Fidest – Agenzia giornalistica/press agency

Quotidiano di informazione – Anno 32 n° 289

Posts Tagged ‘sovereign’

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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Italy’s expansionary budget goals add to growing risks to sovereign rating

Posted by fidest press agency su giovedì, 4 ottobre 2018

Italian public debt stood at 133.4% of GDP as of Q1 2018, 31pp above Q1 2008 levels. Italy’s debt ratio has remained high after reaching about the current level in 2014 despite sustained economic recovery since then. The limited scope for fiscal slippage is exhibited in difficulties reducing debt-to-GDP even during good economic times: Italy grew 1.2% YoY in Q2 2018, above Scope’s estimate of potential growth for Italy of 0.75%.
“A failure to firmly improve fiscal sustainability while Italy is growing above potential could leave the economy exposed to significant risk come a future downturn,” says Dennis Shen, analyst at Scope Ratings. “Significant pro-cyclical fiscal expansionary policy is a mistake at this later stage of the global cycle, as it increases the likelihood of pro-cyclical fiscal austerity becoming needed in a recession, amplifying the hardships of that recession.”
Higher spending and lower taxes curtail future fiscal space while increased government borrowing and higher interest rates could crowd out private investment and consumption.
Scope has noted, for instance, that the IMF’s baseline for a gradual decline in Italy’s debt ratio to 116.6% by 2023 is optimistic, as this assumes budget balances improving from an estimated -1.6% in 2018 to a balanced position by 2021-23 alongside uninterrupted economic growth to 2023. If, for example, the fiscal deficit were raised to 2.4% of GDP and held at that level from 2019 onward, the debt ratio edges down only slightly to 127% of GDP by 2023, assuming nominal growth averages 2.4% over this period. The debt ratio could climb well above 145% of GDP in a ‘stressed’ scenario in which Scope assesses the impact on Italy’s public-sector balance sheet under conditions of a global economic shock (with the effect of two years of recession in Italy and associated deterioration in the fiscal balance) alongside a simultaneous spike in market financing rates. Viewed holistically, Scope assesses debt sustainability risks as material. “The likelihood of Italy’s debt ratio taking an overall upward slope over a five-year horizon is non-negligible,” says Shen. Scope awaits details of the new fiscal measures included in the 2019 budget alongside the published Update to the Economic and Financial Document as the budget is due to be submitted to the European Commission by 15 October. At this coming stage, Scope will evaluate the degree of a positive growth impulse based on the composition of the measures.In Scope’s view, even though the government has held the 2019 fiscal deficit target to under the 3% of GDP Maastricht level, the significant upward revision in deficit objectives, continued non-observance of the debt brake rule, and a breach of Italy’s progress towards its medium-term objective of a balanced budget in structural terms (requiring an annual structural adjustment of about 0.6% of GDP) risk nonetheless a new Excessive Deficit Procedure. The structural deficit is now slated to weaken to above 2% of GDP in 2019.Party leaders Luigi Di Maio and Matteo Salvini have staked considerable political capital on the elevated budget deficit goal so it may be hard to see them easily reversing course in the near term. From the EU’s perspective, any future consideration of sanctions (of 0.2% of GDP alongside available temporary suspension of European structural and investment fund inflows) must also crucially consider the impact on the May 2019 European parliamentary elections. The degree of market pressure (Italian 10-year bond yields have risen to 3.4%, the highest since 2014) and warnings regarding the budget’s consistency with the Italian Constitution will likewise prove consequential to any budgetary amendments.On 8 June, Scope affirmed Italy’s sovereign rating of A- but revised the Outlook to Negative from Stable. Italy’s ratings reflect both credit strengths including a 6.9-year average public debt maturity with nearly 70% of debt held by the resident sector, as well as vulnerabilities like gross government financing needs of 21.3% of GDP in 2019 – the highest in the EU. (by Scope Ratings GmbH is part of the Scope Group)

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