Positive Outlook for Italy's Fiscal Path

By Sara Rossi
MILAN (Reuters) – Ratings agency DBRS on Friday revised its trend on Italy to 'positive' from 'stable', citing an expected improvement in the country's fiscal path, benefiting Prime Minister Giorgia Meloni's government.

The upgrade follows a similar move by Fitch last week and comes shortly after Rome reached an agreement with the European Commission on a seven-year budget adjustment.

The 'positive' trend indicates DBRS' belief that improvements in Italy's medium-term fiscal path mitigate risks related to a very high public debt ratio. The country's rating remains at BBB (high).

Last month, the Italian government lowered its budget deficit targets for this year and next, predicting 3.8% and 3.3% of GDP respectively, and anticipating a fall below the EU's 3% limit by 2026.

DBRS also noted Italy's better-than-expected recovery from recent shocks, enhanced labour market performance, and signs of higher-than-historical potential output growth in the euro zone's third-largest economy.

However, Italy's debt, which is the second highest in the 20-nation bloc, is projected to rise from 134.8% of GDP last year to 137.8% by 2026 before gradually decreasing. This rise is attributed to expensive home renovation incentives introduced post-COVID, known as the Superbonus.

DBRS emphasized that Italy's high debt ratio constrains its credit ratings, stating, "The country's public debt ratio and interest burden make the country vulnerable to shocks and limit fiscal space for further government measures."

The Italian economy grew by 0.7% in 2023, with most analysts predicting similar growth rates going forward, which falls below the government's official 1% target.

In June, the European Commission placed Italy, along with six other countries, under a disciplinary procedure to enforce public finance consolidation after Rome's 2023 fiscal deficit reached 7.2% of GDP, the highest in the euro zone.

S&P Global recently confirmed Italy's rating at 'BBB' with a stable outlook. Further credit rating reviews from Moody's and Scope Ratings are expected in the coming weeks.