When I first came to Barcelona in 1985, there was already a group of people in favour of Catalan independence. This small group remained very stable for many years and it was not until 2010 that the option of independence became a relevant political issue, and after 2012 it escalated to reach the present situation.
The Spanish government did not authorise this Sunday’s referendum and therefore it may take some time before we see what its consequences will be, but the opinion of many people in Barcelona is that the relationship between Catalonia and Spain has been damaged beyond repair. Just ten years ago, Catalan independence seemed a remote possibility. Today, for many the question has shifted from “if” to “when” Catalonia will become independent.
This being the case, the private equity community should start thinking about what impact this may have on its business, both at the level of its portfolio companies, and when looking at new investments. Assuming that Catalonia will separate from Spain in the near future, several factors may directly affect businesses, both in Spain and Catalonia.
One of the topics generally raised in this context is the possibility that exports from Catalonia, both to Spain and the rest of the world, may become subject to custom tariffs as Catalonia would be forced to leave the European Union. In my opinion, however, this is not likely to happen. Unless Spain recognises the independence of Catalonia, according to Spain, Catalonia will remain a part of Spain and thus a part of the EU. This means that trade conditions will remain unaltered. On the other hand, if a separation agreement is negotiated and Spain recognises Catalonia, there is no obstacle for Catalonia to become a member state of the EU, so again, a change of tariffs is highly unlikely.
Another issue to look at is the loss of sales by Catalan companies in Spain and vice versa, caused by boycotts. This is indeed a possibility which portfolio managers should review for their companies, depending on the geographic distribution of sales. Consumer brands with a clear local identity are the most likely candidates to suffer. However, the conflict between both territories has been building up for many years now, so fierce “anti-the others” have probably already stopped many consumers from buying “the others” products, and therefore a new boycott will probably have only a small additional impact. The “War of Wine” produced a decline of seven per cent in sales of Catalan sparkling wine in 2005 in Spain, but did not have a lasting impact on the cava industry, which shifted sales to export markets.
Some people expect a huge decline of Catalan GDP, due both to tariffs and boycotts. To me this seems to a large extent “wishful thinking”. As explained above, I don’t expect a significant “tariff” effect and on the other hand, the exports to Spain are not significant enough to produce a significant drop of GDP. Over the last 20 years, the importance of “exports” to other regions of Spain has declined and it stands today at around 20 per cent of Catalan GDP, with 30 per cent of GDP exports to other countries and 50 per cent generated internally. Applying the “War of Wine” figures leads to a small 1.4 per cent drop of GDP, but one must consider that many consumers do not identify all goods produced in Catalonia as Catalan, as they are produced by foreign multinationals. Furthermore, much of the sales to the rest of Spain are not consumer goods but intermediate products sold to other businesses and are therefore less likely to fall victim to a boycott. Therefore, the “boycott” effect on Catalan GDP will probably be smaller than 1.4 per cent of GDP.
One of the most significant changes caused by the demerger is a shift in cash flow generated by taxes and this shift may directly affect companies selling to the governments of Spain and Catalonia. And it may indirectly affect all companies as tax rates may have to be adjusted to compensate for the shift in tax cash flows. The total government revenue of Spain stands at 37.9 per cent of GDP, well below the eurozone average of 46.2 per cent. Catalonia is a net contributor to the Spanish public financial system, as the tax collected exceeds the total government spending by an amount in the range of €16bn to €17bn (eight per cent of Catalan GDP). Should Spain lose this net cash inflow, the budget deficit will increase from 4.5 per cent to 7.4 per cent and Spain would be forced either to reduce expenses, increase taxes, or do both at the same time.
On the other hand, assuming unaltered total tax revenue, the Catalan government will be running a surplus, even after the necessary increase in spending caused by the assumption of government functions, which until today the Spanish government covers. This may generate interesting business opportunities, which can compensate a potential loss of business with Spain.
PS – I wrote the above last Saturday, in anticipation of Sunday’s referendum. It is now Sunday afternoon. The polling stations are still open, except those, which the Spanish police have violently closed this morning, causing various injuries among voters. The events of today are, in my opinion, likely to accelerate the Catalan demerger, so considering the potential consequences on portfolio companies is even more urgent.
Maarten de Jongh is managing partner of corporate finance adviser Norgestion’s Barcelona office.