Rajoy Punishes Exporters Sustaining Spain’s Economy: Euro Credit

Aliberico SL survived Spain’s economic crisis by expanding sales of aluminum panels in the U.S., Brazil and Morocco. Prime Minister Mariano Rajoy’s plan to raise corporate taxes may undermine the company’s efforts.

“The fiscal pressure is intense,” Clemente Gonzalez Soler, chief executive officer and founder of the Madrid-based manufacturer, said in a telephone interview. “The changes mean a loss of competitiveness for Spanish companies just at the moment when we need to export more.”

Rajoy is flouting advice from the European Central Bank and the International Monetary Fund by increasing corporate levies as a record debt pile threatens the country’s investment grade rating. ECB President Mario Draghi has urged officials to cut spending instead of raising taxes to foster growth. He said last week that some euro governments could take more responsibility for fixing their economies.

Since July 2012, Draghi’s commitment to buy government debt has reduced the extra-yield investors demand to buy 10-year Spanish bonds instead of German debt by more than 50 percent. The risk premium rose during the past three days to reach 315 basis points yesterday, the highest in two weeks. It narrowed to 312 basis points at 8:33 a.m. today in Madrid.

’Market Complacency’

“Spain will remain between a rock and a hard place,” said Neil Williams, a London-based chief economist at Hermes Fund Managers Ltd. who helps oversee about 31 billion pounds ($46 billion). “Despite market complacency, Spain and the euro zone’s underlying problems are far from over and default risk is not dead.”

With Spanish sovereign debt held at the lowest investment rating by Moody’s Investors Service and Standard & Poor’s, the government announced last month it will eliminate tax deductions on unprofitable subsidiaries starting in October, a measure it says may increase corporate tax receipts by 3.65 billion euros ($4.7 billion) in 2014. The main corporate tax rate is 30 percent in Spain.

Spain’s approach is similar to that followed by other European countries including Germany, Sweden and the U.K., said a budget ministry spokesman, who asked not to be named in line with official policy. He declined to comment on the consequences for companies.

“It’s just the contrary of what should have been done,” said Arturo Bris, a professor of finance at the IMD business school in Lausanne, Switzerland. “Spain should reduce the effective corporate tax to 10 percent if necessary to attract more companies and bolster employment.”

International Expansion

The nation’s exports climbed last year to a record 223 billion euros and the European Commission forecasts Spanish exports will grow 4.1 percent in 2013, compared with 2.2 percent for the euro region. Sales are rising at double-digit rates in fast-growing markets in Asia and Africa, according to Trade Ministry data.

Aliberico, which manufactures a range of semi-finished aluminum products, generated 30 percent of its about 200 million euros of revenue from outside Europe last year, up from 5 percent in 2010. The company now sells in 15 markets outside Europe. International expansion will become more costly once Rajoy stops the company writing off the losses from starting up foreign subsidiaries.

“Companies and citizens have done their homework, now it’s the public sector’s turn,” said Soler, the company’s CEO who aims to quadruple sales by 2017. The government must “drastically reduce the cost of services that aren’t bringing any added value to the economy or citizens,” he said.

Cash Income Fell

Spain had the largest budget deficit in the European Union in 2012 even though Rajoy raised levies on income, savings and property upon coming to power in December 2011. Last year, he increased the sales tax, with the main rate climbing by 3 percentage points to 21 percent and introduced temporary adjustments on corporate tax.

The Treasury’s net cash revenue from non-financial transactions, mainly taxes, fell to 37.4 billion euros in the first five months of 2013 from 40.4 billion euros in the year earlier period. Net cash revenue from corporate taxes fell 48 percent in the period.

“Fiscal consolidation must continue, but the challenge is to reduce the drag on growth,” James Daniel, head of the IMF’s Spanish mission, said at a June 19 briefing in Madrid.

Weaker Recovery

The Washington-based lender dropped its forecast for economic growth in Spain this week projecting gross domestic product will be unchanged in 2014. The Fund had predicted a 0.7 percent expansion in April. The economy contracted for the past six quarters.

By increasing the burden on the exporters to kick-start growth this quarter, Rajoy may be exchanging a short-term gain in revenue for a weaker recovery, said Antonio Barba, tax partner at Cuatrecasas Goncalves Pereira in Madrid. That may hurt his chances of stemming the increases in debt.

Spain’s public debt load has more than doubled from 2007 -- when the country’s real-estate boom ended -- to 88 percent of GDP in the first quarter. The European Commission forecasts the ratio will rise above the euro zone’s average next year for the first time in the single currency’s history.

“Spain needs to remove deductions and lower tax rates to make the system more growth friendly,” said Ruben Segura-Cayuela, a London-based economist at Bank of America Merrill Lynch and former Bank of Spain official. “But this announcement on its own damages growth.”

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