Oscar arce

FINANCING CORPORATE INVESTMENT ALONG THE RECOVERY: THE CASE OF SPAIN

Óscar Arce Associate Director General Economics and Research

27 March 2017 GIC – Central Banking Series Session II: From the Eyes of the Central Banks

ADG ECONOMICS AND RESEARCH – DG ECONOMICS AND STATISTICS

Disclaimer

These views are the author’ ones and do not represent those of Banco de España or the Eurosystem

Do not distribute without the author’s permission

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This talk: three key issues

- Squaring strong investment with strong deleveraging forces: ďƒ˜ How are Spanish firms financing their investments?

- Credit allocation before, during and after the crisis: ďƒ˜ Have lenders changed their attitudes towards credit giving after the last credit boom?

- Banking vs market-based finance: ďƒ˜ Towards a more balanced mix?

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The recovery of the Spanish economy: Deleveraging-cum-investment

INVESTMENT (MACHINERY AND EQUIPMENT) 2008 q1 = 100

EQUIPMENT INVESTMENT AND NFCS DEBT 130

2008q1=100

105 120

100 95

110

90 100 85 90

80 75

80

70 70 65 60

60 2008

2010

2012

SPAIN

2014

2016

2012

2014

2016

INVESTMENT (SPAIN)

NFCs DEBT (SPAIN)

INVESTMENT (EURO AREA)

NFCs DEBT (EURO AREA)

Euro Area

Source: Banco de España, Eurostat

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Internal funding has been key during the crisis and the recovery.

% of GVA NFC

Uses

Resorces

INVESTMENT AND FINANCING FLOWS 70 60 50 40 30 20 10 0 -10 -20 -30 -40 -50 -60 -70 90

91

92

93

94

95

96

97

98

99

GROSS FIXED CAPITAL FORMATION FINANCIAL DEBT OTHER EXTERNAL FINANCING OTHER

00

01

02

03

04

05

06

07

08

09

10

11

12

13

14

15 16 III

INTERNAL FUNDING (GROSS SAVING) NEW SHARES AND OTHER EQUITY FINANCIAL ASSETS

Source: INE, Banco de España

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Aggregate deleveraging has been compatible with a significant share of investing firms raising their indebtedness

ASSETS AND LIABILITIES OF NFCs WITH POSITIVE OR ZERO NET INVESTMENT. FLOWS 80

% GVA 40

30

60

30

60

20

40

20

40

10

20

10

20

0

0

0

0

-20

-20

-40

-30

-60 -80

-40 2008

0 -1 -2 -3 -4 -5 -6 -7 -8 -9 -10 -11 -12 -13 -14 -15 -16 -17 -18 -19 -20 -21 -22 -23 -24 -25 -26 -27 -28

2009

2010

2011

2012

2013

2014

NET CAPITAL INCREASE FINANCIAL DEBT FINANCIAL INVESTMENT OTHER NET FLOWS (ASSETS - LIABILITIES)

2015

Uses

-10

Resources

Resources

%

% GVA 40

Uses

ASSETS AND LIABILITIES OF NFCs WITH NEGATIVE NET INVESTMENT. FLOWS % 80

-10

-20

-20

-40

-30

-60 -80

-40 2008

2009

2010

2011

2012

2013

2014

2015

INTERNAL FINANCE GROSS FIXED CAPITAL FORMATION NET TRADE CREDIT (ASSETS - LIABILITIES) FIRMS AS PERCENTAGE OF TOTAL (Right-hand scale)

Source: INE, Banco de España

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Following the burst of the crisis, credit has been allocated towards firms that on average are more productive…

PROBABILITY OF OBTAINING A CREDIT: TIMEVARYING COEFFICIENT ON TFP

AVERAGE DIFFERENCE OF TOTAL FACTOR PRODUCTIVITY BETWEEN FIRMS WHOSE CREDIT DIMINISH AND THOSE FIRMS WHOSE CREDIT DO NOT DIMINISH (T-1) %

2.5

14

2

12

1.5

10

1

8

0.5 6 0 4

-0.5 -1

2

-1.5

0

-2

-2 2004-2007

-2.5 2004 2005 2006 2007 2008 2009 2010 2011 2012

Source: INE, Banco de España

2008-2013

2014-2016

INDUSTRY TRADE AND ACCOMMODATION INFORMATION AND COMMUNICATION CONSTRUCTION AND REAL ESTATE ACT. OTHER SECTORS

Source: Banco de España

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…and with sounder financial fundamentals

