Spanish Elections: Inconclusive Results Increase Political Uncertainty in the Near Term

On July 23, 2023, the Kingdom of Spain (rated "A" with a Stable trend) held general elections, the results of which were inconclusive and do not offer at this stage clear paths for government formation for either the center-right Popular Party (PP) or the center-left Spanish Socialist Workers' Party (PSOE). Alberto Núñez Feijóo's PP came out ahead in the elections with 33.1% of the votes, followed by Pedro Sánchez's PSOE with 31.7%, Santiago Abascal's far-right Vox with 12.4%, and Yolanda Diaz's leftist bloc Sumar Party with 12.3%. Regional and nationalist parties won the remaining seats in parliament and could be the deciding factors in forming the next government. Neither the combination of PP-Vox nor of PSOE-Sumar managed to obtain an absolute majority in Congress (176 out of 350 seats). This outcome increases the risk of parliamentary gridlock, the emergence of a weak government, or the potential for new elections.

Key Highlights
• The results increase the risk of a parliamentary gridlock, a weak government, or potentially another round of elections that do not guarantee unblocking the situation.

• A hung parliament could complicate a speedy execution of Spain's Recovery and Resilience Plan and the release of the European Union's (EU) funds and/or slowdown the required fiscal consolidation.

• Fiscal rebalance will continue this year, helped by the cyclical recovery. However, tackling long-term challenges amid an economic slowdown in the face of higher interest rates, will require additional adjustment measures.

“The prospect of a hung parliament, if it drags on for several months, could hinder the implementation of EU projects and the release of funds and delay the necessary fiscal consolidation, at a time when the Spanish economy is slowing down,” said Javier Rouillet, Vice President, Global Sovereign Ratings at DBRS Morningstar. “Still, Spain’s ongoing fiscal rebalancing, aided by the cyclical recovery, and its relatively more favorable economic and inflationary performance expected for 2023 compared to other major European economies, help mitigate the associated risks,” added Javier Rouillet.