Spain’s fragmented politics limits the government’s capacity to make structural fiscal adjustments and enact reforms to raise the country’s growth potential, says Scope Ratings.

A no-confidence vote filed on Friday by Spain’s main opposition Socialist Party (PSOE) against Prime Minister Mariano Rajoy will probably lead to a congressional debate sometime in June. It remains unclear whether the no-confidence vote will succeed, and if it were, whether and at what time new general elections would take place. Regardless of the immediate political developments, Scope notes that a stable government, with a parliamentary majority, is needed to address Spain’s medium-term rating constraints.

The euro area’s fourth-biggest economy faces persistently high public and external debt levels, elevated structural unemployment, low productivity growth, and too little structural fiscal adjustment. Spain’s predicament would be more serious were it not for the economy’s upside potential, the result of a continued reduction in economic, fiscal and external imbalances which led to the robust economic performance since the country exited the European Stability Mechanism programme in January 2014.

Scope affirmed Spain’s A-/Stable Outlook rating earlier this month and expects economic growth of around 2.5% over the medium term, down from 3.1% recorded in 2017.

The economy has grown, on average, 2.8% in recent years, a full percentage point above the euro area average, driven by the government’s structural reforms, which were mostly implemented between 2010 and 2015, wage moderation and resulting cost competitiveness gains, in addition to low oil prices, the European Central Bank’s accommodative monetary policy and favourable external conditions, particularly in the euro area.

“Scope expects this benign combination of factors to continue, sustaining Spain’s balanced and employment-intensive economic expansion over the next few years, albeit with less dynamism,” says Scope analyst Alvise Lennkh.

At the same time, Scope pays close attention the sustainability of Spain’s public debt.

“Our analysis, based on IMF forecasts and a combination of growth, interest-rate and primary-balance shocks, confirms that slower growth and primary balances remain the key risks to Spain’s debt sustainability,” says Lennkh. The results reflect Spain’s high debt level, expected narrowing fiscal deficits, and more moderate growth.

Scope’s baseline scenario is for the debt-to-GDP ratio to fall gradually to around 90% by 2023 from 98.3% in 2017, while a more adverse scenario—assuming slower growth, higher interest payments and a lower primary budget balance for each year—would lead to a debt-to-GDP level of around 98% by 2023. While this would be in line with the 100% peak of 2014 and markedly below the debt levels of Italy (131%) and Portugal (124%), such an elevated debt level constitutes a major rating constraint in Scope’s opinion.