Italy: partial privatisations would reduce debt-to-GDP only at the margin; deeper reforms required
      WEDNESDAY, 06/03/2024 - Scope Ratings GmbH
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      Italy: partial privatisations would reduce debt-to-GDP only at the margin; deeper reforms required

      Italy’s public debt of around 137% of GDP is unlikely to decline despite expected primary budget surpluses from 2025 and planned asset sales, underpinning the need for deploying EU funds successfully and containing state spending to reduce public debt.

      By Eiko Sievert and Alessandra Poli, Sovereign and Public Sector Ratings

      Italy (BBB+/Stable) faces high and rising interest costs and structural spending pressures – on healthcare, welfare and  pensions due to its ageing population – which challenge its debt trajectory given the economy’s weak growth prospects. We estimate growth at around 1% a year in 2024-28 amid low inflation, set to average around 1.5% this year.

      For now, the government of Prime Minister Giorgia Meloni has focussed on growth-enhancing measures backed by NGEU funding and plans to partially privatise some companies including those providing public services.

      To be sure, the plan to raise EUR 20bn (1% of GDP) in privatisation proceeds is modest in the context of Italy’s public debt and associated interest expenses of more than EUR 70bn in 2023, set to rise to around EUR 90-100bn in coming years. While the proceeds can support the government’s near-term spending priorities, such as the EUR 24bn of tax cuts announced in the 2024 Budget, it will not materially lower the debt-to-GDP trajectory. Achieving this, will require a credible medium-term plan for fiscal consolidation, in addition to the effective implementation of growth-enhancing reforms and investments under the Recovery and Resilience Plan.

      Italy’s headline budget deficit to decline while the primary balance is set to move to surplus in 2025

      Fiscal consolidation will remain crucial over coming years as continued public sector spending restraint is needed to offset high interest expenses, with the planned partial privatisations, assuming they go ahead successfully, making only a small contribution (Figure 1).

      Debt-to-GDP fell from 147.1% in 2021 to 137.3% in 2023, mainly supported by high inflation, but upward pressure on the ratio will come from high interest expenditure in coming years as inflation eases. We expect the headline budget deficit to narrow this year to 4.5% of GDP from 7.2% in 2023 – significantly higher than the 5.3% of GDP previously expected - and to fall to around 3% by 2027-28. The primary balance should gradually improve and turn into a surplus of 0.3% in 2025 rising steadily to around 1.5% by 2028.

      Still, the growing interest burden, which is likely to exceed 4% of GDP, will keep the headline deficit close to or above 3% of GDP in the medium term. On this basis, the debt-to-GDP ratio will remain broadly stable. Given the elevated, albeit declining fiscal deficits, the revised EU fiscal rules may therefore identify Italy as one of several EU member states facing an excessive deficit procedure in coming years.

      Figure 1. Contributions to changes in gross debt, 2022-2028
      % of GDP

      Source: Ministero dell’Economia e delle Finanze (MEF), Scope Ratings

      Partial privatisations to raise modest amount in relation to public debt burden

      Previous governments in Italy tried to boost revenues by selling shares of public companies, raising proceeds of EUR 156bn during the late 1980s and early 2000s. Such privatisation plans, however, reflect one-off revenues that cannot address structural spending pressures.

      The list of companies potentially involved in the latest privatisation plans targeting EUR 20bn in proceeds, includes some that provide important public services such as Poste Italiane (BBB+/Stable). The Italian universal postal provider also operates the country’s largest network for distribution, insurance and financial services.

      The government, through the Ministry of Economy and Finance, directly holds 29.3% of Poste’s capital, in addition to 35% owned indirectly through Cassa Depositi e Prestiti (CDP, BBB+/Stable), with the remaining 35.7% free-floating. At the end of January, the government approved a decree to sell part of Poste’s state-owned capital. Details of the partial privatisation, including the exact share that will be sold, are yet to be disclosed.

      While the state would retain control directly or indirectly through its combined stake via CDP, it would also forgo a share of its future dividend income, worth almost EUR 250m in 2022, which it has usually reinvested to support economic development and infrastructure investment.

      Successful investment of NGEU funds crucial for improving Italy’s growth prospects

      As the largest recipient of NGEU funds, Italy has achieved 34% of its milestones and targets under the Recovery and Resilience Facility, with payouts to date of EUR 41.5bn in grants (EUR 68.9bn allocated) and EUR 60.9bn in loans (EUR 122.6bn allocated). The government estimates that planned structural reforms could raise GDP by 10% in the long term, with the biggest gains from labour market, education and public administration reforms. All bonds used to finance NGEU must be issued before end-2026. This could pose a challenge for the government to allocate funds efficiently given Italy’s past record of a low absorption rate of EU funds compared with other member states.

      Tackling high public debt remains important for Italy’s sovereign rating (BBB+/Stable), which could come under pressure if the fiscal outlook were to deteriorate or if medium-term economic growth weakens, resulting in higher debt-to-GDP.  

      In this context, continued support from European institutions remains crucial. This includes eligibility of Italian bonds for European Central Bank programmes such as the Transmission Protection Instrument, and in turn compliance with the EU’s revised fiscal rules, as well as Italy’s successful implementation of the Recovery and Resilience Plan.

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