No government, no problem: firms dive into Spain's policy void

[MADRID] In Spain, nurturing the economy is so far proving easier than forming a government. Corporate investment has helped sustain growth this year, even as efforts to establish a government continue to stumble eight months on from a first round of general elections in December.

With the political deadlock set to drag on after Acting Prime Minister Mariano Rajoy lost a confidence vote in parliament on Friday, the strength of the recovery may be put to the test.

"Up until now, no one has altered investment decisions because of the political context," said Daniel Fuentes, an economist at Madrid-based think tank AFI. "That may change if we go to third elections since that would make the risks pegged to political uncertainty more acute."

Investment in capital stock such as factory equipment jumped 2.2 per cent in the second quarter as exports climbed 4.3 per cent. The economy grew 0.8 per cent - more than twice the euro zone's pace of 0.3 per cent - while adding 484,000 full- time jobs compared with a year earlier.

More flexible employment laws and falling labour costs have helped Spanish companies to grow as they also benefit from external factors including lower oil prices and European Central Bank stimulus.

"2016 will be a good year and we view the outlook for next year with moderate optimism," said Xavier Tintore, chief financial officer of Fluidra SA, a water treatment and swimming pool equipment company that's extending a distribution centre for its southern European business in Girona, Spain.

"In the long term, the political situation could have an impact on the economy, but for now the momentum is such that there hasn't been an effect on our plans."

Mr Rajoy's allies have been ratcheting up concerns about the fallout on the economy if Spain can't name a government.

Acting Economy Minister Luis de Guindos has said that an apparent decline in demand for credit from small and medium- sized companies could be an early sign that economic momentum is waning.

Loans of 250,000 euros (S$379,000) to 1 million euros to companies for up to one year, an indicator of SME credit demand, slipped 5.8 per cent in July from June, according to Bank of Spain data.

Spain's fiscal situation offers an additional challenge: parliament needs to pass a budget before the end of this month to ensure it can meet its financial planning obligations with the European Union.

Meanwhile, the public works ministry and state companies said the value of contracts fell 20 per cent in the first half of the year as the political paralysis dragged on.

"Given the tailwinds, the biggest risk facing the Spanish economy is political," said Miguel Cardoso, chief Spain economist at Banco Bilbao Vizcaya Argentaria SA in Madrid. "Not having a budget for next year produces a fiscal contraction - and that could lead to a decline in demand and hit expectations in the private sector."

For now, many companies continue to invest in their business as they keep an eye on political developments - or lack of them.

Carbures Europe SA is pressing ahead with the expansion of its factory making carbon fiber car parts at its Burgo de Osma plant. The company has set aside funds to add a third production line, said Chairman Rafael Contreras.

Increasing global demand for lighter-weight materials in cars is helping Carbures, which exports 90 per cent of its output, said Mr Contreras. So far, the political stalemate in Spain hasn't affected the company's investment plans for the short term, he said.

"We want to keep expanding our capacity and we will take into account the stability of the country as we take these decisions," said Mr Contreras.

BLOOMBERG