Moody’s confirms Italy’s rating at Baa3, raises outlook to stable

This is what the rating agency writes in a note. “I welcome this evening’s ruling with great satisfaction. It is a confirmation that, despite many difficulties, we are working well for the future of Italy”, comments the Minister of Economy Giancarlo Giorgetti

The Moody’s agency confirms Italy’s ‘Baa3’ rating and raises the outlook to ‘stable’ from ‘negative’. This is what we read in a note from the agency. The decision, explains the classification agency, “reflects a stabilization of the prospects for the country’s economic strength, the health of the banking sector and the dynamics of public debt. The medium-term cyclical economic prospects continue to be supported by the implementation of the Italy’s national recovery and resilience plan and risks to energy supplies have diminished, partly thanks to the government’s strong policy action. Improvements in the banking sector, which Moody’s says should be sustained, also support cyclical economic growth. Once again, sustained positive GDP growth in the coming years reduces the risk of a substantial and rapid deterioration in fiscal soundness.”

Giorgetti satisfied

“I welcome this evening’s ruling with great satisfaction. It is a confirmation that, despite many difficulties, we are working well for the future of Italy”. Thus the Minister of Economy Giancarlo Giorgetti comments on Moody’s ruling. “Therefore, in light of the opinion expressed by Moodys and other rating agencies, we hope that the government’s prudent, responsible and serious budget policies, despite the legitimate criticism of a democratic system, will also be confirmed by Parliament”.

Deficit and debt

“Italy’s debt levels will remain high. Reducing the deficit in the coming years will be essential for the future debt trajectory given the differential between nominal growth and interest rates will return negative in 2025, requiring Italy to run a primary surplus to stabilize the debt”. Moody’s states this in its opinion note on Italy.
“Despite the persistence of relatively large deficits, albeit gradually reducing, the prospects for cyclical growth in the coming years reduce the risk of a rapid and substantial deterioration in Italy’s fiscal strength”, writes the rating agency which believes that ” Government debt will decline in 2023 due to still strong nominal growth and deficit reduction.” The ratings agency expects the debt-to-GDP ratio to be 140.3% in 2023, down from 141.7% in 2022 but about 6 percentage points higher than before the pandemic. “Debt will remain broadly stable around this level until the end of this decade,” the agency continues.

The rating agency explains that it does not include revenues from privatizations in its forecasts, which therefore represent a source of potential, albeit limited, outperformance compared to the baseline scenario.

Moody’s recalls that the cost of financing Italian public debt “has increased significantly” and “the high annual financing requirement means that the higher cost of debt is passed on relatively quickly”. Moody’s expects interest costs to eat up 8.1% of revenue in 2023, up from 8.9% in 2022 due to lower payments on inflation-linked debt, and then rise to 9.7 % by 2027, essentially returning to 2013 levels.

The Pnrr

“Moody’s sees the Pnrr as a once-in-a-generation opportunity to strengthen growth and implement specific reforms. For Italy, the credit risks – writes the rating agency – associated with inefficient execution of macroeconomic policies are significant because it is the EU country most at risk of the interest rate-growth differential setting in motion an adverse debt dynamic”. “We had anticipated some difficulties in implementing the Pnrr – adds Moody’s -. However, the delays in disbursing the third installment of EU funds and the significant revisions proposed reveal greater weaknesses” than Moody’s had expected.