Antonio Bonet: "Brexit is going to have a strong impact on Spanish exports"
The coronavirus pandemic has had a strong impact on international trade, which had already been declining slightly since mid-2018. The World Trade Organization (WTO) predicts that world trade in goods will plummet by 13-32% by 2020 due to this pathogen. WTO economists believe the decline is likely to exceed the drop in trade caused by the 2008-2009 global financial crisis. Antonio Bonet, a founding member of the Spanish Exporters and Investors Club and vice-president between 2003 and 2017 of this institution, considers that in order to overcome this crisis it would be necessary to commit to a series of structural reforms in the medium and long term. However, Bonet, who holds a degree in Business Science from the University of Seville and a Master's in Economics and Finance from the Massachusetts Institute of Technology, highlighted the strategic importance of regions such as sub-Saharan Africa in an interview with Atalayar.
In recent weeks, the Exporters and Investors Club has called for the adoption of structural economic reforms to reactivate the international competitiveness of Spanish companies. What has been the impact of this request?
Over the last few weeks, we had several virtual meetings with representatives from the Ministries of Industry and Trade, Foreign Affairs and the Economy, among others, to analyse the current situation. They all listened to us carefully and considered this proposal to be very interesting.
One of the measures we have been calling for since the beginning of this campaign was to improve our country's image campaigns abroad, since the Spain brand has deteriorated, or at least that is what some exporting companies were perceiving. In the last few weeks, campaigns for Spain have started again outside our borders. This measure is necessary to keep companies alive, and therefore we considered it essential to be included in this Decalogue.
What is your assessment of the Government's response to the coronavirus pandemic?
I think that the Spanish government has taken the appropriate measures: ERTES or ICO credit lines, among others. However, this is not enough for the foreign sector due to several reasons. One of them is because in the current crisis there are very different elements such as, for example, the limitation of mobility which has had a strong impact on tourism. This sector accounts for 16% of Spanish exports of goods and services. Such an amount is outrageous. We are talking about 70,000 million euros, just in income from foreign tourists. This is almost all gone. And not only that, but we will probably be unable to return to previous levels next year.
Which other special features does this crisis have?
In addition to the differential elements mentioned above, we must take into account that our international markets are in recession. In this scenario it is worth highlighting that world GDP, that is, the growth of the world economy is ahead of the growth of world foreign trade. In practice, this means that the size of the market is reduced in relative terms, thus generating more competition.
This increased competition is caused because, on the one hand, those who were already exporting have to compete for a smaller market and on the other, as a result of the crisis, countries and companies that are selling less in their own states are betting on foreign markets. This double increase in competition is taking place at a decisive moment and just when the structure and competitiveness of our foreign sector was already showing signs of exhaustion.
What do these signs of exhaustion mean?
For example, the growth of Spanish exports in 2019 was around 1.7%, less than the growth of European Union exports. In 2018 it was 2.9%, also below the EU average. In other words, records were broken, but we are realising that the model is running out of steam for several reasons. Firstly, there is a problem of competitiveness. Productivity in Spain has been stagnating for a long time. The number of regular exporting companies continues to grow, but there are 53,000, out of a total of more than three million companies. But even if we compare the number of regular exporters with the number of companies that venture into doing something abroad, such as some specific operation, this places the number at 230,000. Of these, only 53,000 have repeated. That is to say, only a quarter. We have few exporters and a geographical structure of our exports very much centred on the European Union (66%). The latter is very good because these are rich markets that have the capacity to consume, they are stable, but grow very
little. On the other hand, in the markets growing most at the moment, such as Asia or Africa, our exports are very small, which means that the geographical diversification of our exports is not appropriate.
What about the sectoral composition?
The sectoral composition is not the best for a pandemic like the one we are suffering, as shown by the 16% dependence on tourism mentioned above, or on capital goods which are 20% of the goods exported. These sectors are very pro-cyclical: when there is uncertainty or recession, businesses do not invest and consumers also hold back consumption. In addition, we have a rather narrow composition of sophistication in our exports, as we compete very much on price. So that's the picture. What happens? This is very difficult to change in the short term.
What should be done then?
First of all, a number of structural reforms need to be put in place. And these measures, or rather their results, are not going to be seen in the short and medium term. The government has not implemented those structural reform measures that we have been calling for from the Exporters' Club for some time. And that is what is missing. They are measures which do not only affect foreign trade, internationalisation, but have a strong impact on the economic system and require much more transversal measures such as rethinking the average size of SMEs, since a very small company does not have the capacity to export.
Furthermore, it is also important to adapt the educational system to the needs of the market and future trends. Even so, no way has been found to carry out an educational reform properly and this issue has been discussed for a very long time. In short, we think we are being listened and supported by institutions, but even so, this fact does not really translate into the reforms that are necessary in this country.
If these structural reforms are not adopted, what consequences can we foresee in the short and medium term?
