Scope takes no action on the Republic of Italy
Scope Ratings GmbH (Scope) monitors and reviews its credit ratings on an ongoing basis and at least annually, or every six months in the case of sovereigns, sub-sovereigns and supranational organisations.
Scope performs monitoring reviews to determine whether material changes and/or changes in macroeconomic or financial market conditions could have an impact on the credit ratings. Scope considers all available and relevant information when undertaking the monitoring review.
Monitoring reviews are conducted by performing a peer comparison, benchmarking against the rating-change drivers, and/or reviewing the credit ratings’ performance over time, as deemed appropriate by the Lead Analyst or Analytical Team Head, in addition to an assessment of all aspects of the relevant methodology/ies, including key rating assumptions and model(s). Scope publicly announces the completion of each monitoring review on its website.
Scope completed the monitoring review of the Republic of Italy (long-term local- and foreign-currency issuer and senior unsecured debt ratings: BBB+/Stable; short-term local- and foreign-currency issuer rating: S-2/Stable) on 16 January 2023.
This monitoring note does not constitute a credit rating action, nor does it indicate the likelihood that Scope will conduct a credit rating action in the short term. Information about the latest credit rating action connected with this monitoring note along with the associated rating history can be found on www.scoperatings.com.
Key rating factors
For the updated Rating Report accompanying this review, click here.
Italy’s BBB+/Stable rating benefits from i) supportive European monetary and fiscal policy frameworks under the EU and euro area institutional architecture; ii) the Italian economy’s size (EUR 1.8trn of GDP) and diversification, which, together with a high per-capita income of around EUR 30,000, strong external sector, moderate non-financial private sector debt and financial system buffers, supports economic resilience; and iii) a favourable public debt structure with an average cost of funding of around 2.9% and an average debt maturity of around seven years. Italy’s significant economic, financial market and political relevance as a founding member of the EU further underpins Scope’s expectation of exceptional support from European institutions under stressed scenarios. This includes the ECB’s flexible reinvestment of securities purchased via its asset purchase programmes and the Transmission Protection Instrument.
Rating challenges include i) weak public finances, given high government debt of around 145% of GDP and elevated annual funding needs, including bills, of 25%-30% of GDP, expected to persist into the medium term; ii) structural bottlenecks, which hinder medium-term growth by limiting productivity growth and creating labour market rigidities that curb employment growth and labour force participation; iii) weak demographics, with an ageing and declining working population that will continue to weigh on government finances and growth; and iv) a fragmented political environment weighing on economic reform momentum.
Scope expects economic growth of 0.5% this year, after an expected 3.7% in 2022, and of 1.5% in 2024. Following the 2023 Budget Bill, the budget deficit is forecast to decline this year only modestly to 4.8% of GDP from an expected 5.2% of GDP in 2022. Still, the primary balance should gradually improve and turn into a 1% of GDP surplus by 2026. However, the rising interest burden, which Scope expects to exceed 4% of GDP, will keep the headline deficit close or above 3% of GDP over the medium term.
The Stable Outlook reflects Scope’s opinion that risks to the credit ratings over the next 12 to 18 months are broadly balanced.
The ratings/Outlooks could be upgraded if there is, individually or collectively: i) a firm downward trajectory in the debt-to-GDP ratio; and/or ii) improved medium-term economic growth resulting from an effective implementation of public investments and structural reforms on which EU fund disbursements are conditioned.
Conversely, the ratings/Outlooks could be downgraded if, individually or collectively: i) support from European institutions weakened, increasing refinancing risk on Italy’s high public debt stock; ii) the medium-term growth outlook weakened due to delays in public investment and/or reforms under the country’s recovery and resilience programme; and/or iii) the fiscal outlook deteriorated, resulting in slower fiscal consolidation and an associated slower decline, or even reversal, in the debt-to-GDP ratio.
The methodology applicable for the reviewed rating(s) and/or rating Outlook(s) (Sovereign Rating Methodology, 27 September 2022) is available on https://scoperatings.com/governance-and-policies/rating-governance/methodologies.
This monitoring note is issued by Scope Ratings GmbH, Lennéstraße 5, D-10785 Berlin, Tel +49 30 27891-0.
Lead analyst: Alvise Lennkh-Yunus, Executive Director.
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