's oil exploration in Algeria are two good examples of the more aggressive approach to overseas markets (see page 36).

Yet there is still scepticism about the strength of the recovery and whether the economy is free of deeper structural weaknesses.

'Spain can't help but lift out of recession so long as Germany and France lead the way,' says Alison Cottrell, senior international economist at Midland Global Markets in London. 'But the recovery isn't underpinned by consumer confidence yet. It won't feel like a recovery so long as unemployment continues to rise. And Spanish manufacturers will feel more pressure from competing manufacturers in low cost central European countries.'

Unemployment is still likely to rise to 24 per cent by the end of this year from 23 per cent last year, according to recent government estimates. Although the new labour laws address management complaints about excessive costs investment is still restrained and job creation is slow. Economists expect unit labour costs to rise by 2.1 per cent this year compared with 3.3 per cent in 1993.

The reforms passed in December should make the labour market more flexible. They will take time to have an impact on the structure of large companies, which complain of being over-staffed. They have been reluctant to lay off employees who, according to existing contracts, are entitled to 45 days redundancy pay for each year of service.

The public sector is the Achilles heel of Spain's economy. Many of the state run companies come under the aegis of the INI or Teneo, the state holding companies, which account for more than 7 per cent of GDP.

Most INI entities, such as loss-making airline Iberia, the Hunosa mining concern and troubled defence maker Santa Barbara, have barely begun to restructure.

Losses at Grupo INI rose by 58 per cent to Pta 125,000 million in 1993. Sister holding company Teneo, comprising candidates earmarked for eventual privatisation, delivered a modest Pta 3,000 million profit, up 35 per cent on the previous year.

The structural problems of the state companies are all too familiar: bureaucratic structures, ignorance in some sectors about marketing products outside Spain and inflexible employment practices. In the encroaching single European market such firms are no match for the growing competition.

The government plans to sell further tranches of shares in part state- owned companies such as electricity giant Endesa which floats 10 per cent of its equity this month, reducing the government stake to 65 per cent.

Oil and chemicals giant Repsol says it is waiting for an opportunity to sell some 10 per cent of the state's remaining 41 per cent holding at the end of this year. The sale of the state's 51 per cent share in banking group Argentaria may also come this year. Foreign interest in these blue chip institutions is considerable.

The budget def-icit, which expanded to 6 per cent of GDP in 1993 from some 3 per cent the year before, is a major cause for concern. The deficit was slimmed significantly in the first quarter but the government is still determined to cut back on public spending, crack down on tax evasion and speed up the privatisation programme to raise more cash.

These efforts should begin to pay off slowly, reducing the deficit to less than 5 per cent in 1995, according to Lehman Brothers. It may still prove something of a struggle. A government forecast that inflation will be squeezed to 3.5 per cent this year from 4.9 per cent in 1993 is already looking overoptimistic. Says the IEE's Iranzo, 'Inflation is beginning to worry me again.'

Short term interest rates, now at 7.5 per cent have come down dramatically but there is little room for further reductions. Most Spanish analysts see 7 per cent as the likely lower limit which may be insufficient to maintain the buoyancy of the stock market which has risen in response to the recent cuts.

A question mark remains over when Spain will be ready for 'convergence': meeting the economic targets for EMU set by the Maastricht Treaty. Ministers are evasive but few economists are betting on a date much before the year 2000. If the EU separates into two blocs converging at different speeds, Spain will probably find itself in the slower group, even if the country's recovery gathers momentum in 1995.


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