Setting the Foundations for Sustainable Growth

September 2013

Table of Contents
1. 2. 3. 4. Overview Sustainability of Public Finances and Reform of the Public Sector Thorough and Transparent Reform of the Banking Sector Far Reaching Structural Reforms

5.

Results in the Private Sector: Rebalancing of the Economy

Appendix: Funding and Debt Management Policies

Overview

Addressing the Imbalances of Spains Economy

Three pillars of Spains economic policy
1 Commitment with the sustainability of public finances

Structural fiscal adjustment of c.3.1% in 2012 according to IMF All levels of public administration accounts are becoming sustainable Deficit / GDP in 2012 (y-o-y change): central government 4.11% (1pp), regions: 1.76% (1.6pp), local entities: 0.15% (0.3pp)

Clean up and recapitalization of banks leading to a strong financial system

Increased coverage ratios to real estate and construction Banks exposure to real estate sector down by almost 50% in 2012 More transparent and better equipped banks to finance real economy Enhanced transparency framework and strengthened financial supervision

Structural reforms to boost competitiveness and productivity

Labour market reform is behind the decline in unit labour costs Since 2009, Spains ULC have declined by 7% vs Eurozone up by 3% In the past 6 months, registered unemployment has decreased by 341,000 (down by 6.8%) Orderly private sector deleveraging: -26pp of GDP (from 231% in June 2010 to 205% in Q1 2013) Trade balance surplus with the Eurozone and strong export performance: exports of goods +8% y-o-y in H1 2013. In H1 2012 they increased by 1.2%

Lower funding costs and broader investor base in sovereign debt market. Strong commitment to continuing structural reforms
4

Spains Economy is Enduring a Significant Adjustment

Public sector deficit contracted by 2 percentage points and private sector continued its deleveraging process
CHANGE 2011 PUBLIC SECTOR 2012 12/11

Public Deficit, excl. financial sector one-offs (% GDP)

8,96%

6,98%

-1,98 p.p.

Control of public finances

Wage increase agreed in collective wage agreements (y-o-y change)

LABOUR MARKET

2,7%
-1,5% 2,2% 1,2% -3,5% -3,0% -91,7% 15,6% -42.331

1,7%
-3,4% 3,2% -0,6% -1,1% -0,6% -91,9% 4,2% -25.800

-36,9%
-1,9 p.p. 1,0 p.p. -1,8 p.p. 2,4 p.p. 2,4 p.p. -0,2 p.p. -11,4 p.p. 16.532

Unit labour costs. Total economy (y-o-y growth) Productivity per employee. (y-o-y growth) Total labour cost (y-o-y growth) Current account balance (% GDP) Net Lending(+)/Borrowing(-) vs RoW (% GDP) Net International Investment Position (% GDP)

Wage moderation and productivity

EXTERNAL SECTOR

Exports of goods (y-o-y growth) Trade balance ( mn)

Competitiveness, Product and geographical diversification

Share of exports to Euro Area

Share of exports to non Euro Area Trade balance with Eurozone ( bn) Provisions; Impairment losses on assets ( mn) (Dec. 2012)
FINANCIAL SECTOR

53%
47% 1.636 125.258 363.348 7,0% 221,0% 138,8% 82,2%

49%
51% 7.777 191.566 405.173 11,9% 210,5% 130,7% 79,8%

-3,3 p.p.
+ 4 pp 6.141 66.308 41.825 4,9 p.p. -10,5 p.p. -8,1 p.p. -2,4 p.p.

Net equity, adjustments and provisions ( mn) (Dec. 2012) Provision coverage over credits (Dec. 2012)

Sounder and more solvent financial system Deleveraging via debt reduction Adjustment in housing market

PRIVATE SECTOR DEBT

Gross debt. Non financial corporates and households (% GDP) Gross debt. Non financial corporates (% GDP) Gross debt. Households. (% GDP)

HOUSING

Price of Housing per sq m (y-o-y growth)

1.702

1.531

-10,0%

___________________________ Source: MINHAP, Banco de Espaa, Spanish Customs, Ministerio de Fomento, Eurostat, INE.

Spains adjustment in an international context

Despite the recent turbulences, the Euro Area displays strong macroeconomic indicators

Spain (% yoy change) GDP growth HICP Unit Labour Costs Public Deficit (% GDP) General Govt Gross Debt (% GDP) Exports of Goods and Services Current Account (% of GDP) 2012 -1.6 2.4 -3.4 -7.0 84.2 2013 -1.3 1.5 -0.6 -6.5 91.3

