Scope has completed a monitoring review on the Republic of Italy
Scope Ratings GmbH (Scope) monitors and reviews its credit ratings on an ongoing basis and at least annually, or at minimum each six months in the cases of sovereign, sub-sovereign and supranational organisation issuers.
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’s 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 ratings assumptions and model(s). Scope publicly announces the completion of each monitoring review on its website.
Scope completed the monitoring review for the Republic of Italy (long-term local- and foreign-currency issuer and senior unsecured debt ratings: BBB+/Stable Outlook; short-term local- and foreign-currency issuer ratings: S-2/Stable) on 27 November 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 ratings 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 1.9trn of GDP) and diversification, which, together with a high per-capita income of around EUR 32,000, strong external sector, moderate non-financial private sector debt and financial system buffers, supports economic resilience; iii) a favourable public debt structure with an average cost of funding of around 3.1% over 2022-2026 and an average debt maturity of around seven years, which mitigates the impact of rising financing costs, and iv) the country’s recent political stability given a wide parliamentary majority and the next general elections scheduled for 2027.
Rating challenges include i) weak public finances, given high government debt of around 142% of GDP and elevated annual funding needs, including bills, of around 25% of GDP, expected to persist into the medium term; ii) structural bottlenecks, which constrain medium-term growth by limiting productivity and labour force participation; and iii) weak demographics, with an ageing and declining working population that will continue weighing on government finances and growth.
Scope expects economic growth of 0.7% this year, after 3.7% in 2022, and 0.8% in 2024 before converging towards around 1% over 2025-28. This trajectory assumes the absence of an additional shock, interest rates being at their peak, and a continued implementation of the NGEU recovery plan, following the recent approval by the European Commission of Italy’s revised plan.
Following the 2023 NADEF and 2024 Draft Budget, Scope expects the budget deficit to decline this year to 5.3% of GDP from 8% in 2022 and to decline only gradually to around 3% by 2027-28. The primary balance should gradually improve and turn into a 0.25% of GDP surplus in 2025 rising steadily to around 1.5% by 2028. 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. On this basis, Scope expects the debt-to-GDP ratio to remain broadly stable at around 141% over coming years.
Given the elevated, albeit declining fiscal deficits, the revised and yet-to-be-adopted EU fiscal rules may identify Italy as one of several EU member states facing an excessive deficit procedure in coming years. Should that be the case, Italy’s bonds may no longer be eligible for the ECB’s Transmission Protection Instrument, which is a key policy tool to reduce excessive financial market volatility and/or instability, providing important assurance to Italy’s bond market, and thus the BBB+/Stable rating.
Finally, Scope notes that the government’s plan to reform the constitution to strengthen the role of the Prime Minister to be elected directly by the people rather than being nominated by the president, could raise tensions within the current coalition government and/or lead to a referendum with an uncertain outcome. This may challenge Italy’s recent political stability observed since the September 2022 elections.
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 in line with the national recovery plan.
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 a significantly slower fiscal consolidation and an associated slower decline, or even reversal, in the debt-to-GDP ratio.
The methodology applicable for the reviewed ratings and/or rating Outlooks (Sovereign Rating Methodology, 27 September 2023) 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, Managing Director
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