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Bulletin: New Italian Government Could Bring Important Policy Shifts

Bulletin: New Italian Government Could Bring Important Policy Shifts

MADRID (S&P Global Ratings) Sept. 4, 2019--S&P Global Ratings said today that the announcement of a new Italian government coalition between Movimento Cinque Stelle and Partito Democratico, to be led by Prime Minister Giuseppe Conte, could pave the way for important policy adjustments, including critical budgetary plans for 2020. For the present, however, the announcement of a new government does not change our ratings on Italy (unsolicited; BBB/Negative/A-2).

Positively, the formation of the coalition government avoids the need for new elections this year, which would have reduced the already limited time available for negotiating and approving the critical 2020 budget. By potentially negotiating more flexible fiscal targets in return for commitments to key structural reform measures to boost growth, the new coalition may also be able to enhance coordination between Italy and the EU institutions on key budgetary and structural policies. In our view, such a policy shift could improve Italy's credit metrics, assuming that the coalition can serve the full parliamentary term (until 2023).

During the first half of 2019, the Italian economy showed mixed signals. Despite weaker demand for autos and auto-related components across Europe over that period, exports were up by close to 3% in euro terms. Moreover, employment indicators have stayed benign, with stability in the number of job vacancies across most sectors through June 2019 leading to a decline in the unemployment rate to single digits. Nevertheless, during the second quarter of 2019, Italy's GDP growth decelerated to 0% compared with the previous quarter. Although this quarterly performance is better than that of some of Italy's key trading partners--including Germany and the U.K.--it is considerably below the 0.5% average for the Organization for Economic Cooperation and Development (OECD) in the same period.

At 132% of GDP, Italy's general government public debt is the third highest in the OECD after Japan and Greece. However, we take more than public debt figures into account when assessing sovereign creditworthiness. Private debt and savings levels matter as well. Indeed, our past research suggests that the most useful indicator of sovereign creditworthiness is the country's net external position in relation to the rest of the world, rather than the ratio of debt to GDP. As of first-quarter 2019, Italy's net external liability to the rest of the world was 2.5% of GDP, which is essentially in balance. That figure compares with larger net external debtor positions for France, Portugal, Spain, and the U.K. (see table).

Italy Versus Other EU Nations: External Creditor Or Debtor?
--Net international investment position--
(mil. €) % of GDP
Germany 2,217 64
Belgium 225 48
Italy (45) (3)
U.K. (224) (9)
France (506) (21)
Spain (945) (75)
Portugal (205) (99)
Source: Eurostat.

For the full rationale for our ratings on Italy, see "Research Update: Italy 'BBB/A-2' Ratings Affirmed; Outlook Negative," published April 26, 2019, and "European Developed Sovereign Rating Trends For Midyear 2019," published July 25, 2019.

This report does not constitute a rating action.

This unsolicited rating(s) was initiated by a party other than the Issuer (as defined in S&P Global Ratings' policies). It may be based solely on publicly available information and may or may not involve the participation of the Issuer and/or access to the Issuer's internal documents. S&P Global Ratings has used information from sources believed to be reliable based on standards established in our policies and procedures, but does not guarantee the accuracy, adequacy, or completeness of any information used.

Primary Credit Analyst:Frank Gill, Madrid (34) 91-788-7213;
Secondary Contact:Marko Mrsnik, Madrid (34) 91-389-6953;
Media Contact:Paola Valentini, Milan + 39 02 721 11245;
Additional Contact:EMEA Sovereign and IPF;

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