In recent years, one of the most significant developments has been the reduction of Spain’s external debt, marking a positive shift in the country’s economic landscape. External debt has been a persistent legacy of the credit bubble that ravaged Spain from 2008 onwards. At its peak, total external liabilities, representing the money owed to foreign investors, nearly reached 100% of GDP (in terms of net international investment position), leading to skyrocketing financial burdens. For instance, the majority of income generated from international tourism barely covered debt interest payments. However, starting from 2015, due to surpluses generated by exports, external debt began to decline, albeit gradually. In 2020, as a result of financing needs stemming from the pandemic, external liabilities surged back up to 85% of GDP, significantly lower than during the financial crisis but still alarmingly high.
Since then, however, the volume of liabilities owed to international investors has continued to decrease, now accounting for 53% of GDP. Consequently, interest payments have also decreased, now representing only 15% of tourism income, despite the European Central Bank’s tightening of monetary policy. This journey of debt reduction has been acknowledged by the European Commission in its In-depth review monitoring imbalances in member states.
Furthermore, the structure of debt has improved, mitigating financial risks. A growing portion of liabilities consists of long-term debt securities and, most importantly, foreign direct investments in Spanish companies, which are inherently relatively stable. The Commission’s reference indicator for external debt, excluding foreign direct investment in Spain and other non-default risk liabilities, has declined to 25% of GDP, nearly half the level of 2020 and 54 percentage points lower than during the peak of the financial crisis. This monumental effort to reduce debt, coupled with stable capital inflows to bolster Spain’s productive capacity, projects an image of increased confidence.
However, debt levels still exceed commonly considered prudent thresholds (Brussels’ reference is 17% in terms of net international investment position). Therefore, this remains a vulnerability that has not disappeared. To mitigate it, maintaining competitiveness is crucial, as it generates surpluses in international trade, providing resources to further reduce private sector liabilities. Additionally, containing budget imbalances is essential, given the significant role of non-residents in purchasing new Treasury debt issuances. This must be done judiciously to avoid derailing growth, as economic capacity is essential for bearing financial burdens. Therefore, boosting internal investment efforts is imperative.
In the immediate future, the inertia of the economy and the external surplus seem assured, fostering a further reduction in external debt as a proportion of GDP. However, beyond that, a renewed impetus is needed to create an environment conducive to investment and to contain the structural public deficit, the primary factor contributing to persistent external debt. Despite recent progress, the legacy of the crisis continues to weigh on external accounts, highlighting the longevity of financial cycles. Deepening these advances is key to reducing our exposure to market fluctuations, thus expanding the scope of economic policy.
Trade Surplus: In 2023, the balance of trade with foreign countries (current account balance) reached a historic surplus of 38 billion euros. This outcome stems from both a reduction in the trade deficit of goods (partially due to cheaper imports) and an increase in the surplus of services, both tourism-related and non-tourism-related. The surplus of non-tourism-related services, nearly non-existent a few years ago, now exceeds 2% of GDP. The growing surplus with the EU is another significant trend.