Italy's outlook improves to positive at Moody's

Moody's revised Italy's outlook to positive from stable, affirming its Baa3 long-term issuer rating, citing better-than-expected fiscal performance in 2024, domestic political stability, and a robust labor market. While Italy's high debt burden remains a constraint, the positive outlook reflects expectations for continued fiscal improvement and economic resilience, supported by a strong banking sector and improvements in external liquidity; however, a slower pace of fiscal consolidation or escalation of the war in Ukraine could reverse the outlook.

Analysis

Moody's Ratings has revised its outlook on the Government of Italy to positive from stable, while affirming the Baa3 long-term issuer and senior unsecured ratings. This revision is primarily attributed to Italy's stronger-than-anticipated fiscal performance in 2024, with a deficit of 3.4% of GDP compared to the budgeted 3.8%, driven by reduced expenditures and robust revenue growth. The stable domestic political climate enhances the probability of continued fiscal consolidation in line with the government's medium-term plan, which targets growing primary surpluses and a fiscal deficit projected to fall below 3.0% of GDP by 2026. Supporting this positive outlook are a resilient labor market, evidenced by a 6% unemployment rate in March 2025, sound household and corporate balance sheets, and a robust banking sector benefiting from strong capitalization and improved asset quality, partly due to the GACS guarantee program (which added 0.4% of GDP in contingent liabilities by end-2024). Italy's economic resilience is further supported by an improving net international investment position and a current account surplus of 1.1% of GDP in 2024. However, the Baa3 rating affirmation also considers Italy's significant public debt burden, which is expected to rise to 138.4% of GDP in 2026-2027, primarily due to stock-flow adjustments from the 'superbonus' tax credit scheme, before a projected gradual decline from 2028. Debt affordability will see interest payments to revenue increase from 8.2% in 2024 to an estimated 9.5% by 2030, though it remains strong relative to peers. The country's large, diversified economy and effective institutional framework, along with implicit support from the ECB, are key credit strengths, though structural issues such as population ageing pose long-term challenges.

Key Decisions for Investors

• Investors may consider adopting a more constructive stance on Italian sovereign debt and related financial assets, reflecting Moody's positive outlook and the potential for spread compression if fiscal improvements continue as projected.
• It is crucial to monitor Italy's fiscal trajectory, particularly the government's ability to achieve sustained primary surpluses and manage the debt-to-GDP ratio, which is forecast to peak at 138.4% in 2026/2027, as these are key determinants for maintaining the positive outlook.
• Despite the improved outlook, investors should remain cognizant of Italy's persistently high debt levels, structural economic headwinds including demographic challenges, and potential downside risks such as an escalation of the war in Ukraine or a slowdown in reform momentum, which could revert the outlook to stable.