MADRID: The International Monetary Fund said on Friday that Spain's economic contraction may be less severe this year than the 12.8% it predicted earlier this year thanks to a strong rebound in the third quarter.

The fourth quarter could however still undermine growth projections for 2021, the IMF said in a report.

The IMF also said that banks' profitability and lending capacity could deteriorate as bad loans would will likely rise "disproportionately" in Spain's non-financial corporate sector upon the expiration of some borrower support measures.

The Spanish government has said it expects gross domestic product to slump a record 11.2% this year due to the impact of the coronavirus pandemic and rebound at least 7.2% next year.

The IMF did not give a new forecast for this year, even if it said it could be better than it had initially predicted.

But it said in the report that the government's macroeconomic outlook in the draft 2021 budget, which projects growth of up to 9.8% with the use of EU recovery funds, was "optimistic", mainly because the IMF expects a somewhat slower absorption of the funds than the government does.

Instead, the IMF expects 7.2% growth for 2021.

"In addition to the EU funds impact, the evolution of the pandemic will shape the recovery. A weaker-than-projected fourth quarter GDP outturn would make the projected 2021 real GDP growth difficult to achieve," the IMF said, citing possible further tightening of pandemic containment measures as a risk.