Economic Analytical Unit - Department of Foreign Affairs and Trade

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Doing business in Spain
An introductory guide to the market

Section 1 - Understanding Spain

Political Overview

Since emerging from its relative international isolation during the Franco era, Spain has steadily become a more active and important player in international affairs.

Spain is the eighth largest industrialised economy in the OECD. For the past five years, the Spanish economy has experienced one of the strongest rates of GDP growth in the European Union.

In 2001, the Spanish economy was valued at US$ 582 billion ( some 62 per cent larger than the Australian economy) .

In 2001, the total value of Spain's imports totalled US$ 182.6 billion. In recent years, the Spanish Government has pursued policies aimed at making Spain more attractive to investors, creating a welcoming environment for foreign investment. It has low labour and transport costs and the introduction of the single market has eliminated exchange rate fluctuations and reduced overall transaction costs.

Spain's credit rating is AAA.

System of Government

Spain is a democratic parliamentary monarchy. The monarch, His Majesty King Juan Carlos I, is the Head of State. The Monarch is responsible for ensuring that the country's institutions operate in accordance with the Constitution and ratifies the appointments of the most senior public officers in the executive, legislature and judiciary.

The parliament (Cortes Generales) is vested with legislative power. The parliament is comprised of two Houses: Congress of Deputies (Congreso de los Diputados) and Senate (Senado) . As of December 2002, representation in the 350-seat lower house is made up of the Popular Party (Partido Popular , PP , 183 seats) ; Spanish Socialists Workers Party (Partido Socialista Obrero Español , PSOE , 125 seats) ; Catalan Nationalists (Convergència i Unió , CiU , 15 seats) ; United Left group (Izquierda Unida , IU , 8 seats) ; Basque Nationalist Party (Partido Nacionalista Vasco , PNV , 7 seats) ; and other regional parties (12 seats) . The Senate is currently comprised of 256 Senators. Members of parliament are elected every four years by universal suffrage.

The Head of Government is the Prime Minister, currently Mr José María Aznar, leader of the PP. First elected in 1996 with a narrow majority, the PP won an absolute majority in the lower house in the 2000 elections. Mr Aznar has announced that he will not contest the 2004 national elections, confirming his long-standing commitment not to seek more than two terms in office. His successor as the PP leader is likely to be announced in the second half of 2003. The main opposition party, PSOE, is led by Mr José Luis Rodriguez Zapatero.

For administrative purposes, Spain is organised into 19 Autonomous Communities. While the Constitution recognises the right of these various regions to autonomy, it also emphasises the indissoluble unity of the Spanish State. Each Autonomous Community, including the Autonomous North African cities of Ceuta and Melilla, has its own assembly and executive government. Their powers vary considerably, with some, such as the Basque Country and Catalonia, enjoying relatively extensive powers, including regional policing, education and health services.

Foreign Policy

The European Union

Since emerging from its relative international isolation during the Franco era, Spain has steadily become a more active and important player in international affairs. Europe is the central focus of Spanish foreign policy. Spain joined the European Community in 1986 and was one of the founding members of the Treaty on European Union, which was signed in Maastricht in 1992. As the European Union's fifth largest country in terms of population, output and production, and second largest in terms of geographical size, Spain has become an influential economic player and trade competitor, not only within the European Union and with Latin America, but also in the wider global marketplace. It receives generous assistance through the European Union's structural and cohesion funds and the Common Agricultural Policy ( CAP) .