Euro Area 2012 2013 -0.6 2.5 1.4 -3.7 92.7 -0.4 1.6 1.4 -2.9 95.5

USA 2012 2.2 2.1 0.9 -8.9 106.5 2013 1.9 1.8 0.6 -6.9 108.1 2012 0.3 2.8 3.2 -6.3 90.0

UK 2013 0.6 2.8 2.5 -6.8 95.5 2012 2.0 0.0 -1.5 -9.9

Japan 2013 1.4 0.2 -1.1 -9.5 245.4

237.9

3.1 -0.9

4.1 1.6

2.7 1.8

2.2 2.5

3.5 -3.0

3.5 -2.8

-0.2 -3.7

1.3 -2.7

-0.3 1.1

4.0 1.8

___________________________ Source: Spains Stability Programme Update April 2013, European Commission, Spring Forecasts 2013 and IMF Fiscal Monitor April 2013

Remaining challenges at the EU-level

A credible commitment towards a robust and complete Monetary Union is required
Lending rates of new loans to Non-Financial corporations (Maturity up to a year, less than 1 million )

Despite the advances in the institutional set up of the Euro area, fragmentation persists and there are asymmetries in SME access to credit

8
7 6 5 4 3 2 1 0 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 Germany Spain France Ireland Italy Portugal

Single Supervisory Mechanism

Genuine European banking union

Single Resolution Mechanism

Common Deposit Guarantee Scheme

Sustainability of Public Finances and Reform of the Public Sector

Commitment to continue with the Fiscal Consolidation Efforts

Structural fiscal consolidation efforts to remain in an adverse international economic environment

Spains 2012 deficit was 6.98% of GDP excluding one-off support to the financial sector. In structural terms and according to the IMF, Spains fiscal effort was 3.1% of GDP; the highest amongst large developed economies The adjustment path to bring the public deficit below 3% has been extended by 2 years. However this does not imply a fiscal relaxation at all: the structural effort will remain substantial

Plus, any unexpected growth surprise over and beyond the forecast scenario will be principally directed towards public deficit reduction

The fiscal path for the public administrations (excl. one-offs)

0

Breakdown of Public Balance (% GDP)

Forecast (% of GDP)
2012 2013 2014 2015 2016

-2 -4

Central Government
Autonomous Regions Local Governments Social Security Administrations

-4,1
-1,8 -0,2 -1,0

-3,8
-1,3 0,0 -1,4

-3,7
-1,0 0,0 -1,1

-2,9
-0,7 0,0 -0,6

-2,1
-0,2 0,0 -0,5

-6 -8 -10 -12 2012 Deficit 2013 2014 2015 2016

General Government

-7,0

-6,5

-5,8

-4,2

-2,8

Structural balance

Cyclical balance

___________________________ 1. Ministry of Economy and Competitiveness.

Spains structural fiscal efforts guarantee the sustainability of public finances

IMF Projections of Change in Cyclically Adjusted Primary Balances
5,00 4,00 3,00 2,00 90,0 1,00 70,0 0,00 -1,00 -2,00 Australia Canada France Germany 50,0 2013 2012 130,0

Evolution of debt/GDP ratios of selected countries

150,0

110,0

30,0 2008 2009 2010 2011 Germany Italy 2012 2013 Spain UK 2014

Change in cyclically adjusted primary balance 4.5% of GDP in 2012 and 2013. The largest among G20 economies
___________________________ Source: IMF and European Commission (Spring forecasts, 2013)

Italy

Japan

Korea

Spain

UK

US

EU

Belgium France Euro area

Spains debt/GDP ratio is sustainable. It is expected to increase to levels around the Eurozone average

10

A new institutional and regulatory framework for all public administrations

In 2012, all 17 regions managed to reduce their deficits by an average of 1.6% of GDP

Regional governments posted a deficit of 1.76% of GDP in 2012. This represents a modest deviation from the deficit target of 1.5% of GDP. But it is 1.6pp less than last years deficit thanks primarily to cuts in expenditures The structural fiscal framework has been strengthened through:

The approval of the Budgetary and Financial Stability Law The creation of two funds to ensure adequate funding of local and regional governments

Budgetary and Financial Stability Law & Enhanced Transparency

Liquidity & Financing to Regions and Local Governments

Fiscal discipline at all levels of the administration Early-warning system, enforcement and sanction procedures Transparency: monthly and quarterly reporting on budget execution. Submission of budgetary guidelines previous to the approval of regional budgets Assurance of compliance: coercive measures and enforced compliance Law for transparency in the public administrations: accountability & governance

Fund for the Financing of Payments to Suppliers (FFPP):

Provides a financing vehicle to regional and local governments for the regularisation of arrears
o

Outstanding commercial debt owed to suppliers

Forcing fiscal adjustment at regional and local level. Subject to conditionality Disbursed amounts:

Local Administrations: 9.3bn Regional Administrations: 17.5bn and a 1.2bn increase in 2013

Regional Liquidity Mechanism (FLA):

9 of the 17 regions have adhered to the FLA 2012: 16.6bn

2013: 23.0bn (already computed in debt/GDP ratio)

11

A Thorough and Transparent Reform of the Banking Sector

12

Banking Sector Reform: A Transparent and Comprehensive Exercise

Cleaning-up of balance sheets through increased provisioning requirements.

