One of the things I do for a living is investment research. Once a month or so, I write rapports on different countries potential risks and rewards for foreign investors. My clients range from corporations to consulting companies and then some sensible business media. I recently (last month) wrote a forecast on France, Spain and Portugal that had some of my customers wondering. My advice regarding Spain was perceived by some as too upbeat since it went against the feel of some of my colleagues. The debate is interesting, so, I have chosen to address some of the criticism using this blog, where I write mostly on politics, since much of the skepticism against my view of Spain’s economic perspectives has to do precisely with politics.


Let me summarize my view of the Spanish economy in the short and medium run. I think that Spain is a good buy, with a couple of qualifications, the main one being that investors should ponder carefully where in Spain they invest and to stay away from a couple of sectors, like the media, which in Spain is too close to pork-barrel politics for comfort.

First of all, regarding where to invest in Spain, I think it is wise to remember that the country is probably the closest to a federal system that you can get in Europe; the Spanish Autonomias (autonomous regions) have a very significant leeway in terms of policy. As a result, there are some very significant differences between the prospects for investment in different regions; that allows for having very good opportunities in some places while in some other spots, like say the Basque Country, no sensible investor would care to set up shop without some very good and imperative reason. The Spanish semi-federal system has another advantage, of the greatest consequence when evaluating risks: the country as a whole can manage to get along with even a quite incompetent central government, since it won't be able to devastate everything everywhere. I would compare Spain to a submarine with lots of watertight compartments… it can afford to have a couple of them full with water and yet remain seaworthy.

To the story belongs, of course, that I remain rather unconvinced about the statesmanship of the Spanish government of José Luis Rodríguez Zapatero [check these links: Link 1, Link2, Link3, Link4 (specially) and Link 5]. But o

Let’s start from the most interesting regions form investment.

Geographically, the whole Mediterranean coast seems bound to continue its process of “californization”, above all, the Valencia and Murcia regions, (conservative regional governments, no populist tendencies, accelerated growth) and then, of course, the Balearic Islands, the tourist emporium of the Mediterranean. The city of Valencia is the center of a Metropolitan Area (L'Horta) that includes ca. 1.5 million inhabitants and 44 municipalities. Valencia belongs to a Region known as Comunidad Valenciana, which was one of the historical kingdoms from which Spain was established. The ‘Wider Territorial Unit’ (EU lingo) corresponds to the area covered by Metropolitan Area. It is strategically situated on the Mediterranean coast and relies on modern road and rail networks that speed up exchanges with other Spanish and European cities. Through its highways, Valencia is linked with Barcelona, Madrid and Southern Spain. Its airport handles 1.7 million passengers a year and it has also a large port, very well organized.

Andalusia is a much less clear bet: traditionally controlled by a local socialist baron, the administration is pretty unreliable and suffers of chronic patronage. But then, again, for long-term investment projects, particularly in the service sectors, it is a very interesting area. A must to research for services to seniors and residential developments.

Catalonia isn’t the brightest option in the Mediterranean for the time being; costs are high, government is less than predictable. The regional government isn’t exactly the ideal for international investors: a shaky coalition of socialists –indulging sometimes in a fair amount of nationalist populism-, ex-communists and radical nationalists, very hostile to business and harboring a particularly obnoxious brand of anti-Spanish bigotry. Yet the region has an enormous potential in the long run: Barcelona, the capital, is perhaps, the main business center in the Mediterranean outside of Italy. Sooner or later the nationalist rubeola will eventually remit and Catalans will vote some sensible people into office… Right now the outlook is quite negative: an increasing number of mainly manufacturing companies are opting out of the region towards the new members of the European Union in the East, a trend that is being accelerated by the thuggish anti-business rhetoric of some of the people in government, trying to scare companies into not moving out (!). Real estate and tourist infrastructure are two fields that can hold the best potential.

Madrid is from all points of view a very good prospect for investment, probably the best in the short run throughout Spain and definitely in the long run. It is the eighth largest city in Europe –ca 3 M inhabitants in the city itself and around 4,3 M in the conurbation- and is a major financial and economic center, well equipped with advanced services. Madrid is the federal capital of Spain, but it has its own autonomous regional government, with the same prerogatives of the other regions (I fact, the Madrid region’s population is heavily concentrated in the capital’s conurbation, the rest being scattered in a few dozens of small villages). In the last 20 years or so, the Spanish capital has become a global city and of the major business places in Europe. It is superbly communicated with Latin America; in fact, it is the only serious contender with Miami for being the main hub for companies who have a multinational operation in Latin America. On the one hand, Madrid has a crucially important pool of talented qualified workforce from throughout Latin America, on the other, actual costs for conducting business are among the lowest in Europe. The regional government is consistently conservative and business friendly and quite competent.