Well, in the short and medium term, the main consequence is a recession like the one we already have, accompanied by job losses. However, if we continue along this path, these will no longer be temporary regulation files, but will become redundancies. This situation is a vicious circle. We are at a point where it is necessary to increase public current expenditure to invest in unemployment benefits or those in need.
How can this increase in expenditure be financed? The EU is going to help, but the aid is not permanent or eternal. Do we want to pass the buck to our children? Who is going to pay for that? In times of economic crisis, if you don't take the right measures to get out of the crisis, it becomes a snowball. In our country in the short term, this situation is going to translate into higher unemployment and lower taxes, as well as a reduction in the number of companies. All this is taking place in a complex global environment, where there is a lot of competition, so the forecast is negative.
So, would it be necessary to change many concepts? Do you think it is necessary to have a great consensus of all the big political parties to be able to carry out all these reforms?
The circumstances are exceptional. This crisis is more complicated than the one we suffered in 2008 or during the transition. In exceptional circumstances a national consensus is needed to move the country forward, to carry out reforms such as those made in the Moncloa Pacts. Circumstances are different, so the nature of the agreement and the type of pact will have to be different, but it seems to me essential to have such a consensus at the national level. Is it easy to reach? We can see that it is not, as it is not achieved. Statements made by some members of the government about raising taxes are not the most appropriate in circumstances such as the current ones, as they will have a counterproductive effect on economic development or the way out of the crisis. All countries in the world are lowering taxes, and here taxes have not been raised, though some statements made by the government say it could happen. And this does not create the climate of confidence for investment to take place. In fact, we need
the opposite. Businesses need to invest to get out of the crisis. If uncertainty is high, it will be more complicated.
What opportunities and challenges do you see for investment once the pandemic is over, especially for markets in sub-Saharan Africa?
There are opportunities and we are lucky to be in the European Union. The EU block has pledged EUR 140 billion, which could be used to support massive investments that would in turn facilitate the change of economic model and the transition to a new economy.
In the case of Africa, Spanish companies are leaders in various sectors in which demand is and will be high. There are serious problems in Africa regarding energy, as they do not have enough energy and Spanish companies are leaders in renewables. The same is true of companies working in the water and sanitation sector or in tourism. There are many sub-sectors such as infrastructure, transport and communications where our companies can operate.
The report "Spanish business investment in sub-Saharan Africa" highlighted Morocco's role in Spanish investments. How did the idea of this document come about?
This report is a study launched by the Exporters' Club to make companies and society aware of the importance of African markets. This initiative was presented to the Ministry of Foreign Affairs which offered to support the project. One of the things we did was to carry out research on the potential of Spanish investment or what Spanish business investment in Sub-Saharan Africa could be.
The people in charge of this project were some professors from the Universidad Autónoma who are part of a European network of different universities working on African economic issues. They were the ones who made us reflect on the strategic importance of Morocco. In fact, now that there are mobility restrictions, the situation has changed. However, before, Morocco's air connections with many African countries were superior to those from Spain. The presence of Moroccan banks in many sub-Saharan African countries is also greater than that of Spanish banks in these countries. Furthermore, Morocco hosts a lot of Spanish investment. We have very good relations and this could be a way of helping to enter Sub-Saharan Africa. Spanish companies must have freedom and alternatives in order to be able to invest.
Do companies have the support of official Spanish institutions?
Spanish exports both to Morocco and to other countries in Sub-Saharan Africa do have official Spanish support, from institutions such as ICEX. For exports from Morocco to Spain, it is Morocco itself that provides support, when it can, as the Kingdom of Morocco does not have the same export support structures as Spain.
In addition to this lack of structures, what other barriers do Spanish investors encounter when it comes to investing?
Basically, a lack of knowledge, that is, these are countries where Spain has a very limited presence. When the characteristics of these states are unknown, it is more complicated since there are no contacts, nor are there any legal or operational restrictions to act. This is the main problem. In Latin America, investments began to be made due to proximity, mainly linguistic, as we speak the same language, as well as because the legal regimes are more or less similar. Let us not forget that almost all Latin American legislation is based on Spanish law. They have obviously changed and each one has its peculiarities, but there is a lot of affinity. Later, it was the European Union, as it is a single market and by being within this body it was easier to initiate trade relations. What we economists call agglomeration economies are missing, that is, insofar as there are many economic agents anchored in one place, this attracts more economic agents. The same applies to Spanish investment in both sub-Saharan Africa and China.
Do you think this change can be explained by a transformation in the mentality of the Spanish businessman?
A very important structural change has taken place in Spain, particularly in terms of progressive internationalisation. Before the financial crisis, the foreign sector accounted for 22% of gross domestic product. Last year, this figure rose to 35%. This is a very important structural change that has two important manifestations: the first is that in the past Spanish companies have traditionally exported when there was a failure in the Spanish market.
Changes in mentality are always complicated and slow. The commitment to internationalisation is a definitive one. The companies exporting are very clear about this and know that they cannot say "well, now that there is a crisis in Spain I am going abroad but when the crisis is over in Spain, I will abandon the investments made in order to export". Secondly, companies are increasingly aware that if they do not go out and compete abroad, their capacity for growth and survival will be very limited. The proof of this is the number of exporting companies which has grown tremendously, even though it is still very low.