The impact on profits and reserves of increased coverage requirements on exposures related to real estate developers has been of 78bn.

Identification of individual bank capital needs through evaluations from the IMF and independent external evaluators.

70% of the Spanish financial sector is sound and didnt require additional capital. Capital needs concentrated on the 4 banks owned by the FROB (BFA-Bankia, Catalunya Bank, NCG Banco, Banco Valencia), which account for 18% of the system.

Recapitalisation, restructuring and/or orderly resolution of the troubled banks.

Total public support for the financial sector has been 41.3bn; less than 4% of GDP.

Segregation of real estate problem assets and their transfer to an external Asset Management Company (SAREB).

SAREB, with majority of private capital (55%), has received 50.5bn of foreclosed assets and risks linked to developers.

Regulatory reform focused on resolution, savings banks, enhanced transparency and minimum capital requirement for all banks.

Introduces a state-of-the-art recovery and resolution system for banks, which has already been tested

Early intervention for banks in mild difficulties Restructuring measures for institutions with temporary troubles that can be solved with public support Orderly resolution for non-viable institutions

New framework for Bank Restructuring and Resolution

Early introduction of provisions foreseen in the future European Directive on Bank Recovery and Resolution currently under negotiation at the EU level

13

Spains Financial Sector Reform remains on Track

According to the European Commission and the IMFs progress reports, the reform remains on track despite the ambitious deadlines
Brussels, 3 June 2013 On the basis of the review, it can be concluded that the programme remains on track Spanish financial markets have further stabilised since the last review, with sovereign and corporate bond yields dropping amidst lower volatility. In parallel, the liquidity situation of the Spanish banking sector has further improved. This allowed Spanish banks to further regain access to funding markets and to reduce reliance on central bank financing. Also, the solvency position of Spanish banks has been bolstered after the recapitalisation of parts of the banking sector and the transfer of assets to SAREB (the Spanish asset management company), and solvency rates are above regulatory requirements The process of bank restructuring is well underway Further important steps have been taken since the last review in separating impaired assets from banks, as the foreseen transfers of assets to SAREB have now been completed and SAREB has become fully operational Progress has also continued with respect to horizontal financial-sector conditionality. Thereby, compliance with the requirements in the Memorandum of Understanding is nearly complete and achievements toward strengthening the governance, regulatory and supervisory framework of the Spanish banking sector have been made

Recent government initiatives aimed at strengthening non-bank financial intermediation are welcome, including capital market funding and venture capital non-bank financing...
The solvency position of Spanish banks has been bolstered after the recapitalisation of parts of the banking sector and the transfer of assets to Sareb There is at present no reason to foresee further programme disbursements (Third review of the programme)

EUROPEAN COMMISSION

14

Asset Management Company: SAREB

Segregation and transfer to an Asset Management Company of troubled assets from banks that have received public support
Assets

Liabilities

Transfer of assets from Group 1 and Group 2 banks completed: Foreclosed RE assets with net accounting value < 100.000 Loans to RE developers > 250.000 of net accounting value

Equity approx. 8% of total assets

Majority holding by private investors (55%) Sources of funding:

1. State-guaranteed senior

debt issued in exchange of assets received

2. Subordinated debt and

common equity

28 equity holders, of which 27 are private investors and include domestic and foreign banks and insurance companies The only public shareholder is FROB, with a 45% stake Equity: 4.8bn (25% share capital / 75% subordinated debt) Business Plan with a 15 year horizon Expected RoE of approx. 13 14% under conservative assumptions. Transferred assets: 50.5bn, for a gross book value of 106.6bn Overall average discount close to 52% A total of around 200.000 assets have been transferred: Foreclosed RE assets 107.000 assets for a value 11.3bn Loans to RE developers 90.500 assets for a value of 39.4bn

TOTAL ASSETS 55.5bn

SAREBs activity Nearly 1bn of cash collections coming from the on-going activities by month-end July 2013

