Fitch: Spanish Fundamentals Index Shows Recovery Holding Up

The Fitch Spanish Fundamentals Index shows that recovery across key sectors in the economy is holding up, although there are still underlying challenges, Fitch Ratings says.

The Spanish Fitch Fundamentals Index remained unchanged at +6 in 1Q15. Positive trends in new credit strengthened during the quarter, while ABS performance declined. Trends in mortgage and SME performance, unemployment and transportation remained strongly positive.

New bank credit extended to borrowers continued to grow in 1Q15, but was not quite sufficient to push the year-over-year new credit sub-component score up to +10 ('strong positive') from +5. Easing financing conditions reflect progress Spanish banks have made in improving their balance sheets and the European Central Bank's liquidity initiatives. The return of credit flow supports mortgage and SME performance and house prices.

Economic growth has also picked up, boosting new lending. In March, we revised up our GDP forecasts for 2015 and 2016 to 2% and 2.3%, respectively, with growth stemming largely from domestic demand this year as employment and real disposable incomes grow.

Nevertheless, whether Spain will see a sustainable return to meaningful yoy rises in net lending remains uncertain. New bank lending remains well below pre-crisis levels and is largely offset by loan amortisation.

The Fitch Fundamentals Index (FFI) tracks changes in credit fundamentals across key sectors of the Spanish economy. Analysing the relative strength or weakness of the index or its sub components can provide insight into how conducive conditions in Spain are towards economic growth.

The trend in potential drivers or constraints on economic growth or decline is indicated by the relative strength or weakness of the FFI, ranging from +10 to -10. Released quarterly, the FFI relies primarily on proprietary Fitch-sourced data. The FFI's components include mortgage, SME and ABS performance, EBITDA and capex forecasts, rating outlooks, the CDS outlook, new credit, unemployment forecast and transportation trend. As a result, the index provides a complete picture of the health of the Spanish credit markets.

The Spanish FFI is an extension of the US Fitch Fundamentals Index, launched in October 2013 and published quarterly.