Fitch Maintains Italy's BBB Rating with Positive Outlook
Fitch Ratings has affirmed Italy's public debt rating at 'BBB' while upgrading its outlook from 'stable' to 'positive'. This decision, announced on October 18, 2024, is attributed to Italy's commendable budgetary performance and adherence to European Union fiscal commitments. The agency noted that the positive outlook reflects not only Italy's solid budgetary results but also a reduction in potential budgetary and financial risks in the medium term. Fitch anticipates a public deficit of 3.7% for 2024, a decrease from the previously projected 4.7%.
The rating agency emphasized that Italy's stability program, which outlines medium-term deficit expectations to the European Commission, is credible. It also assessed the risks of non-compliance with EU rules as limited, given that Italy's fiscal measures align with the Commission's requirements. Significant public spending measures, including increases in public sector wages and health spending, are expected to be balanced by equivalent fiscal adjustments.
Italian Government's Fiscal Strategy
In response to the positive rating outlook, the Italian government led by Giorgia Meloni is preparing a 2025 budget aimed at balancing electoral promises with necessary fiscal adjustments. The proposed budget includes €30 billion in measures, partially funded through banks. The government is projecting tax revenues of €1 billion from a new tax on insurance companies and €2.5 billion from banks, reflecting a strategic approach to bolster public finances.
Significantly, the budget proposes tax cuts for lower-income individuals, which will constitute half of the new fiscal measures. Additionally, the government plans to increase the capital gains tax on bitcoin from 26% to 42%, and expand the tax base for digital companies by eliminating existing thresholds. This indicates a proactive stance towards enhancing revenue streams while supporting lower-income citizens.
Challenges Ahead for Italy
While Fitch's outlook is positive, other rating agencies, such as S&P, continue to express concerns regarding Italy's high debt levels, projected to reach 138% of GDP by 2027. The agency highlights the structural challenges faced by Italy, including an aging population and low productivity growth, which could hinder economic investment and growth. Despite these challenges, S&P noted improvements in Italy's fiscal trajectory, projecting a potential primary balance by 2025.
As Italy navigates these fiscal challenges, upcoming evaluations from other rating agencies, including DBRS and Moody's, will be crucial in determining the future of Italy's credit ratings. Moody's currently holds the lowest rating on Italian bonds, which underscores the ongoing scrutiny of Italy's economic policies and public financial management.
