London, 06 November 2020 -- Moody's Investors Service, ("Moody's") has
today affirmed the Government of Italy's local and foreign currency issuer
ratings at Baa3. The senior unsecured ratings have also been affirmed
at Baa3, for both local and foreign currency issuances. The
senior unsecured foreign currency MTN program rating and foreign currency
senior unsecured shelf rating were affirmed at (P) Baa3, while the
local currency Commercial Paper rating was affirmed at Prime-3
and the foreign currency Other Short-Term rating was affirmed at
(P)Prime-3. The outlook remains stable.
The key drivers for today's rating action are the following:
1. While growth will remain a medium-term challenge,
Italy's economy is expected to recover from the deep pandemic-induced
contraction in the first half of the year. Rising infection rates
recently may delay the recovery into 2021, but the ECB's supportive
monetary policy stance and the EU recovery funds will provide important
support to the economy in the coming years;
2. Italy's debt burden is rising substantially this year
and will remain very high for many years, which is an important
constraint on the rating. However, Moody's expects
that recovering growth combined with the temporary nature of many of this
year's emergency measures will allow the budget deficit to fall
in the coming years and support a gradual reduction in the public debt
ratio. The very favourable funding environment ensures that Italy
will continue to benefit from strong debt affordability, an important
mitigating factor for its elevated debt levels.
The stable outlook balances Italy's continuing strengths,
such as its large, diversified economy and in particular its competitive
manufacturing sector as well as high household wealth levels, against
long-standing weaknesses including the very high debt burden,
which now is an even larger vulnerability than it has been in the past,
and relatively weak policy effectiveness. It also reflects the
view that the political situation will remain somewhat more predictable
than it has been for several years, which could be conducive for
the implementation of structural reforms in the context of the EU recovery
funds.
The long-term local and foreign currency bond and deposit ceilings
are unaffected by today's rating action and remain at Aa3.
The short-term foreign currency bond and deposit ceilings are unchanged
at Prime-1.
Please click on this link https://www.moodys.com/viewresearchdoc.aspx?docid=PBC_ARFTL435673
for the List of Affected Credit Ratings. This list is an integral
part of this Press Release and identifies each affected issuer.
RATINGS RATIONALE
RATIONALE FOR AFFIRMATION OF THE Baa3 RATINGS
FIRST DRIVER: ECONOMIC RECOVERY HELPED BY SUPPORTIVE MONETARY POLICY
AND EU RECOVERY FUNDS BUT LONGER-TERM CHALLENGES REMAIN
In the near term, Italy's growth outlook remains determined
by the pandemic. After a deep contraction in the first half of
the year when GDP contracted by 11.6% (compared to Q4 2019),
economic growth rebounded strongly by 16.1% in the third
quarter, mainly reflecting a strong recovery in the manufacturing
sector. Since then, rising infection rates and the re-introduction
of mobility restrictions have increased downside risks and may delay the
recovery into 2021. However, the government has also implemented
substantial policy measures to support liquidity, incomes and employment.
Bank lending has continued to expand, a sharp contrast to the aftermath
of the global financial crisis and the euro area debt crisis, and
important in a country like Italy with a strong predominance of bank loans.
Existing short-time work schemes have been extended and their use
simplified, and they have been effective in containing the loss
of employment. These policies give some comfort that the permanent
damage to the economy can be contained.
Looking beyond this year, the ECB's supportive monetary policy
stance and the substantial EU recovery funds will provide important support
to the economic recovery. Italy will be a key beneficiary of the
so-called Next Generation EU (NGEU) funds, and will also
benefit from the EU's other support packages. In total,
Italy stands to receive the equivalent of around 13.2% of
Moody's forecast 2021 GDP, with the majority of the funds
likely to be disbursed over the 2022-2024 period. These
are significant sums that will bolster Italy's public investment
- which has been almost continuously declining over the past decade
- and economic growth in the coming years. This assumes
that the Italian authorities will follow through on planned measures to
improve the efficiency of public procurement and the public administration
more generally, as well as streamline public investment processes.
However, while the EU funds should help to compensate for the lost
economic output due to the pandemic, they will do little to durably
improve Italy's modest growth performance, if not accompanied
by structural economic reforms that address the obstacles behind weak
productivity growth.
SECOND DRIVER: ECONOMIC RECOVERY WILL SUPPORT GRADUAL DEFICIT AND
DEBT REDUCTION; ELEVATED DEBT BURDEN WILL REMAIN A RATING CONSTRAINT
ALTHOUGH PARTLY OFFSET BY STRONG AFFORDABILITY METRICS
Stronger economic growth over the coming years should in turn help to
reduce the budget deficit and the public debt ratio, from this year's
historically high ratio of close to 160% of GDP. While the
fiscal policy stance will remain highly expansionary, Moody's
expects the budget deficit to shrink from this year's estimated
shortfall of 11.4% of GDP to around 7% of GDP next
year. This is due to the temporary nature of many of this year's
emergency spending measures coupled with the rebound in growth and tax
revenues.