Table 1: Spanish Government Council of Ministers (Cabinet) ( Names as used are highlighted)
President of the Government ( Prime Minister)
José María Aznar Lopez
First Deputy Prime Minister, Department of Prime Minister and Government Spokesperson
Mariano Rajoy Brey
Second Deputy Prime Minister and Minister of Economy
Rodrigo Rato y Figaredo
Ministers
Miguel Arias Cañete Agriculture, Fisheries and Food
Federico Trillo-Figueroa y Martinez Conde Defence
Pilar del Castillo Ver Education, Culture and Sport
Jaume Matas Palou Environment
Ricardo Montoro Romero Finance
Ana Palacio Vallelersundi Foreign Affairs
Ana María Pastor Julian Health and Consumer Affairs
Ángel Acebes Paniagua Interior
José María Michavila Nuñez Justice
Eduardo Zaplana Hernandez-Soro Labour and Social Affairs
Javier Arenas Bocanegr Public Administration
Francisco Álvarez-Cascos Fernandez Public Works
Josep Piqué i Camps Science and Technology
 
The Rest of the World

Spain became a member of the North Atlantic Treaty Organisation ( NATO) in May 1982, with its full integration into the military structure of NATO approved by the alliance in December 1997. Spain now plays an active role in the Alliance, viewing NATO as the basis of European security and defence. It has established close political, economic and security ties with the United States.

Spain shares a close relationship with the countries of Latin America a reflection of their long historical association, shared language and common culture. Spain has become the world's leading investor in Latin America and, as a consequence, its influence in the region is considerable. Another priority region for Spain is the Mediterranean Rim, number of countries of which have important political and economic links with Spain. Relations with Morocco, however, are currently at a low ebb. The future of Gibraltar, including its sovereignty, is the subject of discussions between the governments of Spain and the United Kingdom. Spain continues to take a close interest in Middle East affairs and enjoys good relations with both the Arab states and Israel.

Spain's bilateral ties with the countries of the Asia Pacific region are generally less substantial, apart from its close historical and cultural associations with the Philippines. In an effort to boost relations with countries of the region, the Aznar Government launched its Asia Pacific Plan in October 2000. The Plan includes a number of measures in the trade, investment, political, cultural and educational fields. A welcome initiative under the Plan has been the Casa Asia ( Asia House) in Barcelona, which was inaugurated in November 2001, and now serves as a focal point for cultural, social and economic activities between Spain and the Asia Pacific region.

Spain is closely involved in a number of multilateral fisheries and Antarctic bodies.

Economic Overview

The Spanish Economy

The Spanish economy benefited considerably from Spain's accession to the European Union, and has since undergone a remarkable transformation from a relatively poor, agrarian economy to the eighth largest industrialised economy of the OECD. In 2001, the Spanish economy was valued at US$ 582 billion, some 62 per cent larger than the Australian economy. The overall standard of living in Spain has risen in recent years and per capita income is around US$ 15,000, steadily converging with the European Union average.

Over the past five years the Spanish economy has experienced one of the strongest rates of GDP growth in the European Union, averaging around four per cent per annum, driven by strong domestic demand and productive changes. However, in 2001 02 the economy experienced a period of slower growth as a result of the general economic slowdown in Europe and the United States, and weaker domestic demand. Spanish GDP growth slowed to 1.9 per cent in 2002, the lowest rate of growth since 1993 ( but still the fastest growing of the large European economies) . The Economist Intelligence Unit ( EIU) expects GDP to rebound to around 2.8 per cent in 2003 as a more expansive fiscal policy underpins a recovery in business and consumer confidence. According to OECD forecasts, GDP growth in Spain is still predicted to surpass that of the United States and the United Kingdom in both 2002 and 2003, as well as being ahead of EU averages.

Since the 1980s, inflation has fallen fairly steadily. Spain's Ministry of Economy expects inflation in 2003 to decrease to around 2.9 per cent from the slightly elevated 2002 figure of 3.5 per cent.

One of Spain's main economic challenges has been high unemployment. In 1996, the unemployment rate was around 24 per cent. A steady reduction since that time has been attributed to labour market reform. The rate of unemployment for 2002, at 11.3 per cent, represents a small increase from 2001, attributed to the general economic slow-down.

