As Spain braces for the Catalan parliamentary election on Thursday, 98 per cent of company directors in the region believe the current situation has affected the Catalan economy’s international prospects, according to research published last week by economist Fernando Trias de Bes in collaboration with the ESADE Business School.
Indeed, more than 3,000 companies have moved their official headquarters out of Catalonia in recent months, The Associated Press reported.
Read: Warning signs for investors in 2018
The regional election on Dec. 21 will see Catalans decide on a new government to replace the parliament that was dissolved after the Spanish government deemed an independence referendum to be unconstitutional. With its former vice-president jailed and former president in Brussels and unable to return to Spain for fear off arrest, the region remains tense.
It’s just one example of the national and regional tensions plaguing Europe. There are implications for Canada as well. With Canada’s largest public pension plans holding investments in companies based in the region, will the turbulence affect the area’s business prospects?
“I‘m convinced that, right now, not one international or national investor will take part in a new investment project until this is cleared up,” the Spanish economy minister, Luis de Guindos, told Reuters in October.
The Canada Pension Plan Investment Board’s latest activity in the region was a $1.3-billion investment in Barcelona-based Gas Natural Fenosa in August 2017. The previous year, it acquired Hotelbeds Group, a Spanish-based provider of travel services, from TUI Group for 1.2 billion euros. And the Ontario Teachers’ Pension Plan acquired Spain’s Memora Funeral Services for $170 million in July 2017.
Read: CPPIB to invest in Spanish gas distribution provider
In October, a court ruled the move by the Catalan parliament to hold a referendum to separate from Spain was constitutionally illegal. National police performed a crackdown, arresting and injuring hundreds in the move to clear out polling stations, The Canadian Press reported.
However, polling prior to the vote predicted the race would be much closer than it was, according to Azad Zangana, senior European economist and strategist at Schroders. Since only 42 per cent of those on the region’s voter rolls voted and 90 per cent of them opted for independence, Zangana doubts the vote a true representation of political sentiment in the region. “That tells you that those who supported remain just refused to turn out.”
The equity market in Spain felt the strain in the region with an immediate reaction by the IBEX 35, says Zangana. “There absolutely has been a dent, but the IBEX started to recover and come more in line with other European equities around the time we saw the government in Madrid announce it was taking back control.
“We had even a further rally as they announced [Catalonia’s president Carles] Puidgemont might even face charges, so it seems to me that the market often wants continuity and they’re getting that with Madrid control.”
The region of Catalonia is responsible for 19 per cent of Spain’s gross domestic product and represents a significant contribution to the country’s public finances, amounting to 9.9 billion euros in 2014, according to Zangana. Retail sales in the region dropped four per cent in October, compared to the same month last year, and tourism is down 4.7 per cent over 2016, The Associated Press reported.
Read: Ontario Teachers’ to acquire Spanish funeral company
Zangana doesn’t expect Catalonia to gain independence, unless Spain has a major change of heart and consents to the separation. However, he notes the political upheaval has the potential to stall growth the region might otherwise enjoy. Also, as a significant manufacturing hub for the country, disruptions to transportation could be problematic for supply chains. “Authorities will be keen to allow peaceful protest but not in a way that causes havoc to transportation, especially the road network,” he says.
Institutional investors shouldn’t worry about the situation, unless there are signs of further escalation that could lead to actual independence, says Zangana. While it’s worth keeping an eye on, Zangana doesn’t believe the situation is heading in that direction. “We are a very long way off from that,” he says. “There is really no appetite, either at a Spanish or an EU level, to allow for a referendum.”
He also believes those who remained silent during the now-illegal referendum vote will likely be strong supporters of remaining part of Spain and will make their voices loudly heard in the upcoming election. “I’d expect it to be a much closer election than we’ve seen in the past with far more remain candidates doing better.”
Zangana says the only likely way for Catalonia to gain independence would be to conduct a legal referendum like Scotland did as part of its effort to separate from Britain. Bbut I don’t see that step happening at this stage,” he says.