Lately, many are paying attention to developments in inflation, interest rates, and the labour market (and with due reason). But this is causing the evolution of Spain’s foreign sector to go rather unnoticed. And given all that is happening with the main variables of the Spanish foreign sector warrants an explanation.
The current account balance is one of the components of the balance of payments and measures a country’s international transactions with the rest of the world, for instance, exports and imports of goods and services. Traditionally and until 2011, Spain maintained a current account deficit, which implied, broadly speaking, that the value of the goods and services we imported exceeded the value of those we exported. However, from 2012 and onward, Spain has been running recurrent surpluses in the current account balance. Even with the energy crisis that arose as a result of Russia’s war against Ukraine and the consequent rise in international energy prices, the Spanish economy continues to maintain a current account surplus.
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As can be seen in Graph 1, this is due to two factors: on the one hand,
the considerable reduction in the deficit of the balance of goods and, on the other,
the increase in the surplus of the balance of services (with the brief reduction caused by the pandemic). As far as the balance of goods is concerned,
everything suggests that a historical trend has been broken. When the Spanish economy grew above the European Union average, the deficit in the balance of goods worsened. Indeed, various academic studies point out that
the sensitivity of Spanish exports to the growth of world income has increased, while that of Spanish imports to the growth of our economy has fallen.
Graph 1.- The Development of the Components of the Current Account Balance
The change in Spain’s current account balance is particularly striking when compared with that of our primary European peers (see Graph 2). From being the country with the largest current account deficit among the large economies using the Euro in 2008 (-10% of GDP in the second quarter), Spain now has a more positive current account balance than the euro-zone average—including above those of France and Italy.
Graph 2.- The Evolution of the Current Account Balances in the Euro-zone
What are the reasons behind the reduction in the deficit in the balance of goods and the strengthening of the surplus in the balance of services?
To begin, regarding the balance of goods, the number of exporting companies in Spain has increased by almost 130%, from 72,047 in 2010 to 164,426 in 2020. Logically, this has been accompanied by an increase in the value of exports, which in the case of Spain, grew by 20% between 2015 and 2021, compared to 16.8% in France or 17.8% in Germany. Using December 2019 as a reference, the relative share of goods exports has increased by around 10% in the case of Spain, well above Italy, maintaining lower a lower rate, and Germany and France, whose shares likewise decreased.
Secondly, there has been a diversification of the destination of Spanish goods exports to countries with economic cycles that are less synchronised with those of Spain. For example, in 2001, merchandise exports to Morocco and China represented 1.13% and 0.49% of the total, respectively. However, in 2021, these shares rose to 2.95% and 2.69%. Conversely, export shares to two of our main trading partners, France and the United Kingdom, fell from 19.45% and 9% respectively in 2001 to 16.24% and 5.85% in 2021.
Thirdly, since 2010, and save for a few outlying years, the Spanish economy has gained in price competitiveness, as demonstrated in Graph 3.
Graph 3.- Competitiveness Index for Spain
Fourthly, the goods Spain exports are increasingly high-tech. Indeed, the share of exported high-tech products in total exports has risen from 4.2% in 2007 to 6.8% in 2020.
Of course, although there has been a structural improvement in the balance of goods, the jewel in the crown of Spain's current account balance is the balance of services, with has demonstrated continuous surpluses. While it is true that the restrictions imposed by the pandemic have clearly had an impact on the services sector, the services balance has already recovered. But not only tourism services are pushing up the services balance, but also high value-added services stand out. These also are accompanied by strong job creation, with Social Security enrolment particularly in the fields of programming, architecture, engineering, research and development, and IT sectors well above the levels of the first quarter of 2020 and the average for the sectors as a whole.
This evolution of the current account, together with the transfers received from the European Union through various programmes, like Next Generation EU, which are included in the capital account, is allowing Spain to maintain its financing capacity vis-à-vis the rest of the world. In fact, the latest data provided by the Bank of Spain for November 2022 indicate that in November, the financing capacity of the Spanish economy was €6.7 billion, the highest monthly figure in the entire historical series.
Graph 4.- Capacity/Necessity of Financing of the Spanish Economy
Being things as they may, Spain has managed to significantly improve its Net International Investment Position (NIIP), which is the difference between the stock of external financial assets and liabilities of an economy at a given point in time. Since 2014, the NIIP has improved by almost 40%, with the reduction recorded since 2020 being particularly noteworthy.
Graph 5.- Net International Investment Position (NIIP)
In short, all data point to the fact that we are indeed facing a positive structural change in Spain’s foreign sector. But we should not be complacent, as we face both cyclical and structural challenges. From a (hopefully) cyclical point of view, the Spanish economy will have to face up to the increasingly protectionist attitude of economic powers such as the United States and China. Structurally, despite the notable improvement, the Net International Investment Position continues to remain heavily indebted, especially when compared with other European countries. It is therefore necessary to continue investing in order to ensure that the Spanish economy produces goods and services with an increasingly higher added value.
