Moody's: Italy set to benefit from reforms, though debt to GDP ratio to decline only gradually

Italy's (Baa2 stable) economy is gradually recovering, but its growth trajectory will likely remain low in the coming years, says Moody's Investors Service in a report published today. The rating agency expects that the muted economic growth prospects will result in a gradual decrease of the country's very high debt burden.

Under its baseline scenario, Moody's projects that Italy's debt burden will remain sizeable, peaking at 134.6% of GDP in 2015 before declining to around 130% in 2018, compared with 127.9% at the end of 2013. Moody's forecasts incorporate its expectation that Italy's economic growth will likely be flat in 2015, before recording a modest increase to an average of 1% in 2016-18.

Upside risks to Moody's economic growth outlook in 2015 are related to the low oil price and the weakening euro, while key downside risks stem from a geopolitical event, lower than expected global growth and negative news from other euro area members, says Moody's.

However, structural reforms will likely progress further and could positively impact the economic and business environment, in Moody's view. The government has made progress to advance structural reforms with regard to the labour market, the tax system, the electoral system and the institutional set-up.

Moody's also notes that the government has a track record of achieving primary fiscal surpluses (the fiscal balance excluding interest payments), despite its low GDP growth rates and frequent government changes. The rating agency expects Italy to achieve primary surpluses of around 2% on average in 2015-18. This supports Italy's fiscal consolidation efforts, which have slowed but are scheduled to resume more forcefully from 2016 onwards, says Moody's.

Fiscal consolidation is also supported by measures taken by the European Central Bank (ECB), which will likely continue to benefit Italian government bond yields, says Moody's. The ECB's support in times of crisis also limits Italy's susceptibility to government liquidity risk, according to the rating agency.