In 1999, the Spanish Government undertook to reduce the budget deficit and deliver balanced budget. With program of privatisation and a reduction in public expenditure, this target was achieved in 2001 the first time in 25 years. However, this positive state of affairs was diminished by the general economic slow-down in the following year, with a negative impact on the Government's 2002 fiscal position. That said, the deterioration was modest in comparison to other EU countries and Spain has remained well within the EU's Stability and Growth Pact guidelines.

The balance of trade in 2001 was in deficit by US$ 7.0 billion. The current account deficit was about 2.9 per cent of GDP and is forecast to fall below 2 per cent by 2003. Total external debt was around US$ 465 billion at the end of 2001 and is forecast to rise slightly over the next two years. However, as a proportion of GDP, it is expected to remain stable at around 80 per cent.

At the end of 2001, Moody's Risk Management Services upgraded Spain's credit rating to AAA status, and the IMF rated Spain's economy as the most dynamic in the European Union over the previous five years. Overall, despite the recent economic slow-down, the Spanish economy is still performing above the EU average and looks set to perform well over the next few years.

Economic Reform

Since its election in 1996, the Popular Party Government has focused on making the Spanish economy more internationally competitive through a series of financial incentives and legal reforms. Key elements have included cutbacks in government expenditure, income tax cuts, labour market reforms, liberalisation of the telecommunications sector, and large-scale privatisation of state enterprises.

The privatisation program, begun in 1985, has significantly reduced state ownership of Spanish industry, public services, utilities, and transport. The program is nearly complete, with only few smaller companies remaining to be privatised. Recent reforms have concentrated on the privatisation of the telecommunications company ( Telefonica) , energy groups ( Endesa and Repsol) , and the Iberia airline.

Flowing from the legislative steps taken in 1994, 1997 and 2001, the labour market has become more flexible. The labour contract system has been simplified and more flexible forms of hiring have been introduced.

Economic Sectors

Once heavily reliant on agriculture, the Spanish economy is now dominated by services, which account for between 60 65 per cent of all employment and total GDP. Tourism is particularly important, as Spain is the world's second largest tourist destination after France, with approximately 50 million tourists and another 20 million people on business, family and other visits per annum. Spain's second most important sector ( in terms of GDP and employment) is the industrial and manufacturing sector, at around 20 per cent. The agricultural sector, once an integral part of the Spanish economy, now accounts for only about 3 per cent of GDP and 6.5 per cent of employment. Fishing remains a major primary industry, and Spain has one of the world's largest fishing fleets. Spain is also relatively rich in mineral deposits, but coal reserves are of poor quality, and almost all domestic oil demand is met by imports.

Infrastructure

Spain has undergone a process of rapid modernisation over the last ten years, investing in an extensive renewal of its transport, telecommunications and banking infrastructure. All main economic centres now have good transport links. In the last 20 years, the highway network has greatly expanded and is now extensive. There are 33 international airports. Spain's extensive coastline is serviced by 44 large seaports that together account for 52 per cent of all European trade. Bilbao and Barcelona, two of the most important seaports, are currently being upgraded and modernised. They are also the primary industrial centres in Spain. At present, Spain has two high-speed train lines. One operates between Madrid and Seville, and a second, faster line between Madrid and Lerida/ Lleida ( spelling dependent on language used) . Construction of the extension of this second line to Barcelona is already well underway. Madrid is the centre for transportation, banking, administration, as well as, the headquarters for numerous international companies.

Recent liberalisation has brought the quality and density of Spanish telecommunications infrastructure in line with that of the European Union. The banking sector is strong with two banks, Banco Santander Central Hispano ( BSCH) and Blanco Billboard Vic Argent aria ( BBVA) , dominating the finance sector. Despite the high level of concentration, well-developed network of regional, mutual savings banks ensures that the retail banking sector remains competitive.

