Balance of Payments: Understanding Spain’s Economic Transactions
Balance of Payments
The balance of payments systematically records transactions between residents of one country and the rest of the world (RM) over a specific period, typically a year. Residents are defined as agents who work in a country’s economy for at least a year.
The balance of payments uses a double-entry system, ensuring that income always equals payments, resulting in a balanced equation. Resources (inflows of remittances) and jobs (outflows of foreign exchange, imports) are recorded.
The balance represents the difference between earnings and payments. Imbalances, such as deficits or surpluses, can occur in specific areas.
The Bank of Spain prepares the balance of payments according to International Monetary Fund (IMF) standards. It comprises three accounts:
A. Current Account + Capital Account
This account registers transactions with the RM that affect a country’s income and expenditure. The balance is crucial because it reveals an economy’s capacity or funding requirements resulting from its economic transactions. A surplus indicates the ability to pay the RM, while a deficit suggests insufficient revenue generation or reliance on financial investments from the RM.
Developing countries typically experience temporary deficits due to infrastructure investments. Conversely, persistent surpluses (savings exceeding investment) indicate an economy’s underutilization of resources, suggesting a need for increased investment.
The Spanish economy faces a deficit due to factors like the oil crisis, pre-EU years, and financial concerns from the 1990s onwards. The origins of this deficit lie in:
- Balance on goods: Deficiencies
- Balance on services: Initially surplus, now declining
- Balance on income: Deficiencies
- Balance on transfers: Surplus
Therefore, Spain’s balance of payments is offset by the transferable balance.
Trade Balance
The trade balance focuses on the exchange of goods. It provides insights into an economy’s trade liberalization and interdependence with the rest of the world. Economies engaging in international trade reallocate resources to more competitive sectors, enabling economies of scale and stimulating innovation for greater efficiency.
Three indicators assess trade: propensity to export, propensity to import, and the volume of trade relative to GDP. Commercial coverage is calculated as (Exports / Imports) * 100.
Spanish Commercial Coverage
Spain’s integration into the EU necessitated investments to enhance competitiveness. Consumer demand and the propensity to import also increased. Since the mid-1990s, imports have exceeded exports due to:
- External factors: Oil price volatility significantly impacts Spain’s energy-dependent economy.
- Internal factors: Spain’s growth rate, surpassing the EU and OECD averages, necessitates increased imports (machinery, technology). Additionally, declining competitiveness and rising wages contribute to the imbalance.
Trade Balance Trends
- EU enlargement (2004), Bulgaria and Romania’s incorporation (2007): These countries, with lower income levels but high skill levels, produce similar goods to Spain, intensifying competition.
- Developing countries: China, Brazil, Mexico, and India’s growing manufacturing exports directly impact developed countries.
- Liberalization of specific sectors in Spain: The footwear sector, for instance, has experienced a significant decline.
The trade balance also reveals Spain’s primary trading partner: the EU.
Balance of Services
This balance encompasses services exchanged between residents and non-residents. Tourism plays a significant role in the Spanish economy, although it has experienced a decline. There is a need to enhance business services.
Balance of Income
This balance includes transactions related to labor and capital.
Balance of Transfers
These are movements without a counterpart. There are two types:
- Private: Transfers made by migrant agents (inheritances, prizes)
- Public: Government grants to the RM
Two distinct periods can be observed:
- Surplus remittances from emigrants and EU subsidies received in the 1980s
- Negative balances: Spain is now a recipient of immigrant remittances
Within the current account and capital account, the most relevant are capital transfers, including investment funds and European FEDER funds.
Financial Account
The financial account records the Spanish economy’s operations with the outside world. The equation BCC + Capital Account + Current Account = 0 implies BCC + Current Account = -Financial Account.
To understand borrowing requirements, we analyze changes in assets and liabilities:
- Net liabilities variation: Reflects increases and decreases in the economy’s liabilities to the outside world, such as Foreign Direct Investment (FDI) in Spanish companies.
- Net asset variation: Represents Spanish companies’ purchases of assets abroad.
Reserves: Liquid assets in foreign currency used to balance the remaining accounts.
Capital Movements
: the ’80s were very scarce., 87-92: + increase and enhance the entreasa Salis, especially in direct investment.
93-98: Increased k flows during this period are matched inputs and outputs.
99-07 deceleration
We managed portfolio inv resources to finance our foreign deficfit the problem is very unstable q