Daniele Franco, Minister of Economy
Moody’s lowers the outlook to negative and the Mef replies: “Questionable decision”
Moody’s announced the change in the outlook for the sovereign rating assigned to Italy from “stable” to “negative”. Moody’s confirmed the rating at Baa3 but indicates three reasons for the revision of the outlook: the risks for Italy’s credit profile due to the economic impact of the invasion of Ukraine by Russia and internal political developments.
According to the agency, there are greater risks than the political context hinders the implementation of structural reforms, including those contained in the National Recovery and Resilience Plan. Furthermore, there is an increased risk that energy supply problems will weaken the economic outlook; finally, there is a risk that Italy’s fiscal strength will be further weakened by slow growth, higher financing costs and potentially weaker fiscal discipline.
End of Draghi’s government and vote increase uncertainty
“The end of the Draghi government on 21 July and the early elections on 25 September 2022 (anticipated from spring 2023) increase political and programmatic uncertainty in a difficult economic and market context”. This is one of the reasons given by Moody’s for the decision to revise the outlook on Italy’s rating downwards. The outgoing government – the agency claims – has made significant progress in fully and punctually respecting the milestones and objectives contained in Italy’s NRP, requesting two installments for a total of 42 billion euros, equal to 2.4% of GDP. (in addition to the pre-financing disbursed in August 2021 for a value of 25 billion euros, equal to 1.4% of GDP). However, early elections are likely to delay the achievement of some milestones and objectives that had to be achieved by the end of 2022; these results are needed to unlock access to the next loan tranche, which amounts to € 19 billion (1.0% of GDP). According to Moody’s, “there is also a real risk that the milestones and targets set for 2023 may also be delayed”.
The reply from the Ministry of Economy
Immediate, the reaction of the Italian government. “Although the worsening of the outlook, as is well known, does not necessarily anticipate an imminent lowering of the rating and, if anything, signals a monitoring phase that can last even for many months the decision appears questionable“This was stated by the Ministry of Economy in a note.
“Even in a time of economic slowdown and geopolitical tensions at an international level, accompanied by the uncertainty relating to the political elections of 25 September – continues the Mef – Italy’s economic conditions do not justify this orientation“.
“After the most acute phase of the economic crisis caused by the pandemic – points out the Mef – Italy has achieved GDP growth rates among the highest in the European Union. After the 6.6 percent recorded last year, the acquired annual GDP growth for 2022 is 3.4 per cent, higher than the forecasts made in April in the DEF. In 2021, net debt fell significantly and more than expected. In the first seven months of the year, the state sector borrowing requirement amounted to 34.4 billion, an improvement of about 45 compared to the same period in 2021; it fell sharply also net of subsidies from the Recovery and Resilience Facility (10 billion). After falling by 4.5 percentage points in 2021 to 150.8 per cent, the debt / GDP ratio is expected to decrease significantly this year as well “.
“To this – the ministry continues – they are added progress in the implementation of the National Recovery and Resilience Plan (all targets have been achieved so far, including those regarding reforms), the trend of gross fixed investments (which grew by 17 percent in 2021 and by 13 percent in the first quarter of the year compared to the first quarter of 2021. the latest trend should also be confirmed in the second quarter), the evolution of the labor market (employment in June marks an increase of 1.8 percent compared to the previous year), the progress made in achieving the country’s energy security (the storage percentage of natural gas reserves has reached 74 percent and continues to grow steadily). Yesterday the Government intervened again to calm the cost of energy for businesses and families and to support the weakest sections of the population – without changing the public deficit target set by the DEF for 2022 “.
“The high level of Italian public debt compared to other countries is already fully reflected in the rating assigned to Italy by Moody’s. Furthermore, the worsening of economic expectations signaled by the July economic surveys is common to all advanced economies.
Regarding political factors, early elections do not constitute an anomaly in the context of European democracies. We remain confident – concludes the Mef – that the implementation of the PNRR, the policies to relaunch investments and innovation and the energy security strategy will continue quickly after the next elections “.
Moody’s estimates debt at 145% of GDP
Italy’s debt will continue to decline in 2022 thanks to strong nominal growth and deficit reduction. These are Moody’s estimates, according to which the debt / GDP ratio will stand at 145%, down from 151% in 2021, but about 11 percentage points higher than before the pandemic. The debt – underlines the rating agency, which has revised Italy’s outlook downwards – will further decrease in 2023 and will stabilize below 143% of GDP thereafter, due to the slowdown in nominal growth and higher interest payments.
Energy impact, good diversification
The significant energy dependence on gas exposes Italy to further cuts in supplies from Russia and an increase in energy prices. Moody’s underlines this in explaining the revision of the rating outlook. However, the agency also underlines the significant efforts made by Italy to diversify gas supplies and the better position compared to other European countries.
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