Monetary Policy

Spain joined the European Economic and Monetary Union ( EMU) on 1 January 1999. Responsibility for monetary policy was transferred from the Bank of Spain to the European Central Bank. Spain's currency, the peseta, was set at a fixed rate of 166.386 to the euro. Spain, along with other EMU members adopted the euro as the sole currency on 1 January 2002. The euro, although inflationary in the short-term, should benefit the Spanish economy in the longer-term, especially through the improved degree of price stability it will generate, as well as its encouragement of foreign trade and investment through the removal of exchange rate risk. It is expected to bring increased competition and lower transaction costs within the euro zone ( European Union countries with the exception of the United Kingdom, Sweden and Denmark) , leading in time to greater consolidation within the EU market and increased growth. This, in turn, should provide opportunities for Australian companies wishing to increase their trade exposure in Europe.

Foreign Trade

Spain's Foreign Trade

Spain's international economic profile has grown appreciably in recent years, becoming the world's 16th largest exporter. In 2001 the total value of Spain's exports was US$ 175 billion, with imports totalling US$ 183 billion. This represented an overall 2 per cent increase in the volume of trade on the previous year. Reflecting Spain's geographic and economic position in Europe and its historic and cultural ties with Latin America, Spain's principle trading partners during this period were the European Union (in particular France, Germany, Italy and the United Kingdom) , the major Latin American countries, and the United States (see Figure 1) .

Figure 1: Spain's principal trading partners in 2001

Figure 1: Spain's principal trading partners in 2001

Source: Spain in Figures year 2001, Instituto Nacional de Estadistica, Madrid 2001 (www.investinspain org)

Figure 2 details the breakdown of Spain's foreign trade. Nearly 40 per cent of Spanish exports are high value-added industrial products.

Figure 2: Spain's top ten exports and top ten imports in 2001

Source: A Guide to Business in Spain, ICEX 2001

Source: A Guide to Business in Spain, ICEX 2001

Foreign Investment

Outflow

Overall, Spain is a net exporter of foreign direct investment ( FDI) . During the late 1990s, international cross-border investment experienced a period of significant growth. Spanish FDI was no exception. By 2000, it had reached a high of US$ 53.7 billion, placing Spain as the world's sixth largest capital exporting country. However, recent international concerns about the possibility of an economic crisis have led to a massive decline in foreign investment worldwide. In 2001, Spanish FDI fell 49 per cent to US$ 27.8 billion, reducing its ranking as cross-border investor to ninth worldwide. However, while this figure represents a substantial decrease, it must be placed in the context of a 60 per cent decrease in EU FDI in the same period, indicating that Spain is faring better than many of its counterparts. The initial figures for 2002 point to a slowing of the rate of decrease, although the final result has been influenced by the stability of the international situation.

Much of the growth in Spanish investment abroad over the past decade has been directed to Latin America. Spanish FDI in the region has largely been concentrated in the financial services, telecommunications and energy sectors. Today, Spanish companies are amongst the leaders in these sectors in Latin America. Recent concerns about the economic stability of the Latin American region have, however, reduced investment from a high in 1999 of 63.7 per cent of total Spanish FDI to only 10 per cent in 2001. As Spanish investors now look to reduce their exposure in Latin America, the majority of new investment is occurring in other EU countries (78 per cent in 2001, compared to 35 per cent in 2000) and, to a lesser extent, in North Africa. Interest in investing in the Asia Pacific region is emerging although this amounts to only around three per cent of total Spanish foreign investment.

Inflow

Spain's accession to the European Community in 1986 and the Government's ambitious program to transfer the assets of state-owned enterprises to the private sector has stimulated large inflow of FDI into Spain. Foreign multinationals quickly took advantage of the lower-cost environment, buying into and re-structuring many Spanish industries, including in the chemicals, pharmaceuticals and food and beverage sectors. The motor vehicle manufacturing industry, now almost entirely foreign owned, presents a particularly good case, with Spain now the sixth largest car producer in the world.

