IMF warns about the weakness of Spain’s corporate sector

Report recommends more deleveraging and finding alternative sources of funding

Ignacio Fariza
Christine Lagarde, head of the International Monetary Fund.
Christine Lagarde, head of the International Monetary Fund.ERIC VIDAL (REUTERS)

The International Monetary Fund (IMF) has warned about the weakness of Spanish businesses in the wake of the economic crisis, and is making recommendations to prepare for potential future shocks.

In a paper called The Italian and Spanish corporate sectors in the aftermath of the crisis, IMF technicians conclude that “the crisis has had a severe impact on the corporate sector in Italy and Spain.”

“Evidence of weakening performance can be seen across a range of measures of profitability and liquidity,” explains the document. “The deterioration has occurred across the board, though the negative effects of the crisis are particularly pronounced for smaller businesses, and firms in select sectors, such as construction.”

The IMF stresses the need for a broad strategy to repair and revive the corporate sector

Part of the problem is that in Spain, non-financial companies (NFCs) borrowed heavily during the boom years, reaching a debt-to-GDP ratio of nearly 190 percent in 2007.

“Since then, Spanish NFCs have deleveraged quite rapidly, but debt remains high, at nearly 150 percent of GDP,” the report says. “The significant debt overhang in both countries poses risks to the recovery despite mitigating policy actions, and has led to a significant deterioration in the asset quality of the banking systems.”

And despite the Spanish banking sector’s efforts to clean up its balance sheets of non-performing loans (NPL), “at 12.5 percent, the NPL ratio remains high.”

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“Debt overhang and impaired balanced sheets could act as a drag on firm investment. Indeed, real private investment has fallen to levels not seen in 15 years, dramatically slowing the pace of recovery,” adds the report.

Meanwhile, “the profitability of Italian and Spanish firms fell dramatically over 2006–2013.” The drop was even bigger in Spain, where “for the median surviving company, return on assets (as measured by profits before tax in percent of total assets) fell from about 3% in 2006-07 to just about 0.5%” in 2013.

The IMF stresses “the need for a broad strategy to repair and revive the corporate sector.”

This strategy, says the report, should aim to reallocate resources toward healthier firms and sectors, rehabilitate the financial and operational structure of viable enterprises to give them a fresh start, and expand firms’ access to alternative sources of funding to reduce the interdependence of the corporate and banking sectors.

The European Commission and, more recently, the Organization for Economic Cooperation and Development, also insisted on the potential pitfalls caused by high debt levels among Spanish companies.

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