Wholesale disposals and activity are picking up 9th August: disposal of 245m of loans to Colonial 6th August: Bull project: Sareb creates an SPV with an institutional investor to sell together a portfolio valued at 100m consisting of 939 homes and annexes and a commercial real estate asset 30th May: Sareb sold its interest of 35m in a syndicated loan to Metrovacesa

15

Enhanced Transparency in Refinancing Requirements

Spain is leading the field in best practice transparency frameworks and is well ahead its European partners

Disclosure requirements have been enhanced and harmonised for all entities on key areas of their portfolios such as restructured and refinanced loans, NPLs, asset quality across asset classes, sectorial concentration and etc. In 2012, restructured and refinanced operations amount to 208bn, equivalent to around 13% of the total loan portfolio c58% of the refinanced portfolio considered doubtful or substandard, and hence already provisioned The remaining 40% of the portfolio are performing loans 33% of the refinanced portfolio is related to real estate developers and construction. These exposures were significantly provisioned in 2012 The Oliver Wyman stress test already took refinanced and restructured loans into account:

Restructured and refinanced loans in 2012

250,0 200,0 150,0 100,0 50,0 0,0 bn Performing Substandard Doubtful 77,0 42,9 88,3

Provisions for restructured and refinanced loans

50,0 40,0 30,0 20,0 10,0 0,0 7,9 bn 31,3

It specifically considered refinanced loans: the default rates of non-doubtful refinanced exposures were adjusted . This increased the estimated capital needs These assumptions were more conservative than current developments, as actual figures and data prove

Bank of Spain has homogenised the classification criteria of restructured and refinanced loans across banks to ensure adequate provisioning

16

A significant Capacity Adjustment has already occurred

Sharp reduction in number of branches and number of employees in the financial sector
Adjustment in Deposit Taking Institutions: No. of Employees and Branches
Employees Branches

The Spanish financial sector has wound down most of the excess capacity built up during the housing boom

275.000 45.000

-13% in employees and -17% in number of branches from the peak in 2008

265.000 43.000

The recapitalisation exercise entails further downsizing, with marked increases on the efficiency ratios of the sector The total number of entities has decreased from 50 in 2009 to 12 in 2012 (excluding credit cooperatives and foreign branches)

255.000 41.000

245.000

39.000

Sizeable reduction in the former saving banks model: from 45 to 7 entities that have been transformed into banks

235.000 2000 37.000

2002 2004 2006 2008 2010 Branches 2012 2013

Legislation to improve, strengthen and clarify the governance structure of former savings banks and of commercial banks controlled by them

Employees

___________________________ Source: Bank of Spain.

17

Far Reaching Structural Reforms

18

An ambitious reforms agenda

The 2012 set of reforms aimed at increasing the Flexibility and Competitiveness of the Economy

Labour Market Reform

2012

Fostering wage moderation and facilitating job creation with lower GDP growth rates Eliminating dualities and rigidities in the labour market Moving beyond the model of indexation of salaries and wages Addressing high youth unemployment levels Has avoided 225,800 job losses during its first year of application

Other Structural Reforms

Retail sector: liberalization of opening hours and elimination of restrictions on sale activities Liberalization of the Housing rental market Health and Education. Streamlining and cost reduction in order to increase efficiency

19

A labour market reform to foster wage moderation and job creation

Summary of measures adopted
Firm-level wage bargaining prevails over national, regional or sector agreements Collective dismissals without administrative authorization are allowed for firms posting falling profits for

three or more consecutive quarters

Convergence of dismissals costs with the EU average

Unjustified dismissal: severance pay of 33 days per year worked up to 24 months Justified dismissal: severance pay of 20 days per year, up to 12 months

Clarification of objective causes for justified dismissals

Creation of a new permanent contract directed at SMEs

The latest Labour Force Survey of Q2 2013 indicates that:

Against an adverse cyclical position, the latest employment data signals a change in labour market dynamics

Employment increased by 149,000 in Q2 2013, even beyond seasonally adjusted

terms, in stark contrast to the 15,900 jobs shed in Q2 2012.

Unemployment fell by 225,000. The second largest quarterly decrease since

records are kept.

Total registered unemployment has decreased in the last 6 months by 341,000, down by

6.8%.
Social Security affiliation (registered employment) has increased in the last 6 months by

267,000 to 16.3 million.

