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Country Commercial Guides for
Report prepared by U.S. Embassy Madrid, |
II. ECONOMIC TRENDS AND OUTLOOK
Major Trends and Outlook
Spain's GDP grew 3.8 percent for 1998, up from 3.5 percent in 1997. Growth was spurred by increases in agricultural exports, construction, capital goods investment, and, most significantly, private consumption, international institutions (IMF, OECD, and E.U.) project growth to be 3.5 percent for 1999.
Spain qualified for the EMU on May 2, 1998. Spain's fiscal and macroeconomic guidelines are determined by its commitment to this stability pact.
Inflation: Spain's inflation in 1998 was 1.4 percent. It is expected to rise to 1.8 percent in 1999.
Interest Rates: Interest rates on ten year government bonds are the standard against which Spanish rates are compared with their E.U. partners. In 1998, the Spanish ten-year government instruments were yielding 4.93 percent.
Deficit: Spain's composite public sector deficit for 1998 was 1.8 percent. We expect the deficit to decline further in 1999 and 2000 as Spain complies with the even more stringent EMU stability pact requirements.
Debt: The stock of government debt as a percentage of GDP stood at 69 percent at the end of 1998. We expect debt to stabilize at that rate and then begin to decline from 2000 on.
Exchange Rate Stability: The peseta is fixed to the Euro at pesetas 166.386 equals one Euro. The Euro dollar rate has fluctuated between $1.17 to $1.03 between January 1 and May 30, 1999. We expect the Euro dollar rate to stay in the $1.10 range or below for most of 1999 (implies a USD/peseta rate of USD 1 = pesetas 151.26). On January 1, 1999, the peseta fixed to the EURO. Throughout 1998 the peseta/Deutch Mark (DM) rate stayed at 84.90 pesetas to the DM.
Spain's national telecommunications market opened completely on December 1, 1998. The government also liberalized television broadcasting and implemented a regulated authorization system. Other liberalizing measures have followed in the energy sector (electricity, gas, and fuels) and possibly in the management of water services. To ensure the success of the liberalization programs, the government is taking steps to strengthen the Free Competition Tribunal, the regulatory agency, which has been established to oversee and coordinate the decontrol process. The government is passing additional measures to restrict monopolistic practices and to increase judicial oversight over leasing, factoring, and franchising contracts.
Financial reform has been geared toward improving mechanisms of corporate finance (especially for smaller companies) and promoting stable savings over the long term. To address Spain's high unemployment levels, the government has implemented two rounds of reform to liberalize hiring practices. Spain's unemployment rate continues to be the highest in the E.U. Projected unemployment for 1999 is 18 percent, compared with 10.5 percent for the E.U. and 4.7 percent in the U.S. The job-for-life principle, initiated by Franco, continues today in the form of high dismissal costs and generous welfare benefits that rank among the highest in the E.U. Labor market reforms in 1994 and 1997 have led to an increased use of "temporary contracts" and job growth. We anticipate that incremental labor market reform tied to close consultations between the government, union, and employers will be the rule for the foreseeable future.
Gross Agricultural production in 1998, estimated at 4.43 trillion pesetas, declined 0.5 percent from 1997 levels. This decline began when Spain joined the European Union in 1986. Falling agricultural prices combined with set-aside land programs and country production quotas have contributed to the decline.
Income per agricultural worker has risen considerably due to a dramatic loss in agricultural jobs. During the 13-year period of E.U. membership, about 800,000 agricultural workers have abandoned their jobs, bringing the total agricultural employment down to about 1 million. Income per agricultural worker, however, has declined over the last two years. Nonetheless, agriculture still employs about 7.7 percent of the country's total employed population and comprised about 3.0 percent of the country's total GDP in 1998.
As part of the "Agenda 2000", the E.U. heads of governments approved a reform of the Common Agricultural Policy (CAP) on March 25, 1999. Reforms were implemented in the arable crops, dairy and beef sectors. Support prices for grains will be cut by 15 percent over the next two marketing years, and a land set-aside rate of ten percent is fixed for the years between 2000-2006. High area payments for oilseeds will be cut down to the same level as those for grains. This is expected to have a major impact on the Spanish sunflower seed crop, and cause a dramatic reduction in the area in which this crop is planted. However, this low-water consuming, extensive and well-adapted rotational crop could be included in some of the existing environmental support programs, which might partially offset the negative impact. In addition, beef support prices will be cut by 20 percent in three steps, and as with grains, the rise in E.U. production-decoupled payments will not fully offset the decline in support prices. The dairy reform plan has been postponed, and the current country-milk quota system will remain in place until 2005.
The GOS was able to resolve several issues that arose from, what Spanish farmers considered weak negotiations on the part of Spain during its accession to the E.U. in 1986. These included unjustifiably low historical grain yields taken into account for estimating E.U. payments in Spain, and a milk quota allocation that was well below the actual production level.
