Standard & Poor's confirmed Italy's BBB rating and keeps the outlook stable, as it did in its last rating in October last year.
The rating agency believes there will be an economic slowdown this year due to high inflation and rising rates, but it will be the EU's large transfer payments up to 2026 that will provide a strong counter-cyclical boost to the economy. Even if risks remain for the implementation of all the necessary reforms, says the agency. As for fiscal consolidation, S&P's says it will likely be gradual and contingent on growth and political pressures.
For S&P's the focus must be on economic growth
S&P continues to view economic growth, rather than fiscal policy, as the key factor in the sustainability of Italy's large stock of debt.
The rating agency expects a GDP in 0,4% increase this year, slowing down from +3,7% in 2022, to then start growing again by 1% next year and by 1,4% in 2025 and 2026.
The Meloni government is more optimistic about this year's growth: in the Def (Economics and finance document) presented in recent days, indicated a 2023 GDP of +0,9%
“Moderates salary increases in Italy, despite rising inflation will erode real incomes, while families have absorbed most of the savings accumulated during the pandemic”, specifies the note accompanying the data. In our opinion, observes the rating agency, “the energy support package, estimated at 2% of GDP for the full year, will only partially cushion the consequent impact on private consumption, which with around 60% of GDP is a key factor for growth. Furthermore, the recent changes to the Superbonus scheme will limit its adoption and dampen the performance of the sector. We also expect a export slowdown net income, including tourism receipts, given sluggish eurozone growth, which S&P Global Ratings forecasts at 0,3% in 2023.
Negative scenario: if debt/GDP is not reduced
The rating could come under downward pressure if the government fails to downgrade the debt/GDP ratio because of tax deviations persistent, of a prolonged shock oninterest rates or as a result of one weaker growth expected. Even a partial implementation of reforms, in particular those related to the disbursement of EU funds, would entail risks for growth and public finances and consequently a downward pressure on the rating.
Positive scenario: we will upgrade the rating if the economy grows
We could raise the rating if the economic growth should exceed our forecasts, leading to a sustainable improvement in real per capita GDP growth, says S&P. A solid implementation of reforms and a continued path of fiscal consolidation that addresses high government borrowing would also encourage a rating upgrade.
Debt/GDP will come down with difficulty
According to the rating agency the budget consolidation will probably be gradual, even if austerity is not needed to bring down the public debt but rather development. Not so much in terms of absolute variation (in February it reached a new absolute record of 2.772 billion) as in relation to GDP.
Thanks to the reintroduction of EU tax rules next year, the agency says, authorities are set to prosecute a gradual pace of consolidation in the coming years, registering slight primary surpluses by 2024 and putting the debt-to-GDP ratio on a slightly downward path. Even assuming 5,2 percentage points of fiscal consolidation between end-2022 and end-2026, according to our projections, in 2026 the gross debt in relation to GDP it would still be around 136% of GDP, well above the current euro area average (93%) and the third highest level of sovereign debt in the Organization for Economic Co-operation and Development, after Japan and Greece.
“In our view, the 2024 budget will be important in assessing the government's commitment to fiscal prudence and policy direction, as well as annual updates to competition legislation and other growth-enhancing reforms,” the release said.
The next appointments with the rating agencies
Next week it will be the rating agency Dbrs to express his opinion on Italy, which is also currently on the same level as the S&P': at BBB with a stable outlook. May 12 is the announcement of the rating of Fitch, also at the BBB, stable.
May 19 will be the turn of Moodys which, on the other hand, confirmed its Baa rating last August and changed its outlook from stable to negative on the other.