What is the role played by new technologies and the consequent digital revolution in this process?
The digital transformation has undoubtedly affected us all and many companies have had to adapt. And this means not simply selling on Amazon or online trading platforms, but also opening up opportunities which many companies are taking advantage of to use new technologies, for example, in exporting non-tourist services, consultancy, engineering, etc. This situation has led many medium-sized companies to export. How are they exporting and why are they exporting? Because they can do so thanks to new technologies. Now they can make surveys, designs and send them over Internet and contact potential clients through the network. In the end you have to adapt to new technologies.
Which investment sectors are a priority for Spanish companies?
Everything that generates wealth is a priority for Spain. In the end, it must be the companies that decide whether to go abroad or not. I believe that companies are mature enough and have the experience to be the ones who decide what they want to do, how they want to do it, how they want to invest, etc. The State must facilitate this process, but it is the companies that must decide on what should be a priority in their strategy. Quite another thing is deciding in which sectors there can be more opportunities. In Sub-Saharan Africa, each country has its own peculiarities. South Africa is not the same as Southern Sudan. The lowest common denominator is that all the countries have problems and unsatisfied needs in terms of energy, water, social infrastructure, sanitation, mobility and transport.
The uncertainty caused by the COVID-19 has made companies more concerned about investing. From the Exporters' Club, what would you recommend they should do?
The first thing is to be clear about the company's capacity. One of the main obstacles to internationalisation is a fear to failure. When companies do not provide sufficient resources to be able to succeed in their internationalisation process, they usually fail. And failure is a major disincentive to try again. That is why we have to choose very carefully the products or services and the markets in which we want to succeed.
In comparison with other European countries, do we lack confidence in ourselves or in a better design in order to sell better?
These are several issues. On the one hand, there are companies within the same sector in Spain that are doing very well and succeeding and others that are doing badly. Could it be that in Spain we are not good at selling? I believe that this issue is closely related to the quality of business management and companies. This happens in wines, toys, textiles, fashion, in other words, in lots of sectors. It is a subject directly related to the company itself, its size and the resources it can allocate.
On the other hand, it is also a matter of image. For example, in the United States, Italian olive oil is super consolidated. The perception of many American consumers is that Italian olive oil is the good one, but it so happens that a very important part of this Italian olive oil is produced in Spain and exported in bulk to Italy. In other words, there are also image problems. Something similar happens with Germany and the perception that its machinery is very good, when in Spain 20% of exports are capital goods. So, the image of the country is very important. That is why image campaigns will be important, but not only campaigns to say "Spain is beautiful". The change in the perceptions of consumers or buyers is not changed overnight. It has to be a sustained effort over time. The effect of negative campaigns is devastating.
On November 3rd the US elections will take place. What do you think from the Exporters Club, Trump or Biden?
As an organisation, the Exporters' Club should not speak out or take sides with one person or another. So, if we have to take sides, it's about policy. And in Spain, companies need a global foreign trade system where the rules of the game are respected, where the WTO works and is not paralysed, where the foreign trade policies adopted in the United States are not like a zero-sum game, in other words, what you win is what I lose. Everything should be good for everyone. In the Exporters' Club we are interested in the negotiation and signing of a free trade agreement between the United States and the European Union. So, from this organisation we do not think whether it should be Trump or Biden, what we do believe is that there are certain political programmes that are good for us and will benefit us and others that will not.
In the case of China, has the pandemic taught us that deindustrialisation is very harmful to the interests of both Spain and Europe?
It is clear that in Spain the participation of industry in GDP is very low and insufficient. We should have more industry. That is good, for the wealth and autonomy of the country and to avoid situations like those that have occurred now. In a more general framework, there is a war between quotes for world economic supremacy and what is clear is that all Western governments expected that as China grew and became richer, the country would adopt more liberal policies similar to those we have in Western democratic countries. In the end, this is not happening. China is using the rules of the game very much to its advantage on some issues and not in the same more aseptic and neutral way as other countries do. Issues such as respect for intellectual property, support for the granting of subsidies to sectors that are not allowed by the WTO, or the status given to this country. In the WTO, China has the status of a developing country. How can it be a developing country when it is at the forefront of production in so many sectors? There is a background of issues that need to be rethought. All OECD countries are subject to rules of the game that limit financial competition. China is not a member of the OECD and does not act according to these criteria as other countries do.
And in the case of Brexit, to what extent could Spanish exports be affected?
It is our fifth customer for export of goods. Brexit will obviously affect us. It is the second destination for Spanish investment abroad and the main source of tourists coming to Spain. We are not interested in a hard Brexit, neither we nor the UK. There are many issues to assess, yet we cannot yield to possible blackmail from the London Government, as there are a number of important issues for Spain and the EU that we cannot accept because of the threat of a hard Brexit.
