Italy’s Public Debt: A Constraint on BBB Rating, Despite Strong Economic Outlook

The DBRS Morningstar agency has confirmed Italy’s BBB (high) rating with a stable trend. Despite the effects of a more restrictive monetary policy and a weaker external context, economic growth is expected to gradually resume as household purchasing power and financial and external conditions improve. The implementation of Italy’s National Recovery and Resilience Plan is expected to help mitigate weaker residential investment over the next two years.

Italy’s public debt-to-GDP ratio fell faster than expected to 137.3% of GDP in 2023, thanks to nominal GDP growth. However, the fiscal impact of these incentives is expected to decrease in the future, but will lead to increased financial needs and a rise in Italy’s public debt/GDP ratio in the coming years. The fiscal deficit in Italy reached 7.4% of GDP in 2023, above the government’s forecast of 5.3% of GDP, largely due to the impact of tax credits such as the Superbonus.

Morningstar DBRS confirms Italy’s Bbb (high) rating with several supporting factors, including membership in the European Union and support from the European Central Bank. The economy benefits from diversification and resilience in the manufacturing sector, as well as a positive net international investment position. Although Italy’s public debt level remains high and potential GDP growth is weak, the country’s banking system is in a stronger position in terms of capitalization and net impaired assets. The credit ratings are constrained by Italy’s political context, which hinders government stability and the ability to address economic challenges.