March 26, 2024 10:13 am


Italy & Spain 2024: Macro and NPL review and outlooks

Italy’s central bank has also downgraded GDP forecasts for 2024 to 0.6%, after economists project the economy ended 2023 in stagnation mode. The restrictive monetary policy cycle, geopolitical headwinds, elevated inflation and subdued wage growth continued to weigh on investment and household consumption. Tighter euro area monetary policy has also increased the risk premium on Italian government securities, keeping borrowing costs for corporates high.


ING predicts minor negative GDP contraction in Q4, with industry acting as a drag into the early part of the new year. Italian industrial output was slightly stronger than expected in December, nudging up 1.1% on a monthly basis, reported ISTAT, the Italian national statistics bureau. However, the annual rate of industrial production fell 2.1%, reflecting broader weakness in the German economy and soft conditions in China.


Giorgia Meloni, Italy’s prime minister, reportedly said she sees scope for Italy’s economy to grow faster than the European Union average in 2024, despite the bloc’s executive predicting a lower performance for the country. In its latest economic projections, the European Commission forecasts GDP growth was revised down to 0.9% in the EU, 0.8% in the euro area, and 0.7% for Italy in 2024.


More persistent inflationary pressures are expected in 2024. EU HICP inflation is forecast to fall from 6.3% in 2023 to 3.0% in 2024 and 2.5% in 2025. In the euro area, it is projected to decelerate from 5.4% in 2023 to 2.7% in 2024 and to 2.2% in 2025. Disrupted supply chains will subdue import-export activity due to container vessels attacks in the Suez Canal, one of the world’s most significant container shipping routes. Exports are projected to expand in line with foreign demand while weak investment expenditure on capital goods will keep a lid on import growth. In January, business confidence marginally ticked up in the manufacturing, construction and retail industries, although volume of order books have stabilised at low levels.


Private sector investment is projected to slow markedly, held back by the rise in borrowing costs, tighter credit access conditions and the fading impact of the construction incentives, according to the Bank of Italy. Economic activity in Italy will receive only gradual support from the eventual monetary easing by the ECB. More significant will be the effectiveness and pace of the Italy’s financial boost from public investment related to the National Recovery and Resilience Plan (NRRP).


Into 2025, GDP forecasts increased to 1.1%, due to the expected positive effects of lower interest rates over the forecasting horizon. Employment, which expanded strongly in 2023, is expected to continue to grow, though at around half the pace of GDP, according to Italy’s central bank, while the unemployment rate is projected to decline slowly, to just under 7.5% by 2026.


In the Italian non-performing loan (NPL) market, underperformance of some existing GACS securitizations is thought to be preventing the revival of scheme, which expired at the end of 2022. According to Scope Research, 14 out of the top 25 GACS transactions underperformed relative to their initial business plans, while annual NPL collections were €226 million, reflecting 21% against the previous two-year average.


This reduction was driven by lower extrajudicial proceeds: discounted purchase offers (DPOs) fell 36% and note sales 38%, according to Scope Ratings data. “During the pandemic when the courts were closed, servicers relied on alternative collection methods (DPOs and note sales). But as the courts are once again working as before, Italian NPL servicers favour the judicial approach that in general grants higher collections even though it takes longer. In addition, the rise in interest rates and the stressed macroeconomic scenario has reduced the margin on extrajudicial strategies,” wrote Scope.


A total of 42 transactions completed in 2023 with an overall gross book value (GBV) of €12.3 billion, 67.4% lower by GBV than in 2022. However, inflows of new Italian NPEs have dropped to the lowest levels in the last three years, according to PricewaterhouseCoopers, as the aftermath of the loan moratoria scheme and more than €300 billion in pandemic era government-guaranteed lending helped contain new defaults. The stock of NPEs in Italy is estimated to have reached historical minimum levels of €56 billion in 2023, down from €397 billion in 2015, according to PwC data. While the high interest rate environment improves banks’ profitability on new lending, the environment also poses increased default risks for corporates struggling to absorb elevated and protracted high borrowing costs.  In addition, the environment also increases banks’ funding costs, results in a slowdown in credit demand, and potential deterioration in credit quality. With more than €300 billion in NPEs that still need to be managed and recovered, there is considerable volume to stimulate an ongoing vibrant secondary market in the years ahead.


