On the international stage, Spain has started punching above its
weight. The photo of José María Aznar, the country’s moustachioed prime
minister, alongside US President George W Bush and UK Prime Minister
Tony Blair, on an Azores island in March delivering an ultimatum to
Iraq, made the front pages of the world’s press. Whether it was worth
alienating crucial European allies is another matter.
“From the Spain of 25 years ago that was a backward country in every
sense, today we are a society that is more dynamic than the average
European one, more decentralised than the average in Europe, probably
more open than many other European ones, and more predisposed for
change,’’ Rodrigo Rato, Spain’s finance minister and first
vice-president and one of the architects of its transformation, told
The Banker at his offices at the Ministry of Economy in Madrid.
Dictatorship to democracy
However talented he is, Mr Rato is not alone. A host of able political
leaders, technocrats and businessmen have brought about the
transformation from the inward-looking developing country left by the
dictator Francisco Franco on his death in 1975.
On the political front, these range from King Juan Carlos, who
surprised everyone by engineering a return to democracy with prime
minister Adolfo Suárez in the late 1970s, to socialist prime minister
Felipe González, who performed a 360-degree turn to convince the
electorate to approve a referendum on joining the North Atlantic Treaty
Organisation in 1986, to the current right-of-centre Popular Party
government, which has overseen the transformation to a flexible,
low-tax economy.
Emilio Botín, president of Santander Central Hispano, expanded his bank
from the smallest of the big seven into the largest bank in Spain and,
at one point, one of the three largest banks in the EU by market
capitalisation. And Francisco González, president of BBVA, has built on
his predecessors’ efforts to make his bank one of the strongest in
Latin America and Spain (see BBVA profile below).
Meanwhile, the Valls brothers have turned Banco Popular into the
world’s seventh most profitable bank (see table overleaf) and
Telefónica has been transformed from an inefficient state
telecommunications company into the leading telephone operator in the
Spanish and Portuguese speaking world, with almost 93 million clients.
Close ties with Latin America have been a blessing but also a bane. On
the one hand, they have allowed Spanish companies to become global,
using the natural language advantage, but on the other hand, fears
associated with a left-leaning government in Brazil and the Argentine
crisis have knocked back their share prices.
Structural funds from the EU have also played their part. But as Jaime
Caruana, governor of the Bank of Spain and chairman of the Basel
Committee notes, Spain is not the only country that has had transfers
from the EU budget. “One of the questions asked is why Spain got more
out of EU entry than others,’’ he says (see page 32 for full
interview). “We have had fiscal orthodoxy and gone to a balanced budget
from a deficit of 6% of gross domestic product (GDP) and salary growth
has been reasonable.’’
Take the past 10 years’ of economic indicators: GDP has grown by 36% to
$653bn with growth in nine of the 10 years, while Germany dipped into
recession and France stagnated. Even the latest figures confirm the
trend: while the eurozone economy contracted 0.1% in the second quarter
of 2003 compared with the first, the Spanish economy expanded 0.7%.
Inflation is down from almost 5% in 1993 to price stability in 2002
(although it has ticked upwards in 2003), while real interest rates
have fallen from more than 4% to 2.7% in 2002, as membership of the
euro took effect. (Mr Caruana, a member of the governing council of the
European Central Bank, is not worried by the rise in the euro, pointing
out that it is at the same level as it was at launch).
“Our next challenge is to consolidate this real convergence, to
continue with orthodox budgets, maybe to reach budget surpluses,
continue with structural reforms and [match] salary evolution with the
productivity of our economy,’’ he says, seated in the library of the
Marques de Salamanca in the Bank of Spain.
On the negative side, if Europe does not grow and construction slows
down, then Spain has a problem. Eighty percent of Spain’s trade is with
the EU while construction, through both private business and structural
EU funds for public infrastructure, is one of the main factors
responsible for high growth, notes Jesús Martínez, a director of rating
agency Standard & Poor’s.
Real estate prices have risen about 15% in each of the last three
years, leading to private sector indebtedness soaring to levels that
have almost surpassed EU averages. The Bank of Spain is keeping an eye
on that as well as on an inflation upsurge. Tourism, the country’s
biggest industry, representing 11% of GDP, is another of the main
drivers and has suffered from the European slowdown.
It is also worth bearing in mind that per capita GDP in Spain, albeit
up from 70% of the EU average in 1986 to 85% in 2002, still has some
way to go.
Future challenges
“There are various important challenges [for Spain in the next
decade],’’ says Mr Rato. “It still has to consolidate its position in
Europe as an advanced society, politically, economically and socially.
But we still have levels of income, social protection, research and
development that are behind European levels.
“We still have to consolidate the transformation of a society with a
very high unemployment rate to one of full employment, finalising the
transformation of having women joining the workforce; make our
companies truly global when it comes to their markets – they are still
very focused on Europe, with limited export experience. We have to
transform our educational and technological systems, advance to a more
sustainable growth path, especially related to water – a complex
subject in Spain. We must become a society with other cultural
ingredients that are not our traditional ones, a society with [an
expected] two-to-three million immigrants, therefore a different
society,’’ he adds.
The accession of 10 new countries to the EU in May 2004 also represents
a major challenge in terms of how funds will be distributed as well as
in terms of influence. Spain needs to consolidate its role in Europe,
moving further away from being an accession member to one of the core,
established ones. This is being supported by the presence of more
Spaniards on the international circuit in positions of authority. Pedro
Solbes, the Spanish Commissioner for Economic Affairs, has certainly
had a high profile role in the press as the guardian of the Stability
Pact. Mr Aznar has been touted as a candidate to succeed Romano Prodi
as president of the European Commission next year (although his Iraq
stance and defence of the Nice Treaty may have scuppered his chances),
while Mr Rato himself might make a good head of the IMF following Horst
Köhler, although he insists it is a job that is “impossible to do well”.
