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Prime Minister Mariano Rajoy’s progress in luring investors back to Spain is spreading well beyond the bond market, according to Bloomberg. With the euro region’s fourth-biggest economy out of recession, exports at a record and government bond yields at less than half the level they reached in 2012, foreign direct investment is also surging.
Data published today by the Economy Ministry showed capital from France, Mexico, Venezuela, Japan and Hong Kong last year boosted inflows which the Bank of Spain said have jumped by 40% to almost €30 billion.
Vodafone Plc underscored Spain’s attractiveness as an investment destination with the announcement this week that the world’s second-largest wireless carrier will buy cable operator Grupo Corporativo Ono SA for €7.2 billion. Fresh from labour-market reforms and wage devaluations inflicted by the region’s debt crisis, Spain became the euro area’s second-biggest recipient of foreign capital after Ireland last year, according to United Nations data.
“Spain is recovering its capacity to attract investment,” said Alfredo Arahuetes Garcia, head of the economy department at Pontificia Comillas University in Madrid. “Growth will be more balanced in the next economic cycle as reforms have strengthened the foreign sector which was neglected for years after Spain joined the euro.”
Among companies boosting capacity in Spain is Germany’s Bayer AG (BAYN) HealthCare unit. It spent €6 million in the northern Asturias region last year to allow the Langreo plant to cover its entire global aspirin output. It previously had produced 90% of Bayer’s aspirin.
In contrast to Bank of Spain data, the Economy Ministry figures today provided a breakdown of activities and regions attracting inflows, and excluded funding between companies, reinvested profits and real estate. Investments in new production sites or the extension of existing ones as well as purchases of stakes in existing companies rose by +8.8% from a year ago to €15.8 billion, it said.
“Spain’s qualified and flexible labour force, its competitive production costs and its strategic location make it very attractive,” said Manuel Fernandez Ortega, who manages Bayer’s Langreo plant. The company, which employs about 2,160 people in five Spanish facilities.
Automobile manufacturers are also betting on Spain. General Motors Co. (GM) invested €165 million in its Figueruelas plant in 2013 and plans to spend another €210 million this year. Renault SA (RNO) will create 250 jobs in its Valladolid factory in 2014 as it increases output, Spain Chairman Jose Vicente de los Mozos said this week.
In total, direct foreign investment accounted for about 3% of gross domestic product in 2013, up from 2% a year earlier. It contributed to investment expanding by +0.7% in both the third and the fourth quarter and will further boost growth in 2014, said Maria Jesus Fernandez Sanchez, an analyst at Spain’s savings banks’ foundation Funcas.
“Confidence is returning,” said Fernandez. “Declines in labour costs have restored lost competitiveness compared with other European countries while the reform of labour rules has conveyed the message that rigidities aren’t as strong anymore.”
As investors returned to Spanish securities in the past 12 months, the Ibex 35 (IBEX) index of leading companies has risen by +19%, while the yield on the sovereign’s 10-year benchmark bond fell about 170 basis points to 3.38%. Portfolio investment rose by €35 billion in 2013 after four straight years of outflows.
Rajoy made it easier for companies to fire and cut payroll to boost foreign demand for Spanish products as domestic spending slumped. Households’ average income has declined 10% since 2008 as unemployment climbed as high as 27% and the government implemented the deepest budget cuts in the country’s democratic history.
Ahead of European elections on May 25, the premier may have scope for bigger-than-expected tax cuts, Spanish newspaper El Mundo reported today. The government is counting on €5 billion in additional resources that were originally set aside for interest payments on debt.
While Ireland has attracted corporates with a 12.5% tax rate, companies in Spain are benefiting from local authorities’ efforts to retain jobs. Oxybarica Impactos Internacionales, a medical equipment company that is 40% owned by a Colombian company, says government subsidies prompted it to set up in Spain rather than Italy.
“There is lots of aid, they are always ready to help so that we stay in a special industrial neighbourhood they’ve created,” David Andres Mejia Molina, a manager at the company, said in a telephone interview from Illescas, a city near Toledo in central Spain.
According to the European Commission, Spanish investment in equipment will increase by +5.8% in 2014, compared with an average gain of 4.6% in the euro area. It predicts 1% economic growth in 2014 after two years of contractions.
Foreign investment will remain crucial for Spain as credit continues to decline, restricting capital spending by local companies, said Victor Echevarria, an economist at BNP Paribas SA in London. Even so, Spain has to keep up its efforts, he said.
“Competing on product quality or technology rather than huge declines in labour costs will be key to export growth and foreign investment going forward,” Echevarria said. “Spain’s recovery has started faster than expected but there is still a long way to go.”