Spain's 2013 Sovereign Funding Outlook
The government stated a general government (GG) deficit/GDP ratio target of 4.5% (versus 6.3% previously) based on an economic contraction of 0.5%. Breaking down the government’s official GG deficit expectation, the central government (CG) is expected to post a 3.8% deficit of GDP, autonomous regional governments’ a deficit of 0.7% while local government should have balanced budgets. Our fiscal scenario is more pessimistic, given our expectation for a 6.7 % GG deficit against a backdrop of 1.6% economic contraction. The overall debt/GDP targeted by the government is 90.5% in 2013 from an estimated 85.3% this year.
The austerity measures announced include: removal of some corporate tax breaks; new levies on energy usage; only replacing one-in-ten retiring civil servants; heavy spending cuts in governmental agriculture, education and industry & energy ministries.
The central government set up the Regional Liquidity Fund earlier this year in order to support regional governments that have effectively lost access to the markets with borrowing costs spiralling well into double digits. The fund consists of EUR18bn with the contribution coming from Spanish banks (EUR8bn), lottery money (EUR6bn) and the central government (EUR4bn). The central government has said there would be no extension, but there is a question mark as the fund is already close to capacity.
Borrowing requirement/Funding sources
In 2013, the government forecasts a CG deficit of EUR40.4bn. However, we see budget slippage of around EUR4bn next year. In addition, bond redemptions are sizeable at EUR60.4bn and the ESM contribution is EUR3.8bn. Hence, we estimate a funding requirement of around EUR109bn next year.
Andalusia is the latest regional government to request aid to the tune of EUR4.9bn. This is in addition to five other regions (ie, Catalonia – EUR5bn, Valencia – EUR3bn, Castilla La Mancha – EUR0.8bn, Canary Islands – EUR0.8bn, and Murcia – EUR0.3bn), amounting to just under EUR15bn in total. Hence, the requests are not too far from the size of the EUR18bn fund. It is not clear how the regional governments will be financed if their needs are in excess of the Regional Liquidity Fund. Thus, this could be additional source of funding.
We forecast EUR104bn of domestic fixed-rate bond issuance in 2013, and have factored in the remainder of the borrowing needs coming from a combination of T-bills and other bond issuance, such as floating and/or foreign issuance. We have broken down our domestic bond issuance view by maturity and the obvious shift we expect is more supply at the longer end, in line with an easing of Spain’s risk premium.
Preview of Q1 issuance and 2013 outlook
We forecast Spanish Treasury to firstly issue a new 10Y benchmark in February, which would be first new offering in this maturity since November 2011. In addition, we expect a new 3Y at some point during the quarter, most likely timing is March. In addition, we expect re-opening across the curve –including the on-the-run 15Y bond, which only has EUR6.8bn outstanding despite being launched back in March 2011.
Looking further ahead, we expect a new 5Y later in the year during either Q2 or Q3. We also anticipate more foreign issuance provided the demand and borrowing costs make it a viable alternative to domestic offerings. In addition, another source of funding could be further floating rate paper issuance, following October offering, though this will likely be highly sensitive to market conditions.