In addition, the E.U. approved the reform of two agricultural sectors, olive oil and wine, which was beneficial for Spanish interests. Unlike previous proposals that threatened to severely jeopardize the competitive position of the Spanish olive oil industry, vis a vis other E.U. producing countries, the new country quota was reasonably aligned with Spain's production capacity. Brussels also reoriented its wine policies, which were harmful for the Spanish wine industry, to a new policy that stresses quality. Instead of the major vineyard-uprooting programs, which have been implemented in Spain in recent years, the Spanish wine industry will benefit from programs designed to restructure vineyards with varietal changes in order to improve the quality of the wines. This will make the Spanish wine industry more competitive.
Spanish lamb, beef, grain, dairy, legumbre and other sectors have had difficulties with increased competition from other E.U. countries, while horticultural crops have greatly benefited from increased access to other E.U. markets. In fact, Spain's exports of these products have risen dramatically during the last few years.
Livestock, dairy and poultry have traditionally been the most important sectors in terms of value of agricultural production in Spain, accounting for about 39 percent of total farm output last year. Horticultural crops (citrus, deciduous fruit, olives and olive oil, nuts, wine and vegetables) are, however, gaining importance and in the past year, have been equalizing in terms of value to the livestock, dairy and poultry sectors. Moreover, horticultural sectors account for over 70 percent of Spain's agricultural exports. Field crops (grain, tobacco, cotton, forage, sugar beets and oilseeds) cover a larger proportion of total planted area, but comprised only 16 percent of the value of total production in 1998.
For 1999, Spain's production of agricultural products is expected to be below average as field crops and pastures suffer from dryness. Other crops such as some fruit and vegetables are expected to be smaller than normal as a result of frost. The wine sector will experience the same problems due to dryness.
Principal Growth Sectors
a) Agriculture
Oilseeds Wheat, hard and durum
Lumber and other forest products
Tobacco leaf
Cotton
Pet foods
Edible pulses and edible sunflower seed
Seafood
Bourbon
Hides and Skins
Animal fats
Planting seeds
Though agriculture has played a smaller role in the overall economy since Spain's accession to the E.U. in 1986, exports of items such as fruits, vegetables, olive oil and wine have been greatly assisted by E.U. membership. On the other hand, Spanish lamb, beef, cereals, dairy products, pork and poultry have struggled due to increased competition from E.U. countries. However, given that Spain has the widest range of agricultural produce in the E.U., the agricultural sector is destined for increased growth.
b) Industry and Services
Industry has been recovering since the middle of 1996, particularly in the metalworking sector due to increased production in shipbuilding, data-processing equipment, and other transportation equipment. Manufacturing also showed growth due primarily to increases of manufactured food products. Prospects for growth are only moderately optimistic, following a record-setting year, in the manufacture of cars, Spain's top export. In 1996, five of the main brands (all foreign subsidiaries: Opel, Seat, Volkswagen, Citroen, and Renault) beat their own all-time records for production in or exports from Spain. The mining and chemical products sectors remain stagnant. However, mining is expected to recover when Spain increases its gold production.
All indicators show that the service sector is still expanding in nearly all areas: transportation, wholesale and retail trade, and tourism. Growth in tourism appears promising in the upcoming years, particularly as Spain continues to restore aging resorts. Spain has recently overtaken the United States as the world's second most popular tourist destination. In 1998, 47.7 million tourists visited Spain. One out of every eight Spanish workers is directly or indirectly involved in the tourism sector, which generates 10 percent of GDP with gross inflows in 1998 of 4.45 trillion pesetas (USD 29.6 billion). Annually, growth is about 4.5 percent for this sector. Tourism revenue has been the main driver of Spain's current account, with receipts regularly covering the country's merchandise trade deficit.
Sectors destined for future growth include telecommunications, which continues to register spectacular increases. For example, in the mobile telephone business, at the end of 1998, the client base totaled over 7 million, and grew to 8.7 million in the middle of 1999. In the cable television sector, there is excellent room for growth, considering that only one percent of the population has access to cable service.
Other growth areas include the environment and aviation. In order to comply with E.U. environmental regulations, it is estimated that Spain has to invest an estimated USD 33 billion in industrial clean-up, sewage treatment, water and air pollution control, and water and soil treatment. In the aviation sector, the E.U.'s liberalization policy has added new local regular airlines to cope with the increased demand for air transport services.
Spain is restricted from making further reductions in infrastructure spending both by previous commitments, such as the Master Infrastructure Plan for 1993-2007 and E.U. funding conditions, and by the need to stay competitive. Investments to upgrade Spain's infrastructure in terms of roads, airports, seaports and railroads will proceed, whether with public, private, or joint financing. Construction and related engineering services will benefit from these projects, which will require investments of over USD 100 billion through 2005.
Government Role in the Economy
The Spanish government influences the economy primarily through regulation rather than through direct ownership, though the government does own part or all of several of Spain's largest companies. Under the center-right administration, Spain has moved rapidly toward privatization, both out of conviction and because of the limited options available for curbing the budget deficit. Companies in SEPI will be privatized by the year 2000, following whatever deregulation or restructuring measures are necessary.