20

Impact of the labour market reform: July assessment

The reform is already having a positive impact on Spains labour market

The increase in unemployment has moderated since the reform was approved

The y-o-y rate of increase in unemployed workers has dropped to 5% in Q2-13 from 18% in Q2-12, despite the more severe cyclical context

For the first time since the onset of the crisis, weaker growth has not led to a faster pace of job destruction in the private sector Self-employment has progressed more favourably in the last 9 quarters, especially since the reform was approved More jobs would have been lost without the labour market reform. The reform would have helped prevent the destruction of almost 226,000 jobs in the year before its implementation After this reform, the Spanish economy will create employment with GDP growth rates of around 1%-1.2%, according to the Ministry of Economys own estimates. Significantly below the figure before the reform, which was above 2%.
Change in registered self-employed workers (H1 of each year)
000s workers

Year-on-year change in unemployment

90,0%
80,0% 70,0% 60,0% 50,0% 40,0% 30,0% 20,0% 10,0% 0,0% 1Q-08 2Q-08 3Q-08 4Q-08 1Q-09 2Q-09 3Q-09 4Q-09 1Q-10 2Q-10 3Q-10 4Q-10 1Q-11 2Q-11 3Q-11 4Q-11 1Q-12 2Q-12 3Q-12 4Q-12 1Q-13 2Q-13
17.8% 5%

40.000 22.985 20.000 0 -20.000 -40.000 -60.000 -80.000 -100.000 -84.367 2009 2010 2011 2012 2013 -14.045 6.413 1.153

___________________________ Source: INE and Ministry of Employment and Social Security

21

Increased Competitiveness and Declining Labour Costs

Total labour costs in 2012 dropped by 0.6%,
Unit Labour Costs & Productivity and Labour Costs
Index 2008 = 100 y-o-y change

compared to the 1.2% increase registered in 2011. So far in 2013 they have fallen by 1.4%
Wage costs, which had been moderating since

115 110 105 100 95 90 2008 2009 2010 2011 2012 2013 Unit Labour Cost (Left Axis) Labour Costs (Right Axis)

the labour market reform was implemented, fell by 1.8% in Q1 2013

This has had a positive effect on unit labour costs which have been on a downward trend since 2009
The declining unit labour costs are boosting

6% 5% 4% 3% 2% 1% 0% -1% -2% -3% -4% Labour Productivity (Left Axis)

competitiveness Unit labour costs have decreased by 3.0% in 2012. So far in 2013 they are falling by 2.6% y-o-y
There are signs of less segmentation due to

Evolution of ULCs in the largest European economies

Index 2005 = 100

130 125 120 115 110 105 100 95 2005 2006 UK 2007 2008 Spain 2009 2010 GER 2011 FR 2012 2013 IT

the fall of dismissal costs On average, dismissal costs have decreased almost 13% in 2012 compared to 2011
__________________________ Source: Eurostat; Ministry of Economy and Competitiveness.

22

The Reform Programme goes on

The National Reforms Programme details the Structural Reform road-map and aims to increase the flexibility and competitiveness of the Spanish economy

Modernisation and Rationalisation of the Public Sector

Fight Against Unemployment

2013

National Reforms Programme

Measures to Improve the Financing of the Economy Reforms in Internal Markets & Enhanced Business Framework

23

Modernization and Rationalization of the Public Sector

Improved governance practices
Law of Transparency, Access to Public Information and Good Governance of all Public Administrations Creation of the Independent Authority of Fiscal Responsibility which shall ensure the compliance of the

principle of Budgetary Stability at every level of the Administration.

To be set-up before the preparation of the 2014 budget

Social Security measures: legal regulation of the sustainability factor

The basic parameters of the Social Security system will be reviewed, in light of the evolution in life

expectancy and other demographic and economic factors. New regulation to be approved throughout 2013
These measures are complemented by those that have already been approved in terms of transparency in

budgetary execution and with the measures to be adopted to fight arrears and late payments of Public Administrations Draft Law on the rationalization and sustainability of the local administrations
The Law will focus on the structure of the local administration, targeting fiscal balance, greater efficiency

and the professionalization of the political and administrative functions. Four main objectives:

To clarify local responsibilities in order to avoid duplicities and overlaps,

To rationalize the organizational structure,

To ensure financial and fiscal discipline, and To promote a business friendly regulation

24

Measures to improve the financing of the economy

A number of measures have been launched to mitigate the effects of credit restriction and to increase the

range and flexibility of the financing sources available to companies, with particular attention to companies in internationalisation stages and SMEs
Main measures:

New

Securities markets: launching an alternative fixed income market (MARF), decreasing administrative burdens in security issuances, facilitating the movement between alternative (MAB) and organized stock markets Venture capital: reform of the Law of Venture Capital entities, launching of FOND-ICO Global and the National Network of Business Incubators, reinforcement of business angels Modification of the Insolvency Law.

