When I arrived in Spain a few weeks ago the newspapers were bemoaning the extraordinary loss of global soccer star Neymar from Barcelona to Paris St.-Germain for a staggering $262 million transfer payment. Grown men were crying in the streets. A popular storefront in Ibiza captured the despair many felt, as they searched for meaning post-Neymar.
Tragically, only days later, everyone was now crying in the streets after the horrific terrorist attacks in Barcelona. In addition to the obvious devastation, tourism is 14% of the Spanish economy and given problems elsewhere in European, Spaniards were expecting a bumper summer season of 38 million visitors.
Spain had been relatively insulated from Islamist terrorist attacks, although Barcelona which is in the Catalonia region of Spain has had a restive past with sporadic separatist violence. In three weeks, Catalonians are to vote in a referendum to determine if the region will separate from Spain. This action was just ruled unconstitutional by the Spanish Constitutional Court so expect continued unrest. Three years ago, Catalonia, the most economically powerful of the 17 administrative regions of Spain, held a non-binding referendum that saw 80% of voters pushing to leave Spain.
All of this turmoil belies what is an extraordinary story of economic recovery and a real resurgence of entrepreneurial activity over the past ten years. Gross Domestic Product (GDP) is expected to increase 3% in 2017, which is remarkable given how severe the situation was just a few years ago. The economy contracted 10% from the pre-Eurozone crisis levels of 2008; the unemployment rate was north of 26% and is now at 17%. The IBEX 35 index trades at 13.9x forward P/E, not an unreasonable level given that the Euro Stoxx index is at 14.8x.
This summer most European banks reported relatively stable financial results and appeared to finally be adequately capitalized. Non-performing loan balances at Spanish banks are estimated to be 5% which compares very favorably to their neighboring Portuguese banks which are running at 18%. This is all the more remarkable given the reputation for lax corporate governance, particularly at Spanish banks. The sixth largest bank by assets, Banco Popular Espanol, was sold this summer for 1 euro to Banco Santander SA when the true quality of its balance sheet was revealed, turned upside down by the disastrous level of inside deals with affiliates.
Arguably the harsh steps taken to address the crisis created by the credit-fueled construction boom were quite successful, notwithstanding the pain incurred. The dramatic reduction in government spending led to lower wage levels across the board which analysts attribute to why Madrid is 36% cheaper than London and 28% below Paris. Average Madrid rents are 345 euros per square meter now, which is well below the 504 euros rate in 2008.
This lower wage level had the effect of spurring a significant amount of entrepreneurial activity. Barcelona, which happens to be the location of Amazon’s European headquarters, recently developed 22@District, which is a 40-acre technology zone on the waterfront (no cars are allowed). Regularly we hear from interesting Spanish start-ups as they contemplate raising additional capital and/or expanding into the US market. For instance, Lug Healthcare Technology, a Spanish start-up providing technologies for hospital pharmacies, is deployed in five leading Spanish hospitals and is now looking to expand overseas.
The Spanish healthcare system has always been considered one of the best in the world and should continue to be a source of future healthcare innovation. The World Health Organization places women longevity at 85.5 years, second only to Japan. With a population of 46.5 million, the Spanish spend 9.3% of GDP on healthcare and enjoy universal coverage with no upfront payments and modest co-payments for pharmaceuticals based on an income test. Over 90% of the population uses the public health system, which is quite decentralized across the 17 regional health ministries. Some of the greatest health concerns are obesity at 15% of the population and something called “hazardous drinking” which 7% of men and 3% of women are guilty of.
The Spanish healthcare system was dramatically restructured as part of the General Health Law of 1986 which extended coverage and access to all. As healthcare costs accelerated over the following decade, the 1990s saw a greater focus on cost containment and management reform. This not surprisingly led to a tension in the 2000s between a more federalist approach versus a nationally coordinated system.
The impact of this increased commitment to national wellbeing was dramatic: vaccination rates were 80% in 1985 and are now well above 95%, leading Spain to be ranked fifth globally. The number of CT scanners and MRI machines per million residents was 14.4 and 9.2, respectively in 2008 according to the National Catalogue of Hospitals (last year of data), which compares impressively to other advanced European economies such as the United Kingdom which was 7.4 and 5.6, respectively. Today the central health minister is principally focused on four areas:
- Chronic and rare disease management
- National safety issues
- Resource allocation to regions to endure uniformity and balanced care across the country
- Nationalized IT system (single patient ID system, single EMR)
As a healthcare tech investor, the fourth priority is most interesting. In addition to a robust “health card” platform which allows access to all Spanish healthcare facilities, the analytics the system generates give administrators effective tools to combat unwarranted regional variability by procedure and outcomes. For instance, it was recently shown that there is up to 12x variability by region for avoidable hospitalizations due to diabetes complications.
Like many summer trips to Europe, one often needs to recuperate upon the return. At least in Ibiza, you can stay on east coast time, US east coast time.