In addition, debt interest spending will decline further,
as the ECB ensures continued favourable funding conditions for euro area
governments. Moody's expects that the share of revenues dedicated
to debt interest -- a key indicator for the affordability of the
debt -- will stand at 7.3% at the end of next year,
similar to the level in 2019 and the median of Baa-rated peers.
Importantly, this ratio is much lower today than it was in 2012
(10.8%), at the height of the euro area debt crisis.
Above-trend growth and low funding costs will allow Italy's
debt ratio to slowly decline, reaching close to 150% of GDP
by 2024 under Moody's baseline assumptions. However,
this would still leave Italy's public debt burden very elevated
and a material vulnerability from a rating perspective.
The government has recently outlined its broad fiscal policy aims for
the coming years, which assume continuing fiscal expansion during
the next two years, followed by a gradual fiscal consolidation from
2023 onwards as the impact of the pandemic fades. A reform to the
personal income tax system is planned for 2022, with the aim to
lower the high tax burden on labour and simplify the tax system.
More details are likely to emerge in the coming months as the Italian
government presents its reform plan to the European Commission in the
context of the NGEU. Of interest from a credit risk perspective
will be the multi-year plan's effectiveness in supporting
the recovery and sustaining growth in the rest of the decade while generating
budgetary outcomes that gradually reverse the debt buildup.
RATIONALE FOR MAINTAINING THE STABLE OUTLOOK
The stable outlook reflects several considerations: Firstly,
Italy's economic structure remains an important strength,
with a large, very diversified and competitive manufacturing sector,
which has shown its capacity to rebound swiftly. High household
wealth levels provide a much stronger cushion in the current shock than
exists for any other peer at the same rating level. Secondly,
the political situation is calmer than it has been for several years,
which could be conducive for the implementation of structural reforms
in the context of the EU recovery funds. However, Moody's
also notes that Italy's track record in pursuing such reforms has
been halting at best in the past.
Thirdly, while Italy will undoubtedly emerge from the pandemic-induced
shock with a materially higher debt ratio, the benign funding conditions
and high affordability of the public debt give the government some breathing
space to address vulnerabilities stemming from its very elevated public
debt levels. In line with other advanced economies and key to informing
its credit view on Italy, Moody's will closely monitor the
strength and durability of the country's economic recovery and whether
the government's fiscal strategy will ensure a consistent reduction
in the high public debt level over the medium-term. Italy's
track record in this regard is not encouraging; Italy last managed
to reduce its public debt ratio consistently in the early 2000s,
since then the ratio has stabilised at best in years of above-average
growth.
ENVIRONMENTAL, SOCIAL, AND GOVERNANCE CONSIDERATIONS
Moody's takes account of the impact of environmental (E), social
(S), and governance (G) factors when assessing sovereign issuers'
economic, institutional, and fiscal strength and their susceptibility
to event risk. In the case of Italy, the materiality of ESG
to the credit profile is as follows.
Environmental considerations are not currently material to the rating.
Social factors are material in determining Italy's credit profile.
The most relevant social factors relate to the impact of an ageing population
combined with low labour force participation rates on labour supply and
potential growth. The fiscal impact is less of a concern given
material pension reforms that should reduce pension spending over the
coming decades. Italy's education system has also been long
identified as in need of reforms. Moody's regards the coronavirus
outbreak as a social risk under its ESG framework, which is negatively
affecting Italy's growth and fiscal metrics. The significant
EU funds that Italy stands to receive are however an important mitigating
factor.
Governance factors are material in determining Italy's credit profile,
and form an integral part of our assessment of institutional strength.
Italy's institutional strength scores are broadly in line with global
peers, but the country's governance scores tend to be relatively
weak for an EU member state.
GDP per capita (PPP basis, US$): 44,161 (2019
Actual) (also known as Per Capita Income)
Real GDP growth (% change): 0.3% (2019 Actual)
(also known as GDP Growth)
Inflation Rate (CPI, % change Dec/Dec): 0.5%
(2019 Actual)
Gen. Gov. Financial Balance/GDP: -1.6%
(2019 Actual) (also known as Fiscal Balance)
Current Account Balance/GDP: 3% (2019 Actual) (also known
as External Balance)
External debt/GDP: 124.5% (2019 Actual)
Economic resiliency: a2
Default history: No default events (on bonds or loans) have been
recorded since 1983.
On 03 November 2020, a rating committee was called to discuss the
rating of the Government of Italy. The main points raised during
the discussion were: The issuer's economic fundamentals, including
its economic strength, have not materially changed. The issuer's
institutions and governance strength, have not materially changed.