Spain: strongest performing euro economy for second consecutive year


Spain is expected to be the strongest-performing economy in the monetary union for the second-consecutive year in 2024. The Spanish economy slowed in 2023, but continued to grow at a relatively fast pace. Annual GDP is forecast to slow to 1.7% this year, after 2.5% in 2023, according to European Commission forecasts. GDP will then run at 1.9% in 2025 and 1.7% in 2026, forecasts the Bank of Spain.


In Q4, Spain’s economy grew by 0.6%, buoyed by domestic demand. The manufacturing sector in Spain is a less dominant economic engine than compared with Germany, and is also less dependent on China exports. That said, Spain’s economic outperformance is colling. Consumers and businesses are increasingly feeling the impact of higher interest rates, while excess pandemic savings have depleted and the worsening global environment has reduced international trade.


Household consumption also continues to moderate, as tighter monetary policy passes through the economy in higher financing costs, restricted bank lending to corporates and households, lower consumer confidence and credit demand. New lending to businesses is markedly lower. Although rates should start to come down this year, there is typically a delayed impact before the monetary easing filters through the economy.


Underlying inflation dynamics are expected to moderate, as energy and food prices both normalise. Prices in leisure, hospitality and tourism sectors have all started to moderate. However, residual inflationary pressures will still have a dampening effect on economic activity, albeit to a lesser extent. Headline inflation fell to 3.4% in 2023 and is forecast to 3.3% in 2024, 2.0% in 2025 and 1.9% in 2026, according to the Bank of Spain. Core inflation (excluding energy and food) is forecast to fall from 4.6% in 2023 to 3.0% in 2024, according to Caixa Bank. The unemployment rate will decrease from 12.9% in 2022 to 12.1% in 2023 and will head slowly downwards – standing at around 11% – over the period 2024-2026. The debt-to-GDP ratio is projected to gradually decrease in 2023, driven by strong nominal GDP growth, and then stabilise at 106.5% in 2024 and 2025.


Downside risks are elevated by the emergence of a new geopolitical flashpoint in the Middle East, which have the potential to disrupt global supply chains, as well as the weakness of other major economies, notably Germany and China.


In this context, the Spanish banking system has proved resilient. Non-performing loan (NPL) ratios have continued to decline and wholesale bank funding markets have normalised. With interest rates expected to remain higher for longer, some gradual deterioration in credit quality is expected. The higher cost of funding creates an element of vulnerability in corporate financing markets, which can lead to defaults among more poorly-capitalised firms.


Spain’s NPL ratio fell to 3.4% at end-2023 H1, according to the bank of Spain, remaining on its downward trend, driven by improvements among residential and non-financial corporate stock. M&A activity in the loan servicing sector has been vibrant. In March 2023, Finsolutia sold to Pollen Street, and Intrum closed the purchase of Haya Real Estate two months later. Haya Real Estate manages more than 200,000 real estate assets and €60 billion of debt under management. KKR has also agreed to the sale of servicer Hipoges for €200 million, while Lone Star and CaixaBank are negotiating the sale of subsidiary Servihabitat to the Pollen Street.


This post was written by Timur Peters

Timur Peters is the founder of Debitos GmbH. He holds a diploma in finance and law. He has more than 10 years’ experience in the range of finance.
Before Founding Debitos Timur Peters was responsible in the distribution of Software for Banks and Financial Institutions for Comarch for the D/A/CH Region. Next to this he has worked for several years as a self employed Project Consultant in the area of Financing of Litigation cases, Peer2-Peer Credit Marketplaces and other online projects for financial institutions.


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