As a result of the major surge in investment, Spain received a total of US$ 101 billion in FDI between 1996 and 2001, making it the sixth largest recipient in Europe. However, with the slowing of global economic growth in 2000 01, FDI dropped 42 per cent, from US$ 36.6 billion in 2000 to US$ 21.8 billion in 2001, pushing Spain down to twelfth position as an investment recipient.

The European Union ( in particular, the Netherlands, Germany, France and the United Kingdom) was the principal investor in Spain, accounting for 69 per cent of all FDI in the period 1997 to 2000. The United States, followed by Japan, was the single largest investor, providing one third of investment in Spain. More recently, the services sector has been the main target of investment, in particular the transport, communications and financial sub-sectors, receiving a total of 82 per cent of total FDI from 1997 to 2000. Around 23 per cent of FDI was directed to the industrial sector, more specifically the automotive, chemical, food and beverages, electronics and pharmaceutical sub-sectors.

Box 1: Spanish Investment in Latin America

A shared language, historical ties and cultural familiarity have given Spanish companies an advantage in the Latin American market, which in recent years has received almost half of Spain's investment abroad, total of US$ 80 billion. Argentina, Brazil, Chile, Venezuela and Mexico have all been major targets, with Spanish firms focusing on the financial services sector, utilities, telecommunications and energy.

The recent economic turmoil in Argentina, and increasing economic instability in Venezuela and Brazil, has led to a significant reduction in investment ( from 63.7 per cent in 1999 to 10.34 per cent in 2001 of Spain's total foreign direct investment) as Spanish companies focus on trying to minimise their losses after the Argentine crisis of 2001 02. Spanish companies lost an estimated US$ 11 billion as a result of the Argentine peso's devaluation, and the biggest telecommunications company in Argentina, Spanish-owned Telefónica, lost US$ 1 billion on the devaluation alone. However, it is unlikely that the large Spanish firms will withdraw from the region given the relative earning importance of Latin America and the large financial commitments already made. Indeed, Spanish Prime Minister José Aznar and Spain's leading financial and industrial leaders have insisted that Spain is committed to the region irrevocably. Instead, it is likely that they will re-evaluate their investment and business strategies in the region, directing new investments to countries with more stable currencies and favourable investment policies, such as Chile and Mexico, and to a lesser extent Brazil. For example, in February 2002, Telefónica acquired majority stake in the Mexican mobile operator, Pegasus.

Investment Climate

Despite a downturn in foreign investment in Spain in 2002, Spain continues to present welcoming environment for foreign investment over all. For the forecast period 2002 to 2006, the EIU assessed Spain's business environment as 17th out of 60 countries worldwide, based on government policies to encourage investment, increasing economic openness, and reforms of technological and transport infrastructure, the energy sector and the labour market that have improved Spain's economic efficiency. The relatively stable macroeconomic climate over the past five years, which the EIU assessed as enhancing the capacity of firms to effectively plan long-term investments, contributed to the improved ranking.

In recent years, the Government has pursued a number of policies aimed at making Spain more attractive to investors. Under recent reforms, 100 per cent foreign ownership of equity is now permitted and capital movements have been completely liberalised. A wide range of economic incentives is offered, both by the central government and the autonomous communities, for companies that set up operations in Spain. Incentives include financial subsidies, preferential access to official credit, bonuses for the acquisition of certain material, real estate grants, incentives for research and development, tax deductions and exemptions, guarantee of dividends, bonuses and incentives for hiring and training workers and low interest loans. Any firm with foreign capital has the same access to these incentive schemes as Spanish firms.

Spain is also ranked by the EIU as the least expensive of the EU countries studied for doing business. In particular, Spain has low cost labour and transport, and the introduction of the single European market has eliminated exchange rate fluctuations and reduced overall transaction costs. It should be noted that Spain's present comparative cost advantage may be diminished with the coming accession to the European Union of 10 new members, particularly the lower-cost eastern European countries. However, the structural reforms implemented over the last decade should mean that Spain continues to offer a competitive, yet more secure, stable and reliable environment in which to conduct business.

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