The issuer's fiscal or financial strength, including its debt profile,
has not materially changed. The issuer's susceptibility to event
risks has not materially changed.
FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS
Italy's main underlying credit challenge is structurally weak GDP
growth. The outlook on the rating could be changed to positive
and the rating be ultimately upgraded if the Italian authorities were
to put in place a wide-ranging and ambitious programme of structural
reforms that gives confidence that the Italian economy will be able to
grow at a sustained stronger pace beyond the stimulus provided by the
EU recovery funds. In principle, access to the EU funds will
be conditional on such reforms, and with Italy's political
situation being more stable than it has been for some time, there
may be a stronger impetus for reforms than in the past.
Conversely, the rating would come under downward pressure if Italy
was not able to take advantage of the significant EU resources at its
disposal. The inability to implement high-quality investment
projects would imply a return to Italy's very subdued growth performance
earlier than Moody's expects under its current baseline scenario.
In such a scenario, the public debt ratio would likely trend upward
from its already very elevated levels. Relatively small shocks
-- to economic growth, budgetary outturns or possibly arising
from contingent liabilities as a result of the large pandemic-related
liquidity support -- would likely lead to a rising debt trend and
would put downward pressure on Italy's rating. Similarly,
political dynamics which led to a shift in fiscal policy that negatively
affected market sentiment and caused debt levels to rise over the medium
term would lead to downward rating pressure.
The principal methodology used in these ratings was Sovereign Ratings
Methodology published in November 2019 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1158631.
Alternatively, please see the Rating Methodologies page on www.moodys.com
for a copy of this methodology.
The weighting of all rating factors is described in the methodology used
in this credit rating action, if applicable.
REGULATORY DISCLOSURES
The List of Affected Credit Ratings announced here are a mix of solicited
and unsolicited credit ratings. Additionally, the List of
Affected Credit Ratings includes additional disclosures that vary with
regard to some of the ratings. Please click on this link https://www.moodys.com/viewresearchdoc.aspx?docid=PBC_ARFTL435673
for the List of Affected Credit Ratings. This list is an integral
part of this Press Release and provides, for each of the credit
ratings covered, Moody's disclosures on the following items:
• Rating Solicitation
• Issuer Participation
• Participation: Access to Management
• Participation: Access to Internal Document
• Disclosure to Rated Entity
• Endorsement
• Lead Analyst
• Releasing Office
For further specification of Moody's key rating assumptions and
sensitivity analysis, see the sections Methodology Assumptions and
Sensitivity to Assumptions in the disclosure form. Moody's
Rating Symbols and Definitions can be found at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.
For ratings issued on a program, series, category/class of
debt or security this announcement provides certain regulatory disclosures
in relation to each rating of a subsequently issued bond or note of the
same series, category/class of debt, security or pursuant
to a program for which the ratings are derived exclusively from existing
ratings in accordance with Moody's rating practices. For ratings
issued on a support provider, this announcement provides certain
regulatory disclosures in relation to the credit rating action on the
support provider and in relation to each particular credit rating action
for securities that derive their credit ratings from the support provider's
credit rating. For provisional ratings, this announcement
provides certain regulatory disclosures in relation to the provisional
rating assigned, and in relation to a definitive rating that may
be assigned subsequent to the final issuance of the debt, in each
case where the transaction structure and terms have not changed prior
to the assignment of the definitive rating in a manner that would have
affected the rating. For further information please see the ratings
tab on the issuer/entity page for the respective issuer on www.moodys.com.
For any affected securities or rated entities receiving direct credit
support from the primary entity(ies) of this credit rating action,
and whose ratings may change as a result of this credit rating action,
the associated regulatory disclosures will be those of the guarantor entity.
Exceptions to this approach exist for the following disclosures,
if applicable to jurisdiction: Ancillary Services, Disclosure
to rated entity, Disclosure from rated entity.
Regulatory disclosures contained in this press release apply to the credit
rating and, if applicable, the related rating outlook or rating
review.
Moody's general principles for assessing environmental, social
and governance (ESG) risks in our credit analysis can be found at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1133569.
Please see www.moodys.com for any updates on changes to
the lead rating analyst and to the Moody's legal entity that has issued
the rating.
Please see the ratings tab on the issuer/entity page on www.moodys.com
for additional regulatory disclosures for each credit rating.
Kathrin Muehlbronner
Senior Vice President
Sovereign Risk Group
Moody's Investors Service Ltd.
One Canada Square
Canary Wharf
London E14 5FA
United Kingdom
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454
Yves Lemay
MD-Sovereign/Sub Sovereign
Sovereign Risk Group
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454
Releasing Office:
Moody's Investors Service Ltd.
One Canada Square
Canary Wharf
London E14 5FA
United Kingdom
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454
