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Investing.com -- Fitch Ratings has confirmed Italy’s Long-Term Foreign-Currency (LTFC) Issuer Default Rating (IDR) at ’BBB’, maintaining a positive outlook. The rating is bolstered by Italy’s large, diversified and high value-added economy, eurozone membership, and strong institutions. These strengths counterbalance weak macroeconomic and fiscal fundamentals, particularly high government debt and low growth potential.
The positive outlook reflects decreased medium-term fiscal and financing risks from high debt levels due to improved political stability and fiscal management. It also indicates some expected resilience and rating headroom amid economic and public finance challenges from heightened external risks and geopolitical uncertainties.
Italy has consistently exceeded its fiscal targets, demonstrating prudent policymaking and a commitment to meeting EU fiscal rules. In 2024, the general government fiscal deficit was 3.4% of GDP, surpassing Fitch’s forecast of 3.7% and the government’s October forecast of 3.8%. This outperformance was largely driven by increased revenues from a robust labor market, improved tax collection, and strong corporate income tax revenue.
Fitch expects fiscal deficits to narrow to 3% of GDP in 2025 and 2.7% in 2026. These predictions are broadly unchanged from their last review as gains from improved revenue performance are offset by a weaker growth outlook and higher financing costs.
The fiscal consolidation plan, which relies on savings measures already included in legislation, is considered credible. The 2025 budget incorporates new deficit-raising measures partially financed by offsetting measures. This budget, along with the government’s prudent assumptions, indicates some upside for fiscal outcomes.
Italy’s defense expenditure was a modest 1.5% of GDP in 2024. Fitch expects that defense spending could reach 2% of GDP within the forecast period, facilitated by the reclassification of existing expenditure or further fiscal consolidation. However, they do not anticipate additional defense spending that would increase national debt.
Italy’s debt-to-GDP ratio was 135.3% of GDP in 2024, more than twice the ’BBB’ median of 54.7% of GDP. Despite this, debt reduction momentum has been strong, with Italy returning its debt to pre-pandemic levels.
Italy’s political environment has been stable since the 2022 general election, providing a platform for medium-term economic and fiscal planning. This stability is expected to continue, supporting fiscal consolidation and increasing fiscal credibility.
Despite rapidly unfolding US tariff hikes, Fitch believes Italy could be more resilient to tariffs than other EU members due to the structure of its exports. Their growth forecasts of 0.5% in 2025 and 0.8% in 2026, following 0.7% growth in 2024, factored in a 15% tariff on exports to the US and 7.5% on imports from the US.
As of the end of 2024, Italy’s economy was 5.9% above its pre-pandemic levels in real terms, compared with 4.9% for the eurozone. The banking sector is expected to maintain strong fundamentals through 2026, with adequate impaired loan ratios and resilient profitability, despite declining interest rates.
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