The results of Spain's privatization program, including Telefonica, Gas Natural, and the petrochemical company Repsol, have been so successful that the Ministry of Industry announced in May 1997 plans to speed up the privatization program.
Balance of Payments Situation
In recent years, Spain has run significant deficits in merchandise trade (averaging about 2.0 trillion pesetas annually for the last five years) and in net investment income (e.g., debt servicing, 1.0 trillion pesetas for 1997). Receipts from tourism and transfers from abroad (i.e., from the E.U.) have helped to balance the current account deficit. Due in part to the continued growth in tourism, Spain has been able to sustain a current account surplus for the past three years. With increased exports, Spain has also gradually been reducing its trade deficit. However, the current account surplus for 1998 again presented a deficit of about 0.3 percent of GDP.
Infrastructure Situation
The following statistics relate to the Spanish infrastructure (based on 1994 figures):
Electricity: 46,600,000 KWh capacity; 157,000 million KWh produced, 4,000 KWh per capita (1992)
Railroads: 15,430 km total; Spanish National Railways (RENFE) operates 12,691 km (all 1.668-meter gauge, 6,184 km electrified, and 2,295 km double track); FEVE (government-owned narrow-gauge railways) operates 1,821 km (predominantly 1.000-meter gauge, 441 km electrified); privately owned railways operate 918 km (predominantly 1.000-meter gauge, 512 km electrified, and 56 km double track).
Highways: 162,184 km total; 95,089 km national and 67,095 km provincial or local roads.
Inland waterways: 1,045 km, but of minor economic importance
Pipelines: crude oil 278 km, petroleum products 2,119 km, natural gas 1,666 km.
Ports: Algeciras, Alicante, Almeria, Aviles Barcelona, Bilbao, Cadiz, Cartagena, Castellon, Ceuta, El Ferrol, Gijon, Huelva, La Coruna, Las Palmas (Canary Islands), Mahon, Malaga, Melilla, Palma de Mallorca, Pasajes, Rota, Sagunto, Santa Cruz de Tenerife, Santander, Tarragona, Valencia, Vigo, and close to 200 other minor ports.
Merchant navy: 242 ships (1,000 GRT or over) which includes 2 passenger, 8 short-sea passenger, 71 cargo, 12 refrigerated cargo, 12 container, 32 roll-on/roll-off cargo, 4 vehicle carrier, 41 oil tanker, 14 chemical tanker, 7 liquefied gas, 3 specialized tanker, and 36 bulk.
Airports: 105 total, usable: 99. Sixty of them have permanent-surface runways. Four of these have runways over 3,659 meters, 22 have runways between 2,440-3,659 meters; and another 26 have smaller runways between 1,220-2,439 meters. Madrid/Barajas airport is currently expanding its runway from two to three, thereby substantially increasing passenger and cargo traffic capacity.
Telecommunications: generally adequate, modern facilities; 15,921,000 telephones; broadcast stations - 190 AM, 406 (134 repeaters) FM, 100 (1,297 repeaters) TV; 22 coaxial submarine cables; two communications satellite earth stations operating in INTELSAT (Atlantic Ocean and Indian Ocean); MARECS, INMARSAT, and EUTELSAT systems; one satellite HISPASAT, tropospheric links.
Y2K Readiness
Spain has had a national Y2K Commission and has had a program in place since mid-1998. On September 9, 1998, the GOS established a national Y2K Committee headed by the Second Vice President and Minister of the Economy and Finance, Rodrigo Rato. The committee includes members from both the public and private sectors. Progress in testing and, where necessary, replacement of equipment is advanced at both the national level and in the larger private firms. However, the small-to-medium-size enterprises are lagging behind. According to the Spanish Association of Information Technology Companies, to date 64 percent of Spanish Companies have taken measures to adapt to the millennium bug. In terms of financial companies, 80 percent were cited as prepared, and conversion of computer systems in the health and transport sections were characterized as advanced; however, companies in trade and certain industrial and distribution sectors continued to lag behind. Spanish financial, aviation and utility service providers are well along in their planning and implementation.
GOS officials have expressed concern regarding a lag in preparation by small-to-medium sized businesses and municipal governments and have recently focused on making information, solutions and financial assistance available to those responsible for information for these entities. Spain anticipates spending 18.4 billion pesetas, or approximately 12 percent of the federal "information technology budget" on Y2K related expenses for the central government. The GOS has also taken steps in the area of consumer protection, adding a regulation to the consumer protection law which stipulates that unless otherwise marked as not being Y2K compliant, all industrial products sold directly to consumers can be assumed to be Y2K compliant.
The GOS continues to publicize the Y2K issue as something that could cause substantial disruptions to both the public and private sectors, and there are regular press articles highlighting the issue.
For updated information there is a website available at: http://www.map.es/y2000.html
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[end of document] Note* International Copyright, United States Government, 1999. All rights under foreign copyright laws are reserved. All portions of this publication are protected against any type or form of reproduction, communications to the public and the preparation of adaptations, arrangement and alterations outside the United States. U. S. copyright is not asserted under the U.S. Copyright Law, Title 17, United States Code.
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