The doubts of the markets before the early elections in Spain

Spanish voters go to the polls on Sunday in an early national election in which no party is likely to reach a majority, augering uncertainty in the markets.

Polls predict the conservative Popular Party (PP) will defeat the ruling Spanish Socialist Workers Party (PSOE), but will likely need the support of the far-right Vox party to form a government.

The country’s fiscal policy, banks and the transition to green energy are in the spotlight, and any prolonged political deadlock could put a dent in Spain’s stock index, which has risen a fifteen% in so far this year.

Here are five key questions for investors.

What are the markets watching?

The speed with which a new government can be formed. In 2019, the current Prime Minister, Pedro Sánchez, took two elections to form a government.

“The Spanish market, like all equity markets, hates ambiguity”said Steve Smith, a fund manager for European equities at Invesco.

Wouter Thierie, an economist at ING, said the prospects for more political uncertainty were a concern, “although not my base case”.

Georgios Leontaris, HSBC Private Bank’s EMEA investment director, said the post-election debates on budget and taxation were important for fixed income markets.

The gap between the yield of Spanish and German 10-year bonds stands at 104 basis points, little changed from the situation it was in when Sánchez called the July 23 elections at the end of May and more stable lately. than Italy and Greece.

What do the elections mean for the economy?

The Spanish economy has held up relatively well, but is slowing down after the post-pandemic rebound. The Government forecasts for 2023 a growth of 2.1%in front of 5.5% from last year.

A slowdown means that Spain’s high debt, higher than the 100%and the deficit of 4.8% of GDP are in the spotlight and the protracted talks to form a government could slow progress on fiscal reforms and worsen their finances.

ING’s Thierie said the next government will have to deal with Spain’s high debt, noting that the EU’s tougher tax rules will come into force in 2024.

Why is the ecological transition in Spain in the spotlight?

With Spain becoming drier and hotter, energy has been one of the main electoral issues and the two main parties have different views on how to decarbonise the economy.

The Government of Sánchez raised its green energy objective, proposing that renewables generate the 81% of electricity in 2030.

The PP, in opposition, wants to prolong the life of nuclear power plants beyond the closing window of 2027-2035. If this is accompanied by revenue guarantees for the operator, it would be welcomed by power companies, according to JPMorgan.

The Renta 4 analysis house said that the PP’s proposal to introduce a tax on renewable energy projects would be negative for companies in the sector.

What about the banks?

Investors are watching what happens with the rate of the 4.8%approved in December for two years, on the interest margin and net bank commissions of more than 800 million euros (880 million dollars).

Bosco Ojeda, head of small- and mid-cap research at UBS, said the PP could favor an early end to the tax, aimed at raising 3 billion euros ($3.3 billion) by 2024.

“It is quite likely that the tax will be removed, although perhaps not immediately, and that could be seen as a positive for the banks”Ojeda said.

An index of Spanish bank stocks has risen almost a twenty% this year.

Are there implications for the European Union?

It’s possible. Spain has just assumed the semi-annual rotating presidency of the Council of the EU and legislation such as new fiscal rules must be approved.

Federico Santi, principal analyst for Europe at Eurasia Group, stated that the elections “would interfere” in the Spanish presidency of the EU and would limit its ability to effectively direct the community agenda.

“A probable change of government could cause problems for several measures”he claimed. “Environmental legislation is the one that is most in danger.”

Source: Reuters