Italy's credit strength expected to improve
ROME -- The sovereign assessment is detailed in Scope Ratings’ newly published analytical report on Italy. Among the larger European economies, Scope Ratings considers Italy as having low-to-medium sovereign credit strength.
Following a long period of economic stagnation, the country is expected to rebound in 2016, supported by a surge in domestic demand and a recovery in investment. Italy benefits from a low interest rate environment, which has significantly reduced interest-related costs for the public sector and businesses, whereas low inflation boosts consumption.
Italy’s current government has resorted to a comprehensive reform agenda, and has made good progress so far in labor market and judicial system reforms. The former had a positive impact on employment, whereas the latter paves the way to cleaning balance sheets of Italian banks from the significant amount of impaired loans.
"Structural weaknesses, which have accumulated over many years and have delayed the country’s economic recovery, could weigh on further recovery," notes Ilona Dmitrieva, Scope analyst and author of the report. Specifically, these include (i) very high levels of public debt; (ii) overregulation in the labour market and in the markets for goods and services; (iii) less vigorous economic competitiveness; and (iv) government institutions still prone to political instability.
Despite the primary budget surplus – a rare achievement, in Scope’s view, for major euro area economies in post-crisis years – and historically low funding costs, the budget deficit still persists due to the very high level of public indebtedness. A rapid economic recovery and non-deflationary environment are needed to put public debt on a downward path; however, these factors are not easily combined in the Italian context. External deflationary pressure due to low oil prices is combined with a reduction in the competiveness gap, one of the primary aims of the comprehensive reform agenda pursued by the current government.
Both factors are likely to cause a fall in production costs with the downward pressure on prices. Scope believes that this in fact could worsen Italy’s public-debt problem, unless offset by rapid and sustained economic growth.
The comprehensive structural reforms currently underway – constitutional, judicial (insolvency law), labour and goods/services, public administration and the banking sector – aim to facilitate faster economic recovery. However, Scope cautions that some of these reforms may go against vested interests and thus remain incomplete or are watered down as a result.
The report is not aimed at assigning a credit rating to the Italian sovereign. Scope Ratings has stated publicly that at this time it does not plan to assign public ratings to sovereigns. However, the agency stated that it deems the analysis of Italy’s credit fundamentals to be important for its rating assessments of various issuers domiciled in the country.