Morningstar DBRS confirmed the rating of Italy a BBB (high) with Stable trend.
The stable trend reflects Morningstar DBRS’s view that risks to credit ratings are balanced. There post-pandemic recovery of Italy was stronger than expected and outperformed the other large economies of the euro area. The effects of tighter monetary policy and a weaker external environment are weighing on economic activity, but growth is expected to gradually recover as the purchasing power of families and financial and external conditions.
The implementation of Italy’s National Recovery and Resilience Plan (PNRR) should help mitigate weaker residential investment over the next two years as generous home renovation tax credits (Super bonus) will be gradually phased out. The fiscal deficit reached 7.4% of GDP in 2023, well above the 5.3% of GDP forecast by the government, with the slippage largely explained by a larger-than-expected impact of Superbonus tax credits . On the other hand, Italy’s public debt-to-GDP ratio fell faster than expected and stood at 137.3% of GDP in 2023 thanks to nominal GDP growth.
The rating agency expects the fiscal impact of these tax incentives will be much lower in the future; however, their demands will lead to greater financing needs and push Italy’s public debt ratio upwards in the coming years. The government expects that the public debt/GDP ratio will increase to 139.8% of GDP by 2026 and then begin a gradual decline. This is broadly in line with previous projections thanks to a better-than-expected starting point. The likely extension of temporary tax cuts to 2024 could exert further pressure, if not accompanied by compensatory measures. The government’s medium-term budget plan, which will be presented by mid-September this year in the context of the upcoming new fiscal rules, is expected to reconfirm its commitment to reducing Italy’s fiscal deficit.
Morningstar DBRS’ confirmation of the rating is supported by several factors. First, Italy benefits from joining theEuropean Unionas well as the support and high credibility of the European Central Bank. Second, the economy is large and diverse and that’s important manufacturing sector has demonstrated a high degree of resilience despite the energy price shock. Third, Italy’s external position benefits from the rapid recovery of the current account as well as the positive net international investment position.
The private sector debt it is one of the lowest among advanced countries and the Italian banking system is in a stronger position than in the past in terms of capitalization and net impaired assets. However, the ratings remain constrained by a very high level of public debtweak potential GDP growth and a political environment that hinders government stability and the ability to address economic challenges.