Risk

ICO/Axis

Existing

CDTI

Banking Channel: ICO lines ( 22 bn), commitment by banks to increase SME financing by 10 bn in 2013
Loan Guarantees: reinforcement of the mutual guarantee system, CESCE line, ICO-CAF facility

National Incubator Network Business Angels Network Incubator

Enisa Fondo Isabel la Catlica Spain StartUp Coinvestment Fund

FOND ICO Global

Sepides Cofides Other Capital Markets MARF

MAB

Development
Expansion Maturity

Seed Capital Start-up

25

Fight against unemployment

Plan of Employment Policies 2013 (Q2) Pluri-annual Strategy for Employment Activation 2014-2016

(Q4 2013)

Reform of active labour market and improvement of the employability and skills of the unemployed

Implementation Strategy of the dual vocational training

system (2013-2015)
Entrepreneurship and Youth Employment Strategy

2013-2016
Reform of certificates of professional competence New management system of unemployment benefits Creation of a Single Gateway for Employment and

improvement of public-private partnerships

26

Reforms in Internal Markets and Enhanced Business Framework

Law on Entrepreneurship and its Internationalization
Supports a favorable environment for entrepreneurs and the development and internationalization of

companies (Draft Law 24th May 2013)

Entrepreneur of limited liability Less red tape: setting up of limited liability companies without public deeds in 24 hours and reduced bureaucratic procedures through Access Points for the Entrepreneur Fostering second chances: out-of-court resolution mechanisms

Fiscal support for entrepreneurs:

Cash VAT
New tax deductions: profit reinvestments, R&D+I, etc.

Measures to improve entrepreneurship financing :

Fewer constraints to issue in the Alternative Fixed Income Market (MARF) More flexible conditions for refinancing agreements New financing instruments for the internationalization of companies

Measures to spur entrepreneurial growth: elimination of binding municipal licenses and fewer obstacles for

public tender participation

Measures to foster the internationalization of the Spanish economy: fixed income instruments for

internationalization, privatization of CESCE (Spains export-credit insurance agency), and trade finance facilities

27

Reforms in Internal Markets and Enhanced Business Framework (continued)

Law on Professional Services and Professional Organizations
To remove unnecessary barriers to professional access and exercise, and to boost competitiveness. To

reduce the number of regulated professions. Draft law approved on 2nd August Law on Market Unity Guarantee
A new regulatory model based on the principles of free establishment and free movement of goods and

services throughout the Spanish territory. Draft Law already approved Law on Des-indexation of the Spanish Economy
To foster competitiveness by promoting indexation mechanisms other than the automatic indexation to

the general CPI (January 2014)

Reform of the Energy Sector

To achieve the long term sustainability of Spains power system by anticipating economic, technological

and demand changes, as well as increasing competition and the security of the supply

Measures to achieve a balance between revenues and costs of the electricity system

New Code of Corporate Governance

To improve Spains framework of corporate governance according to the highest international standards

Reactivation of the Residential Housing Market

A new visa regime for non-residents to attract investments

28

Results in the Private Sector: Rebalancing of the Economy

29

The Private Sector is Deleveraging at a Fast Pace

Resources redeployed away from construction and real estate and into healthier sectors
Total private sector gross debt has fallen from 231% of GDP in June 2010 to less than 205% of GDP in Q1

2013

Both household debt and nonfinancial companies debt is significantly falling

Households debt is in line with EU average, 80% of GDP

The indebtedness of the construction and real estate companies explains most of the difference in the

leverage ratios vs. other economies

Indebtedness Ratios of Households
110,0 100,0 90,0
150,0 140,0 130,0 120,0 110,0
Max: 87.3% Q2-10

Indebtedness Ratios of Non-Financial Corporations

Spain excl. construction and RRE Max (Q2-10): 141% Q4-12: 130.5%

80,0
70,0 60,0 50,0 2005 2006 2007 2008 2009

Q4-12 79.7%

100,0 90,0 80,0 70,0 60,0 2005 2006 2007 Spain 2008 2009 2010 UK 2011 USA 2012

2010 UK

2011

2012

Spain
___________________________ Source: Bank of Spain.

