Italy: Risk Assessment
Country Risk Rating
|A3||Changes in generally good but somewhat volatile political and economic environment can affect corporate payment behavior. A basically secure business environment can nonetheless give rise to occasional difficulties for companies. Corporate default probability is quite acceptable on average.|
Business Climate Rating
|A2||The business environment is good. When available, corporate financial information is reliable. Debt collection is reasonably efficient. Institutions generally perform efficiently. Intercompany transactions usually run smoothly in the relatively stable environment rated A2.|
Companies continue to struggle despite the strengthening recovery
After a prolonged recession, the Italian economy returned to moderate growth. However, the recovery remains weaken by the subdued world growth, as well as the rise of uncertainty and financial market volatility on the back of the UK vote to leave the European Union (EU). The growth is expected to be around 1% in 2016. The main vector for this will be domestic demand which will benefit from growing confidence. With low inflation and easier credit, household consumption should be boosted by the improving jobs situation and the unemployment rate, below 12% in 2016, in step with the reforming of the labor market (the Jobs Act in 2015) Investment is also expected to record a slight growth. However, banking issues could limit the investment recovery, unless there is a strengthening of banks and companies balances sheets. The moderate growth in European demand, the weakness of the euro and the fall in imported oil and gas prices should offset the rise in imports, consequent on strengthening domestic demand, and the depressed state of emerging markets, helping to produce a small positive contribution from trade. Insolvencies have decreased by 30% on the first quarter of 2016 compared to the previous year. Nevertheless company profitability will remain weak, especially among the smaller companies that form the basis of the economic fabric. These continue to be subject to a high level of tax and charges, an ineffective public sector, in particular in the center and south of the country, and the unwillingness to lend by the banks. Despite reforms, the legal system is slow (taking up to seven years for liquidation).
Massive public debt and delayed budgetary reform
The government is focusing on recovery ahead of fiscal consolidation. Moreover the European Commission has allowed more budgetary flexibility; this represents a budgetary margin of 0.85% of GDP in 2016. In addition, the Commission has granted a margin of 0.1 point for the security costs and to manage the migratory crisis. The public debt is likely to remain high and reach 133 % of GDP this year, thus constraining the government’s ability to maneuver. The government is looking to increased growth and lower rates to boost receipts and limit interest payments on the debt, currently running at 4% of GDP. The country will remain vulnerable to a loss of confidence by the market and a change in European monetary policy, although the relatively long term maturity of the debt and the fact that residents hold 53% of it, limit the risk.
A current account surplus
Despite the energy deficit equal to 2.5% of GDP, trade in goods and services is in surplus by 3% of GDP. This performance relies on famous brands, a top-end positioning and niche products in a variety of sectors as diverse as industrial and electrical equipment, clothing, leather goods, optics, jewelry, food products, home wares, automotive vehicles and medicines. Tourist income is significant thanks to the extensive tourism heritage, but this is offset by a sizeable deficit in terms of transport. The balance of trade surplus easily covers debt interest payments and the remittances of foreign workers.
A weakened banking system
Non-performing loans represent a high level of the portfolio 18% (EUR 360 billions). Some banks in particular are at risk: from January to July 2016, the Italian bank stock index has lost 50% of its value. Deeply affected, Monte dei Paschi di Siena has recorded a loss of 80% of its stock price over the past year. The ECB approved the rescue plan, involving the sale of 9.2 billion euros of non-performing loans and to raise capital worth of 5 billion. Unsurprisingly, the stress test results, issued on July 29th, underscored the weakness of the bank (in the sample MPS is viewed as the most at risk).
Reforms to solve the problem of governmental instability and legislative inertia
The reforms of the Prime Minister, M. Renzi, depend on a fragile center-left coalition between the Partito Democratico (PD) and Nuovo Centro Destra (NCD) parties, as well as occasional allies. The improvements in the economic situation and the impossibility of winning a clear majority with the current proportional voting system discourage political formations from seeking fresh elections. The dispersal of the right and the divergences between its leaders, S. Berlusconi for Forza Italia and M. Salvini for Lega Nord, are not likely to encourage the NCD to join them. This could all change in July 2016 with the entry into force of the new electoral law, known as Italicum, which includes a majority bonus system, then followed in October 2016 with the holding of the referendum on the ending of the bicameral system that would turn the Upper House into a consultative chamber. The issue is crucial as in case of failure M. Renzi promised to resign. Furthermore Renzi could decide not to wait until the next scheduled elections in 2018, at the risk of being defeated by a regrouped right or the Beppe Grillo’s populist Five Star Movement (which won the municipal election in Roma and Turin) possibly assisted by the Sinistra Ecologia e Libertà on the far left.