IMPACT ON THE PROBABILITY OF INCREASING OR MAINTAINING CREDIT LEVELS Coefficients 2005-2008

Coefficients 2009-2013

Coefficients 2014-2015

0,031***

0,005_

0,028**

Debt Burdenit-1

-0,063***

-0,089***

-0,093***

Indebtednessit-1

-0,162***

-0,205***

-0,254***

Sales Growthit-1

0,010***

0,007***

_0,009***

Employment Growthit-1

0,014***

0,010***

_0,016***

Number of firms

310.152_

346.915_

172.046

Observations

638.429_

822.559_

227.154

Profitabilityit-1

Source: Banco de España

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In the new context, banks discriminate firms on the basis of their fundamentals much more than during the boom

PROBABILITY OF GETTING A LOAN FROM ANY BANK

%

80

70

MEDIAN FIRM 60

AVERAGE FINANCIALLY WEAK FIRM AVERAGE FINANCIALLY STRONG FIRM

50

40

30 05

06

07

08

09

10

11

12

13

14

15

16

Source: Banco de España

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Against a background of diminishing financial fragmentation in the EMU, credit conditions faced by Spanish NFC have improved significantly SHARE OF FIRMS WITH CREDIT CONSTRAINTS. BREAKDOWN BY SIZE

INTEREST RATES, NEW LENDING UP TO €1M %

%

6.0

30

5.5 25 5.0 20

4.5 4.0

15

3.5 10 3.0 5 2.5 0

2.0 11

12

13 Spain

14

15 Core euro area

16

17

SPAIN

EMU 2011-2012

MICRO

Source: Banco de España, ECB, SAFE

SPAIN

SMALL

EMU 2015-2016

MEDIUM-SIZED

LARGE

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In spite of such improvement, market-based financing is gaining much prominence in Spain

WEIGHT OF FIXED-INCOME SECURITIES (FI) OVER FINANCIAL DEBT (FI + CRED), NFC

%

50

40

30

20

10

0 GERMANY

ITALY

EMU

SPAIN

JAPAN

2007

Source: Banco de España

FRANCE

Q2-2016

UNITED KINGDOM

UNITED STATES

CERO

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In recent times, the the Eurosystem's corporate sector purchase programme (CSPP) has accelerated further this trend

LOANS AND FIXED INCOME GROSS ISSUANCE

INTEREST RATES. CORPORATIONS 3.0

12 month average

CSPP Mar 16

%

CSPP Mar 16

b€

155 153

2.5

19 18

151

17

149

2.0

b€

16

147 15 145

1.5

14 143 1.0

13

141

12

139 0.5

11

137 135

0.0 2014

2015

2016

LOANS OVER 1 EUR MILLION NON FINANCIAL CORPORATIONS BONDS (BBB) BANK BONDS (BBB)

Source: Banco de España

10 2014

2015

2016

NEW LOANS OVER 1 EUR MILLION LONG TERM FIXED INCOME BONDS (RHS)

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But, beside substitution effects, the CSPP is unchaining positive spillovers to non CSPP-ellegible firms through banks’ credit reallocation

Changes in outstanding loans by corporation and type of bank (feb 2016 vs aug 2016)

Loans to bond issuer corporations

b€ 60

20%

CSPP Announcement 50

15% 40 10%

30

201609

201608

201607

-5%

201606

0 201605

0% 201604

10 201603

5%

201602

20

-10% micro and small medium firms large firms firms Banks with negative outflow with issuing firms Banks with positive outflow with issuing firms

Fuente: Arce, O., Gimeno, R., y Mayordomo, S. (2017). “Making room for the needy: The effects of the CSPP program”. Work in progress.

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Some conclusions & issues for discussion

- Key aspects to understand why an economy may grow and invest even while deleveraging  Heterogeneity at the firm level  Non-banking sources of finance (internal, markets)  The “quality” of credit allocation - What is the nature, scope and persistency of ongoing bank disintermediation?  Temporary (?) factors: Current low interest rates, regulatory uncertainty, expensive and scarce bank capital, ….  Persistent factors: new regulatory landscape, development of new market infrastructures, initial investment/hysteresis….

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