Euro Area

USA

Euro Area

30

The Real Estate Sector has Accelerated its Adjustment

Real estate prices have already fallen by c. 30% from their peak
The largest annual decrease so far occurred in 2012 with a correction in prices of nearly 10% On average, nominal house prices are at 2004 levels; adjustment more intense around most populated

and coastal provinces

Relative stabilisation in house transactions, more intense in Mediterranean provinces
Housing prices declining
2.200

Nominal housing price adjustment in Spain since peak in each province (%) Q4 2011
-29%

Q4 2012

2.000
1.800 1.600 1.400 1.200 1.000 800
>-30 -30 -25 -20 -15 -10 -5 0

___________________________ Source: Ministerio de Fomento.

31

Rapid Expansion of the External Sector

Wage moderation has resulted in a competitiveness based expansion of exports
Despite the global economic slowdown, in H1 2013, exports of goods have increased by 8% in real terms (well above last years increase during the same period; 1.2%)

Exports of non-tourist services, mainly due to professional services and services to firms, have outpaced exports of goods and tourist services

Exports of Goods and Services

Index, 2005=100

Breakdown of Exports of Goods and Services

Index, 2005=100

170 160 150 140 130 120 110 100 90 80

190 180 170 160 150 140 130 120 110 100 90 80 2005 Germany Italy Spain UK France Ireland 2006 2007 2008 2009 2010 2011 2012 2013

Goods

Non-tourist services

Tourist services

___________________________ Source: Eurostat; Instituto Nacional de Estadstica.

32

External Imbalances are being Corrected

Spain will have a surplus in its current account by year-end 2013

From 2007 to 2012 the adjustment in the current account has been of 9% of GDP

The Current Account is in surplus since H2-2012 This will enable Spain to decrease its net external indebtedness

The correction in the current account is of a structural nature and is due to competiveness gains stemming from an internal devaluation. The adjustment is more sustainable than the one achieved by exchange rate devaluations in the 90s

Product diversification and product quality have resulted in a higher resilience of exports to the economic cycle

Geographical diversification of goods exports: exports to non-EU economies account for more than 40% Product diversification: the range of exports has increased particularly in higher value added goods and services Current Account Balance and its Adjustment Current Account Balance & Trade Balance (goods)
% of GDP

Cumulative Adjustment (in % of GDP)

4,0 12 10 8 6 4 1993: 3rd devaluation

CA '07: 10% CA '91: 3.6% CA'97: -0.1%

Forecast for 2013/14

CA '13 (F): +1.3%

2,0 0,0 -2,0 -4,0 -6,0

-8,0
1992: 1st and 2nd devaluations of the Peseta -10,0 -12,0

2
0 0

6 Current account balance Trade Balance (goods)

years since maximum current account (CA) deficit

___________________________ Source: Bank of Spain. European Commission

33

The correction in the current account is of a structural nature

While the 2009 correction in Spains current account was due to a decrease in imports and in internal demand, the correction in 2012 and 2013 is mainly due to strong export performance Spains exports now represent around 33% of GDP and the performance is amongst the best in the EU

Spain: Evolution of Exports, Imports and National Demand

Index, 2008 = 100

Exports of goods and services in select countries

% GDP

120 115 110 105 100

36,0
34,0 32,0 30,0 28,0

95
26,0 90 24,0 85 22,0 80 2007 2008 2009 2010 2011 2012 20,0 2006 2007 2008 2009 2010
Italy

Exports (goods)

Imports (goods)

National demand

2011

2012 2013 (F) 2014 (F)

United Kingdom

Spain
___________________________ Source: Ministry of Economy and Competitiveness, Eurostat

France

34

Appendix: Funding and Debt Management

35

Spain has demonstrated financial flexibility and resilience during the crisis
Despite volatility in European public debt markets, the Treasury is financing itself adequately. Average cost at issuance and average cost of debt outstanding have remained subdued Average life of the debt portfolio has declined in the last year, mitigated by the ESM loan (12.5 years average life) but at 6.3 years its remains longer than rating peers

Cost of Debt Outstanding and Cost at Issuance (*As of 30th June, in %)

6,0 5,5 5,0 4,5 4,0 3,5 3,0 2,5 2,0 3,01 2,66 2013* 5,0 4,5 4,0 3,89 3,80 6,0 5,5 7,0 6,5

Average Life (*As of 30th June, in years)

6,35

6,29

2007

2000

2001

2002

2003

2004

2005

2006

2008

2009

2010

2011

2012

2004

2001

2002

2003

2005

2006

2007

2008

2009

2010

2011

2012

Average cost of Debt outstanding

Average cost at issuance

___________________________ Source: General Secretariat of the Treasury and Financial Policy.

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2013*

Comfortably on track of 2013s funding programme

Year to date, the Spanish Treasury has funded 92.8bn (77%) of the maximum expected amount of medium- and

long-term gross issuance of 121.3bn

Including T-Bills, the Spanish Treasury has issued 165.8bn so far in 2013, around 72% of the overall programme

for the year

Funding Programme. 2013 (Gross issuance, in billion Euros, as of 27th August 2013)
250 215bn-230bn 200

