The Spanish economy got a boost on Friday as ratings agency Fitch changed its credit outlook from “negative” to stable, citing improvements in the country’s fiscal management.
The change means Fitch is no longer threatening to downgrade its rating for Spanish debt. Such a move could have meant that the fiscally troubled country would have been charged more to borrow money on international markets.
However, the move also leaves Spanish debt rated BBB, only two steps above junk bond status.
“Spain has improved its policy track record in 2012-13,” wrote the agency. “The authorities have made significant reforms of the labour market, pension system, fiscal framework and financial sector.” However, it warned that the country could still face some rough spots.
“The pace of reform is likely to slow in 2014-15 as external pressures ease and 2015 elections loom, but the effort made to date should put the economy on a surer footing.” Among the positives, Fitch noted that Spain was making gains on its balance of payments, restructuring its banking sector and had exited recession.
“The ratings remain supported by Spain’s high value-added and diversified economy, which is slowly adjusting after its credit bubble,” Fitch noted. “Strong improvement in productivity since 2008 has been broad-based and private sector deleveraging is underway.
But it also noted that Spain was still undergoing a wrenching fiscal adjustment and that its Government deficit remains large. It stated that, without commitment to stabilising its fiscal accounts and the overall economy, the situation could take a turn for the worse.
“In Fitch’s view, upside and downside risks to the ratings are balanced.” Fitch forecast a return to economic growth in 2014 and said it anticipated public debt to peak in 2015-16 at 103 per cent of gross domestic product.