The only region in Spain where investment can be an outright bad proposition is the Basque region, where there is an endemic problem with ultra-nationalist terrorist activity. The terrorist organization ETA has been, literally, in business since the 60s and maintains itself by means of a sophisticated racketeering operation to extort the so called “revolutionary tax” from local companies. CEOs have been murdered for refusing to pay. The worst part is that the terrorists have a proxy union, present in most companies… including the banking system. They often select their victims among the members of the opposition to the regional government, controlled by relatively moderate nationalist parties in coalition with the local ex-communists. The ideological origin of Basque nationalism is worrisome. The Basque government is rhetorically pro-business but tend to aggressively promote an all-too-rosy picture of the Basque situation and tries offer fiscal incentives to compensate companies for the “revolutionary tax” and connected risks. Ominously enough, the parties in the local government are known to have signed in 1998 a secret pact with the ETA to oppose the central government and they openly subsidize the families of imprisoned terrorists; they also have fiercely opposed the law –quite ineffectual in any event- prohibiting a party considered to be the terrorists’ legal arm. My advice is to keep out of that conundrum.

Beyond the Basque Country, with its old industrialist tradition and location close to the French border, Atlantic Spain doesn’t seem to offer many possibilities for businesses nowadays.

Non-coastal Spain has another area that may offer attention-grabbing opportunities for investors. It is the continuum of three regions, the Spanish Navarre –a very interesting fiscal location- the Rioja en the northwestern part of Aragon, particularly its capital, Zaragoza. It is very strategically located, increasingly well communicated with France and then with the Mediterranean hinterland, both towards Catalonia and Valencia… In fact, Zaragoza has everything going for it becoming a hub city, functionally twined with Toulouse, a main center of French-Spanish exchanges and very probably one of the few places where one can envision a manufacturing venture in Spain…

Lastly I would like to convey a soothing idea about Zapatero and his government, whose negative weight for the economy has been, as I see it, exaggerated by some over-nervous analysts. First of all, the man that the WSJ dubbed “The Accidental President” surely lacks an educated perception of foreign relations and isn’t exactly the sharpest knife in the drawer of the European Union leaders. But, on the other hand, he has had the good sense of understanding that the economy must be left to economists and Pedro Solbes, his minister of Finance, is both an accomplished and an orthodox professional, an old hand of the competent wing of the European Union bureaucracy (yes, there is such a thing), the man who fathered the fiscal responsibility norm.

A cruel saying goes: “There is nothing worse than an idiot with initiative”. Happily enough, Mr. Zapatero has reserved his initiative to the international political arena and social engineering, and in both fields he has left some glowing traces that, I’m sure, will defy the passage of time (I won’t forget his recipe to end terrorism though genre equality). But in economics, thanks God, he has been more hands-off than not.

This and the beneficial effects of the de-centralized Spanish political system will in my view preserve Spain from too much damage during Mr. Zapatero’s time in office.

Another matter, and a very grave one, is the pending menace of an implosion in the very fragile Spanish manufacturing sector, overtly exposed to competition from Asia and Eastern Europe…

For the time being, neither Spain or France are to fall for the German sickness. In fact, I read in today’s Financial Times that business confidence remains low in Germany (95.5 from 96.4 last month) but it's sort of OK in France and Spain. GDP fell in Germany, Italy and the Netherlands in the last quarter of 2004, while in Spain and France it has gone up not-so-timidly (0.8% and 0.7%). I think the FT has got it right. Then, of course, one can argue that those increases both in France and in Spain depend on low interest rates and a real estate bubble. Also Germany and Holland are structurally more dependents on exports…

My personal hunch is that in Europe we are already getting into the crisis and, as usual in this sort of situations, some people will feel the pinch before the others. Spain is in for a pretty bumpy road from 2006 and onwards, particularly after it loses the financial injections from the territorial funds from Brussels in 2007, but it’ll get over it.

# posted by Juan A. Hervada @ 11:04 PM