Spain Balance of Payments September 2012

BdE published the balance of payments for September 2012 (and 2012Q3). Developments are quite positive. Regarding the current account:

 

The goods balance is now firmly below the -€3bn/month threshold. Compared to -€31bn in the Jan – Sep 2011 period, the balance was -€22,13bn. It’s quite positive that most of the improvement is attributed to larger goods exports (+€5.7bn to €170.52bn) than lower imports (-€3.2bn to €192.65bn). The balance in services was also improved by €3.45bn. Total goods and services balance is now +8.17bn compared to -4.15bn a year ago.

A very large improvement came from the income balance which registered at -€16.61bn, down €2.7bn from last year. After growing to more than -€3.1bn during July, the balance dropped below -€1bn during August and September most probably driven by the ‘ECB effect’.

Current transfers were -€8.07bn compared to -€6.84bn in J-S 2011 and the capital account was €3.92bn after €4.17bn a year ago. Overall, the current+capital account deficit is now mainly driven by the income deficit.

 

The financial account was also quite positive during September. Portfolio investment turned strongly positive during September (+€9.75bn after a +€2.34bn in August and -€10.82bn in July), a strong display of ECB ‘powers of persuasion’. Large inflows were registered in the general government category while ‘other sectors’ also had a positive balance after a long time (+€3.34bn after -€2.78bn in August) and MFI outflows continued dropping with September reading below -€2bn.

The largest change was in the other investment balance where investment on MFIs went from -€21.52bn during August to €4.93bn in September, marking the return of Spanish banks in the Euro interbank market.

External adjustment is definitely making progress in the case of Spain (with exports showing healthy increase) while ECB actions allowed for a complete U-turn on capital outflows. How long the ECB effect will last is an open question.

Spain NIIP

Since BdE updated the Spanish NIIP with data for 2012Q2 i ‘d like to update my analysis on the subject after the September Economic Bulletin comments:

Although the drop in the overall Net Investment Position is only a marginal 2.2% (-€960.3bn compared to a peak of -€982.1bn in 2011Q2) what is very impressive is the very large swing in the net position of BdE, from +€39.5bn to -€314.9bn, a change of €354.4bn since 2011Q1. This is basically matched by the corresponding changes in portfolio investment (€210bn, from -€672.4bn to -€462.5bn) and other investment (€146.1bn, from -€342.1bn to -€196bn) while FDI is unchanged.

As a result, the net position of BdE is now 1/3 of the negative NIIP of Spain. Since outflows in both portfolio and other investment are continuing, it is probable that by the end of the year both positions will have dropped even further and BdE will account for probably half of the Spanish NIIP. The consequences will be:

1. Net costs on external net liabilities will be based on the ECB MRO rate (since Target2 liabilities pay the MRO rate to the ECB), limiting income outflows in the balance of payments.
2. Net Spanish liabilities will be towards the official sector, especially if a Spanish bailout+OMT program goes through. In a sense, Spain will be firewalled while its interest and principal payments will be subject to political decisions in Euro summits and ECB governing councils.

In terms of foreign exposure, the Eurozone has managed to slowly move risks of PIIGS debt to the official sector even though the corresponding capital flows were enormous, a task that was made possible due to liquidity provided by the ECB. How governments will handle these risks is an open question.

Spain balance of payments June 2012

The BdE (central bank of Spain) released data on the balance of payments till June 2012 today. The current account developments continue their previous positive trends.

Both the goods and services balance have improved significantly with the general current account deficit (Jan- June) shrinking from €24.57bn in 2011 to  €17.13bn in 2012 or around 1.6% of GDP. I still maintain my projection of an annual current account deficit of less than 3% of GDP during 2012.

On the other hand, the financial account continued its deterioration:

Compared with a positive figure of €22.46bn (excluding BdE) in 2011, the numbers so far show an exit of €219.82bn, or more than 20% of GDP. Portfolio investment is negative €77.49bn, while ‘Other investment’ (mainly loans) is negative by an alarming €154.29bn, marking the high risks of the Spanish banking system.

The detailed breakdown of foreign investment if Spain is as follows:

What is positive is the fact that portfolio investment outflows in government securities appear to have stopped, The main driver of outflows is the banking sector with both portfolio (bonds) and other investment being highly negative (-€14.22bn and -€22.77bn in June). A negative development is the fact that portfolio investment in ‘other resident sectors’ shows large negative outflows since March, with June posting the largest number for 2012, at -€7.15bn.

Recent monetary developments in Spain (for July) seem to suggest that retail investors have also started moving their deposits abroad. MFIs and other resident sectors still have very large foreign liabilities (in the form of bonds and deposits although available data are only available till 2012Q1) . Unless bank resolution (through the bad bank scheme and recapitalization) happens quickly, outflows will continue. The macro risk is quite significant (since Spain is in a deep recession) while bondholder involvement in recapitalizations obviously makes matters worse.

Overall, it looks like foreign investment is quickly replaced by Spanish banks using BdE funding to acquire government securities and pay their own debt with the former being supported by official loans through the EFSF.