Election results ‘will not hinder Spain’s FDI recovery’

The outcome of Spain’s general election on April 28, in which the centre-left Socialist Workers’ Party (PSOE) won the majority of votes but fell short of gaining an absolute majority, is not expected to dent the foreign investment recovery the country has experienced in recent years.

“In 2018, as Spain’s economic resilience defied the eurozone slowdown, inward FDI recovered to €37.6bn (3.1% of GDP) up from €6.7bn in 2017 (0.6% of GDP),” said Georges Dib, economist for Latin America, Spain and Portugal at credit insurance company Euler Hermes. “A socialist-led coalition should not adopt a confrontational stance with separatists; hence we do not expect a standby effect on FDI similar to that of late 2017 at the height of the Catalonia crisis.”

The ruling PSOE of prime minister Pedro Sánchez gained 123 seats in the lower chamber, almost twice as many as the centre-right Popular Party (PP), which did not surpass 66 seats. However, it will need to engineer a coalition to get to the 176 seats it needs to have a majority in parliament and thus form a government.

“The elections on April 28 yielded a fragmented political landscape, making structural reforms harder to pass,” according to Mr Dib. “The socialist agenda could be more focused on demand-side policies rather than further improvements in the business and investment environment. Our forecasts for Spain hence point to a deceleration to a 2% and 1.8% growth in 2019 and 2020, respectively, from 2.6% growth in 2018.”

Observers now expect a coalition between the PSOE and left-wing party Unidas Podemos and the Catalan Esquerra Republicana to be formed, yielding a total of 180 seats.

“Over the coming days and weeks the markets will be looking for progress in coalition talks, but Spain’s recent good growth data appears to have dulled the market’s sensitivity to Spanish politics,” analysts from Dutch Rabobank wrote in a note.

Indeed, the Ibex 35, the country’s stock index of reference, rose 0.12% on April 29, thus ending a tradition of closing in the red after elections results that has held since its establishment in 1992.