Fidest – Agenzia giornalistica/press agency

Quotidiano di informazione – Anno 33 n° 335

Italy’s fiscal policies after European elections will be critical for the sovereign rating outlook

Posted by fidest press agency su giovedì, 30 Maggio 2019

The strong showing by Lega, the party led by Matteo Salvini, in the European elections raises fresh questions about Italy’s commitment to disciplined fiscal policy as the coalition government heads into talks over the 2020 budget.
Click here to download Scope’s updated presentation on the “Italy sovereign rating outlook”The outcome of upcoming budget negotiations with the EU will be highly relevant for Italy’s sovereign rating outlook.European elections in Italy on 26 May saw Lega come in first place – with a 34% vote share – representing a significant victory over coalition partner Five Star Movement (M5S), the latter which received 17%. Forthcoming negotiations with the EU over the 2020 budget could be as contentious as last year’s disagreements over the 2019 budget.In December 2018, Scope downgraded the sovereign rating of Italy to BBB+, from A-, and assigned a Stable Outlook. At a BBB+ rating level, Scope’s evaluation on Italy is 1-2 notches higher than that from its US rating agency peers, and three notches above non-investment-grade. Scope’s next scheduled review date on Italy comes on 2 August.The outlook for Italy’s public finances is highly sensitive to any fiscal deterioration that could result from the forthcoming 2020 budget as well as future budgets through 2023 when the current government’s term in office is scheduled to expire – unless a decision is made to hold elections before then.“We anticipate a 2019 fiscal deficit of 2.6% of GDP, which would mark a deterioration from 2.1% in 2018,” says Dennis Shen, lead analyst at Scope on Italy. “This assumes 2019 growth of just 0.2% – even if this growth assumption represents a slight upward revision from an earlier forecast of 0% growth for this year.”The deficit and growth forecasts embed impacts from the “growth decree” and “sblocca cantieri” decree announced last month, alongside activation of 0.1% of GDP of spending cuts reserved in case of fiscal underperformance.
“A 2.6% of GDP deficit in 2019 would represent a significant underperformance of the 2.0% of GDP deficit the government agreed with the European Commission last December,” says Shen.Scope forecasts a slightly upward trajectory for debt-to-GDP, with public debt reaching 133.8% of GDP by 2021, from 132.2% in 2019, assuming elevated fiscal deficits over 2019-21, real growth of 0.2%, 0.6% and 0.75% in 2019, 2020 and 2021 respectively, and financing conditions held constant at current BTP yields (2.7% at the 10-year maturity, 1.9% on the 5-year).“The risk is that Italy’s debt ratio will have remained roughly stagnant during years of global economic growth like at present, only to worsen significantly come the next financial crisis,” says Giacomo Barisone, managing director of sovereign ratings at Scope.“We think the latest government forecasts for a declining debt ratio from 2020 onwards (to 130.2% by 2021) are too optimistic,” says Barisone.
“The deterioration in Italy’s fiscal dynamics exposes Italy to the risk of an Excessive Deficit Procedure being recommended by the European Commission – now with European elections out of the way,” notes Shen.“Italy’s room for manoeuvre in coming 2020 budget talks with the EU will be less than that which Italy had last year during negotiations around the 2019 budget – simply as the starting point for Italy’s deficit is now closer to the 3% of GDP limit,” says Shen. The risk of an Excessive Deficit Procedure relates to violations of the EU’s debt criterion given the significant upward revision in deficit figures, the continued non-observance of the debt brake rule, and Italy’s limited progress towards its medium-term objective of a balanced budget in structural terms (requiring an annual structural deficit improvement of about 0.6% of GDP).In the December agreement with the European Commission, it was assumed that Italy would hold its structural deficit unchanged in 2019 after exclusion of certain spending under flexibility clauses. The structural deficit will instead increase in 2019, having risen each year since 2015.The European Commission envisions Italy’s budget deficit reaching 3.5% of GDP in 2020; the IMF sees it reaching 3.4% next year. However, Scope observes that such projections for a deviation of this scale could be prevented should the government temper expansionary policy objectives later this year, including under EU and market pressure.


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