Spain’s finance minister admits to feeling disappointed that his party
did not choose him to contest general elections next year, after Mr
Aznar announced that he would step down as prime minister; instead it
chose Mariano Rajoy. “I am quite human, like anyone,” says Mr Rato.
“When one is in a certain position and it does not happen and some do
not select you, they select someone else, then… But life, after all, is
not only one thing,’’ he says, insisting he will serve his party for
the moment.
Current polls show the governing Popular Party is set to return to
power next year, although the gap with the opposition socialists has
narrowed, in great part due to Mr Aznar’s vocal support for the US
invasion of Iraq. After two terms in office, there is still a lot to
do, not least lowering 11.4% unemployment – down from 24% 10 years ago.
“Spain is in the midst of a very intense process of employment creation
and, on top of that, it has no other path. You cannot build a society
with an unemployment rate of 20%, not even 15% nor 12%. We still have
11% and need to create more employment,’’ says Mr Rato.
Export-led growth
In terms of job creation, the export sector has been among the most
dynamic. While France’s, Germany’s and Italy’s exports have dropped,
Spain’s continue to grow and its quota in the EU and outside it is
growing. Meanwhile, gross capital formation represents more than 25% of
GDP in Spain, a major investment in machinery and equipment, although
the government is looking to make companies spend more on research and
development.
“We have an agenda for the next four years, [encompassing] reform of
the administration, making it more agile, more transparent, less
bureaucratic, more dynamic; where we continue with a policy of
austerity, and a policy of efficiency in complicated terrains like
health or social security. And we must ensure that negotiations on
salaries in this country become more flexible,’’ says Mr Rato.
Although he insists he will not give public advice to any other
country, he points out that countries representing 70% of the European
economy have deficits of over 3% yet their economies are not
recovering. Spain already had a zero budget deficit in 2001 and is
forecast to post a deficit of 1% of GDP this year.
Consumer confidence
“Deficits will not be the solution to the European economy. In an
economy without flexibility, there is no confidence,’’ he says, noting
that there is consumer and business confidence in Spain born of a
perception that the country is more dynamic and has more economic
freedom than some of its neighbours.
“Some [politicians] in Europe have confused social protection with
immobility. I believe there are political parties in many areas of
Europe that are the prototype of the status quo. They are the perpetual
establishment.”
A third term in government might give the Popular Party time to
continue working on the Spanish economy, hopefully, rather than
becoming part of the “perpetual establishment”. Whether or not Mr Rato
remains finance minister or takes up a foreign posting is perhaps not
that important: Spain has more than enough capable politicians to deal
with the challenges that lie ahead. After all, Spanish society has
proved its dynamism, both politically in its bloodless democratic
transformation and economically with higher than average European
growth and fiscal orthodoxy, while its corporations and banks are set
to continue expanding their revenues and spheres of activity.
BBVA moves ahead
The 32nd largest bank in the world by Tier 1 capital is finally
emerging from a merger process that – like its rival Santander Central
Hispano – took longer than expected.
“In recent years, hemos bajado a la bodega [we have gone down to the
cellar and done the work] and restructured and put together our plan.
The bank is now poised for growth and is arriving at its cruising
speed,’’ president Francisco González tells The Banker from his office
in temporary accommodation, while refurbishment of the bank’s landmark
high-rise is being finished.
Francisco González: ‘There will be only five players in Europe’
“We can prepare ourselves for a merger in Europe. Not a merger of
equals. But there will be consolidation. In the next five to 10 years,
there will be only four or five players in Europe.’’
This is quite a surprising statement from a bank (in fact a collection
of banks) that 20 years ago would not have even been considered in a
European context. Now, the figures speak for themselves. With total
assets of $293bn, a cost/income ratio that puts it at 26th in the
rankings on the table opposite and 38th in terms of its 21.8% pretax
profit on average capital, the bank is now a serious player
internationally.
Its Latin American exposure has been a mixed blessing: a long-term
opportunity for growth yet with the usual emerging market hiccups, such
as Argentina and its currency crisis. It is the largest private bank in
Argentina.
“A couple of years ago, we provisioned $1.6bn for our operations in
Argentina. This year we will make money in every Latin American country
except Argentina, which will break even,’’ says Mr González.
Still, the bank says only 4% of its Latin America business is in
non-investment grade countries, with investment grade Mexico, Chile and
Puerto Rico being its biggest exposures. The latest fashion for foreign
worker remittances, which saw Bank of America ally with Santander’s
Mexican arm, should serve BBVA well.
“BBVA Bancomer manages close to half of the remittances from Mexicans
in the US. We are developing a much more extensive product range. We
will be a consumer company with a bank,’’ says Mr González.
The retail side is also being developed in Spain. Like its main rival,
BBVA lost market share while carrying out its merger. Now, it feels its
new strategy of personalising services will allow it to grow this and
increase its share of wallet of existing customers.
It now has 150 redesigned branches with longer opening hours and hopes
to increase this to 450 in two years, while training its staff in how
to be financial advisers. The bank is investing E360m in this process.
“The bank has made major advances in terms of corporate governance. For
example, we just empowered 1500 30-40-year-old executives and we are
looking for less hierarchy in the bank,” says Mr González.
Business banking has also changed at BBVA. In January 2002, it merged
its corporate and investment banking units. It now has a specialised
team diagnosing the needs of its 2000 corporate clients with the aim of
seeing what other services can be rendered.
Pre-tax profits for the nine months to September are up 12% to E2.9bn,
despite the low interest rate environment and only a slow recovery in
markets. Investors are beginning to sense the new, positive mood:
shares rose 17% in the first three quarters compared with the same
period last year.