Bill Gates And The Spanish Recovery

You would have to think that Bill Gates has some shrewd investment advisors. You would also have to think that the co-founder of Microsoft might typically invest in technology stocks. Thinking this, then what does one think of Gates having acquired a six per cent holding in Fomento de Construcciones y Contratas? Yes, a construction company. One that deals with bricks and mortar and one that is also Spanish. Remember Spanish construction companies? The ones who helped push the country to the edge?

The purchase makes Gates the second largest shareholder in FCC, some considerable distance behind Esther Koplowitz, who developed a construction firm that she and her sister had inherited from their father, and one that, through merger, became FCC in 1992. Sra. Koplowitz controls 53.9% of what is one of Spain's biggest construction concerns.

But why would Gates be interested in a construction company, and a Spanish one at that? And why would FCC be interested in him becoming a shareholder? The answer to the latter may have to do with the company being in the midst of a restructuring of both debt and strategy. It returned a significant loss in the first quarter this year, partly because of a write down in the value of its renewable energy assets, a move probably in response to the Spanish Government having gone cold on renewables, especially solar, as it seeks to tackle the enormous energy tariff deficit. Otherwise, FCC was, as with the rest of the construction sector, badly hit when public-sector projects were cut and when the property market went belly-up.

Nevertheless, FCC is a company in reasonable shape thanks to its diverse operations and its global status. It is active in 55 countries and its business operations are not confined to mere bricks and mortar. There are environmental services, for example, as well as construction of an industrial nature. It is said that  Gates is taking a punt on a recovery in the Spanish construction market. I'm not so sure that someone like Gates either takes a punt or takes one on something as potentially volatile as simple construction. My guess is that it is FCC's global operations, its investment in various technologies, such as with environmental services, and potential in emerging and less-developed markets that has attracted Gates. One can perhaps be persuaded too much that he is an investment benefactor and philanthropist rather than a hard-nosed investor, but I would suggest there is a fair element of the former about his interest in FCC, and FCC would probably feel it could benefit from an association with a universally recognised businessperson who has become known for wishing to pursue good works. As FCC says on its website, it invests globally in "technology, improving processes and developing eco-efficient communities". Bill Gates as part of this? Yes, it would make some sense.

However one interprets Gates's investment, it is an encouraging vote of confidence in a major Spanish company, and it is evidence of what the president of the Santander bank said recently about money "coming in from all directions" into Spain. FCC, with its overseas operations, is evidence also of the export-led recovery of the Spanish economy. These are feelgood elements which will allow the government and others to point to the corner having been turned, but how real are they? The economy may move into growth on the back of exports - tourism and global actors like FCC - but how much impact does this have on the home market, given that, for example, so much of the export earning from tourism is not actually kept in the home market because it is earned by overseas tour operators and airlines? Moreover, what are the targets for all the money that is coming in from all directions? One is real estate, the consequence of an adjustment in property markets which has made Spain attractive to inward investors. Yet, there is a fair amount of evidence to suggest that much of this investment is being directed towards speculative commercial real estate and in particular the rental returns on investment from commercial property. The feelgood element is also being felt in the stock market, but where it isn't being felt is in actual, productive investment, something which might stimulate the domestic market, create employment, increase consumer demand and so effect a more balanced growth in the economy.

Still, things are better and psychologically, if nothing else, Spain may be moving in the right direction. But for the time being it is a psychological boost enjoyed more by investors and bankers than by the man in the street. There is a long way to go yet.

The Recovery Will Not Be Realised

Alfredo Pastor is professor of economics at the IESE Business School. He is also a former secretary of state for the economy - in the last PSOE government of Felipe González. It was interesting, therefore, to find an article of his in "The Bulletin", one entitled "Reasons to believe Spain's recovery is not far away". The reasons why Professor Pastor believes recovery might be in the offing include greater competitiveness through lower labour costs, a growing export market and some hints of business confidence creeping back.

There are some signs of recovery and it would be wrong to talk down the possibility of an improvement in the overall economic picture if not this year then next. BBVA bank has suggested that negative growth of minus 1.1% in 2013, slightly less bad than had been predicted, will be matched by plus 1.1% in 2014. It wouldn't be a huge improvement, but it would still be an improvement. BBVA, like Professor Pastor, emphasises export performance, but the economist Edward Hugh, generally a pessimist rather than an optimist, has made a comparison with the experience in Hungary where, despite good export performance, its economy keeps slipping back into recession. In Hungary, the country's current account balance is in the black. Spain's is moving this way, too, which sounds like a reason to be cheerful, but this disguises the size of the country's external debt.

Because of this debt, gains that are made from having a trade surplus thanks to export performance are used to service the debt. Greater competitiveness because of lower labour costs (internal devaluation) leads to better export competitiveness but doesn't necessarily mean economic growth, or growth that is anything other than small or even sustainable.

The Spanish Government is pinning its hopes on there being some growth, even if it is very moderate, and on this having a positive impact on the 26% unemployment rate. But unless export growth were to be more spectacular, it remains difficult to see how this unemployment is going to be tackled. Despite Professor Pastor's belief that confidence may be coming back, even if it is only trickling back, is this confidence among exporters or among those involved with the domestic market? The retail sector, for instance, is depressed and is likely to stay depressed. It may even become more depressed. And the reason for this is that there are potentially more recessionary measures yet to be taken.

The EU's budget enforcer, Olli Rehn, has suggested that Spain's deficit targets, ones that the government keeps missing anyway, could be eased, but the fact is that the country's fiscal position is currently unsustainable. More cuts and more tax increases are going to be needed at some point. Indeed, the EU has also suggested that there is room for a further rise in IVA (if not to the higher, general rate then to the lower rate, the so-called tourist rate). The political fallout from a rise in the tourist rate might prove too much for the government and for its supporters in the tourism industry who would desert it. But if the higher rate were to rise, then demand would be squeezed even more, meaning a further brake on any possible growth.

The miserable truth is that although taxes have been raised, although cuts have been swingeing, the deficit targets are still not being met, while, as a consequence -  and perversely enough - of attempting to curb the deficit as swiftly as the government has been attempting to, the economy has been contracting because of the squeeze on demand.

Growth may return next year but as the government has been hell-bent (mainly because it had no other option) on pursuing a policy of internal devaluation through lower costs, this will also, both in the short and longer-term, have a depressive effect. Salary and wage reductions, some in the order of up to 40%, mainly in the public sector but certainly not exclusively, will do nothing to stimulate demand, and with credit squeezed as well (though movements on banks' recapitalisation may just takes the brakes off to a degree), it is almost impossible to see from where  growth, other than any from exports, is likely to come and even more impossible to see how it might be sustained.

Professor Pastor is optimistic that the political situation re Catalonia will not lead to violence (and one can interpret this how one wants). Let's hope he's right. I happen to agree with him, but can there be the same optimism where social discontent is concerned? There is only so much a people can put up with, and while the financial economy might be showing an improvement, in the real world, there is none.


Any comments to andrew@thealcudiaguide.com please.

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