Rating Update on Italy
Fitch and Moringstar DBRS confirmed their rating
In recent credit rating actions, both Fitch Ratings and Morningstar DBRS revised Italy’s economic outlook to positive, affirming its sovereign credit rating at BBB. These updates underscore the recognition of Italy's fiscal improvement, stronger growth prospects, and political stability, which contribute to the revised outlooks.
On October 18, 2024, Fitch upgraded Italy’s outlook to **Positive** while affirming the **BBB** rating on its Long-Term Foreign-Currency Issuer Default Rating (IDR).The decision reflects improvements in several key areas.
- **Fiscal and Economic Stability**: Italy’s budget deficit has decreased faster than anticipated due to robust tax revenues and the conclusion of high-cost programs like the Superbonus tax incentive. For 2024, Fitch projects a fiscal deficit of **3.7% of GDP**, down from the previous estimate of 4.7%.
- **Debt Reduction**: Italy’s debt-to-GDP ratio was revised down to **134.8%** for 2023, marking a reduction of nearly 20 percentage points since its peak in 2020. Despite a temporary rise due to outstanding tax credits, Fitch anticipates a gradual decline starting in 2028.
- **Political Stability and Reforms**: The stable political environment since the 2022 election has bolstered investor confidence and facilitated reforms necessary for long-term fiscal sustainability.
- **Growth Projections**: Italy's economy is expected to expand by **0.7% in 2024** and **1.1% in 2025**, supported by the Next Generation EU (NGEU) investment initiative and rising labor participation.
Fitch acknowledges the Italian government’s dedication to EU fiscal guidelines, projecting further deficit reductions to **3.2%** in 2025 and **2.7%** in 2026, in line with EU’s 1.5% average expenditure growth cap.
Morningstar DBRS, on October 25, 2024, also shifted Italy’s rating outlook from **Stable to Positive**, reaffirming the **BBB (high)** rating on long-term foreign and local currency issuer ratings. Key reasons include:
- **Fiscal Path Adjustments**: Italy’s revised fiscal plan for 2024 forecasts a deficit reduction to **3.8% of GDP**, mainly attributed to improved tax revenues and higher nominal GDP growth. This fiscal strategy aligns with the EU's framework, targeting a balanced budget by **2026** and a public debt decline from 2027.
- **Debt Control**: Italy’s debt-to-GDP ratio, expected to be around **137.8% in 2026**, reflects temporary tax credit impacts, with a projected decrease from 2029.
- **Economic Resilience**: Italy’s current account balance remains favorable, supported by a trade surplus and a positive net international investment position. The labor market also shows resilience, with unemployment near decade lows.
- **EU Support and Reforms**: Italy's economy benefits from a diversified industrial base, eurozone stability, and strong EU backing. Despite high debt, reforms, especially through the NGEU, could boost growth potential above historical averages.
DBRS emphasized that Italy’s governance and political continuity are crucial for sustained economic improvements. The agency cited robust external balances, export strength, and enhanced banking sector resilience as stabilizing factors for Italy’s sovereign rating.
Conclusion
Fitch and DBRS’s positive outlooks reflect confidence in Italy’s ongoing economic and fiscal reforms, though both agencies highlight the importance of continued fiscal discipline and growth-focused policies to mitigate debt pressures. These revised outlooks enhance Italy's economic standing and signal a more favorable investment climate amidst ongoing structural improvements.
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Relevant Links:
https://www.fitchratings.com/research/sovereigns/fitch-revises-italy-outlook-to-positive-affirms-at-bbb-18-10-2024
https://dbrs.morningstar.com/research/422548/dbrs-morningstar-confirms-republic-of-italy-at-bbb-high-stable-trend
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