150
106.3bn- 121.3bn

Variable throughout the year

100

72%
50

77%

6%
Letras Executed

0
Total Projected Medium & long term

___________________________ Source: General Secretariat of the Treasury and Financial Policy.

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Non-resident demand of Spains bonds is picking up

In contrast to the sharp decrease in registered holdings of bonds in the first half of last year, non-resident demand

has picked up in recent months (+ 48.5bn vs. August 2012; gross term Investment at similar levels than in April 2011)
Change in Holdings of Non-Resident Investors (Term Investment. bn)
140000 120000 100000

Non-Resident Holdings of Unstripped Government Debt (As a % of total)

60%
55%

50%
80000 45% 60000 40000 20000 0 2008 -20000 -40000 Credit Institutions Public Administrations Households and non-financials Other Fis Pension, Insurance, Mutual Non-Resident Term investment Registered holdings 2009 2010 2011 2012 2013

40%
35% 30% 25% 2011 2012 2013

May -13 37% Apr-13 35%

___________________________ Source: General Secretariat of the Treasury and Financial Policy . * As of May 31st 2013.

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A Prudent Debt Management Strategy

Redemption dates of medium- and long-term bonds (principal and coupons) match the biggest inflows of

tax revenues
Excess liquidity is lent in the money market each month through repo auctions Liquidity lines with banks provide an additional buffer
Maturity Structure of Medium- and Long-Term Bonds (In billion Euros)
28 26 24 22 20 18 16 14 12 10 8 6 4 2 0 Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Letras Obligaciones Bonos Foreign Currency & Other

Administrative Distribution of Tax Collection

Jan

Feb

Mar

Apr

May

Jun

Jul

Aug

Sept

Oct

Nov

Dec

Personal Income Tax

Corporate Income Tax

VAT

Excise and duties

Degree of concentration of tax collection

___________________________ Source: General Secretariat of the Treasury and Financial Policy .

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Risk and Refinancing Measures

Redemptions of Euro-denominated debt remain well in line with those of peers

Maturity Structure of Medium- and Long-Term Bonds (In billion Euros)
25%

Relative Redemptions (% GDP 2012. July 2013 to June 2014)

90 80 70

20%

19,8% 16,0% 14,1% 62.6 63 298.5

15,7%

311.5

60 50 40 30

15%

305.5

311

10%

137.2

147

7,4% 217.0 201

5%
20 10 0

0% Belgium Spain Germany Italy

2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030 2031 2032 2033 2034 2035 2036 2037 2038 2039 2040 2041

___________________________ Source: General Secretariat of the Treasury and Financial Policy .

___________________________ Source: General Secretariat of the Treasury and Financial Policy for Spain, and Bloomberg for other countries.

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France

15-year Bono: 3.5bn, 5.15%, October 2028

Key summary details
Amount: Issue date: Maturity date: Coupon: Re-offer spread vs. ms: Re-offer yield: 3.5bn 9-July-2013

Fourth syndicated benchmark deal of the year

On the 9th July 2013, Spain successfully priced its

Distribution by region
Nordics ; 2% US; 14% Switzerland; 2% Spain; 46%

new 15-year bond: Oct-2028 maturity

3.5bn size, 5.15% coupon,

31- Oct- 2028

5.15% +280bp 5.194%

The issue is the Kingdom of Spains first 15-year

syndicated bond since March 2011. The deal is the fourth syndicated transaction of the year, following two 7bn 10-year bonds in January and May and a USD2bn 5year in February
The new bond was officially announced on Monday

UK; 18%

8th July and priced on Tuesday afternoon

In just under two hours the orderbook for the

EZ; 18%

transaction grew to 7.5bn

Distribution by investor type

Over 130 investors participated in the transaction Demand from non-domestic investors

exceeded 54% of the orderbook

With this syndicated transaction, Spain completed
Private Banks; 4%

Hedge Funds; 13%

Insurance and Pension Funds; 36%

over 70% of its medium- and long-term funding programme for 2013

Asset Mngrs; 22%

The deal further evidences that Spain has full market access to the long-end of the curve 41

Banks; 24%

Contact details

For more information please contact: Relaciones.Internacionales@mineco.es SecretariaGeneral@tesoro.mineco.es Phone: +34 91 5836043 - Fax:+34 91 5835396 Reuters: TESORO Bloomberg: TESO Internet: www.mineco.es www.tesoro.es For more information on recent developments: www.thespanisheconomy.com

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