Standard & Poor's Upgrades Italy's Outlook to Positive, Citing Fiscal Progress and Economic Resilience

ROME - Ekhbary News Agency

Standard & Poor's Upgrades Italy's Outlook to Positive, Citing Fiscal Progress and Economic Resilience

In a significant affirmation of Italy's economic trajectory, the global credit rating agency Standard & Poor's (S&P) has confirmed the nation's 'BBB+' long-term credit rating while simultaneously elevating its outlook from stable to positive. This decision, announced through the agency's official channels, signals a growing confidence in Italy's capacity for sustained economic stability and fiscal consolidation, even amidst a complex global economic landscape.

The announcement was met with cautious optimism by Italian authorities. Giancarlo Giorgetti, the Minister of Economy and Finance, lauded the decision, stating, “The trajectory of greater credibility for Italy knows no stops. Work pays off.” His comments underscore the government's commitment to fiscal discipline and structural reforms, which appear to be gaining recognition from international financial bodies.

S&P's positive outlook is underpinned by several key factors that reflect Italy's evolving economic fundamentals. Central to their assessment is the expectation that Italy's robust and diversified private sector will continue to generate substantial current account surpluses. This trend is crucial for enhancing the economy's net creditor position relative to the rest of the world, thereby strengthening its external financial standing. Furthermore, the agency anticipates a gradual reduction in the public sector's net indebtedness, a critical step towards placing Italy's high public debt on a sustainable, albeit slow, downward trajectory, projected to commence in 2028.

The agency's analysis delves into the intricate details of Italy's fiscal health. S&P forecasts that the country's deficit-to-GDP ratio is set to fall below the crucial 3% threshold by 2026, with only marginal reductions anticipated in subsequent years. This projection indicates a steady, albeit challenging, path towards compliance with European Union fiscal rules. Notably, analysts observe that Italy is expected to record primary surpluses from 2024 onwards, a testament to the government's efforts to generate more revenue than it spends, excluding interest payments on its debt.

A significant point of concern in recent years has been the financial impact of the 'Superbonus' scheme, a generous tax incentive program for home renovations. S&P acknowledges that cash outflows related to the Superbonus will continue to weigh on Italy's cash balance between 2026 and 2028. However, the agency provides reassurance, noting that the impact of these outflows is gradually attenuating and is expected to dissipate entirely by 2028-2029. This gradual easing of a major fiscal strain is a vital component of the improving outlook.

Despite these positive developments, Italy's elevated public debt remains a focal point. S&P estimates that the Italian public debt, projected to be 136% of GDP in 2025, is set to increase slightly until 2027 before embarking on a gradual phase of reduction. This nuanced forecast highlights the long-term nature of Italy's debt challenge, requiring sustained fiscal prudence and economic growth to manage effectively.

The political landscape also forms an integral part of S&P's assessment. The agency notes that political competition, both within the ruling coalition and among opposition parties, is likely to intensify as the general elections in December 2027 draw closer. This heightened political rivalry is expected to limit the ambition and scope of significant structural reforms, potentially slowing down critical policy advancements. However, S&P downplays the potential impact of the 2026 municipal elections, suggesting they are unlikely to materially influence national politics.

Prime Minister Giorgia Meloni's administration has signaled an intention to amend electoral law, including proposals for a stronger majority bonus aimed at enhancing governability. Nevertheless, S&P analysts express skepticism regarding the prospects of these reforms being approved, citing limited political support and potential constitutional hurdles. The ability to enact meaningful electoral reforms could be crucial for future political stability and effective governance.

On the budgetary front, S&P asserts that Italy's budget consolidation is firmly on track. The agency projects a marginal decrease in the budget deficit to 2.9% of GDP in 2026, down from an estimated 3.0% in 2025. This improvement is attributed to a combination of fiscal measures. These include extraordinary taxes levied on banks and insurance companies, a more rigorous application of VAT regulations, and adjustments to the taxation of short-term rentals and regimes for high-net-worth individuals. These revenue-generating measures are expected to largely offset planned cuts to income taxes for middle-income earners, reductions in employer-paid social security contributions, and support for low-income households. Looking further ahead, S&P anticipates continued fiscal improvement, forecasting a reduction in the budget deficit to 2.7% of GDP by 2029.

The positive outlook from S&P serves as a significant vote of confidence in Italy's economic resilience and its government's fiscal management strategies. While challenges persist, particularly concerning the high public debt and the complexities of the political environment, the agency's revised assessment suggests that Italy is moving in the right direction, supported by a dynamic private sector and a determined effort towards budgetary consolidation. This development could pave the way for increased investor confidence and provide a more stable foundation for future economic growth within the Eurozone.

Ekhbary News Agency