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S&P trusts Draghi, but focuses on the Recovery Plan: “Structural reforms are crucial”

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S&P confirms the Italian sovereign rating, at BBB, with a stable outlook. There is therefore a wait-and-see scenario on the part of the US rating agency, which reiterated last October’s choice. To date, S&P estimates for the growth of Italian GDP are an expansion of 4.7% in the current year, and 4.2% for 2022. The implementation of the resources of the Next Generation EU program will be crucial. , of which the Recovery and Resilience Facility (RRF), or Recovery Fund, is the core. However, S&P explained, a lowering is possible if economic projections, followed by fiscal consolidation, do not materialize.

Trust in the Mario Draghi government. The American rating agency, on the eve of the presentation of the National Recovery and Resilience Plan (Pnrr) to the Council of Ministers, decided to wait. First, we want to see how the European Commission will judge the Italian plan, the formal presentation of which is expected by 30 April, respecting the deadlines requested by Brussels. There are not a few variables that could provide support for the current executive. If there is an acceleration in the vaccination campaign, explains S&P, there could be a recovery in consumption. In this regard, the rating agency expects that “80% of the Italian population will be vaccinated by late autumn, leading to a strong recovery” in the last quarter of the year. At the same time, “the new Italian government is anticipating fiscal support to stimulate growth”, another element that could be crucial in the restart that will be.

However, as S&P points out, there is a chiaroscuro climate. “Our GDP growth forecasts are conservative, and reflect our assumption that the government absorbs only 50% of the 12.5% ​​of GDP in the EU recovery funding available to it, with a delay of six months” , analysts explain. In other words, the full recovery, and consequently the return to pre-Covid levels, could only occur in the course of 2022. Moreover, as highlighted yesterday by the European Central Bank (ECB), these are the basic estimates for the eurozone, which is suffering a delay in vaccination campaigns compared to the United States and the United Kingdom.

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However, there is another aspect that Palazzo Chigi will have to consider. According to S&P, “fiscal consolidation is unlikely before 2023 or 2024”. A factor that could lead, if not to a revision of the sovereign rating, to a downgrade of the outlook, from stable to negative. With therefore a perspective capable of reflecting the possible inaction of the government. Despite this, the rating agency has also left the door open to a positive situation for the country. “We could increase the rating if we see the Italian economy perform better than our current forecast. For example, through the implementation of growth-friendly structural and fiscal reforms and the effective deployment of the resources available to Italy from the Recovery and Resilience Facility (RRF). In such a scenario, Italy’s debt / GDP ratio would likely return to a downward path, but not before 2024, ”S&P wrote in the accompanying note with the rating decision.

To date, the rating agency noted, sovereign debt is on the rise, as expected after the worst recession since the Second World War to date. “Net debt relative to GDP will increase to 149% at the end of 2021, from 127% at the end of 2019”, analysts estimate. At the same time, the deficit will be 11.6% of GDP. A situation, that of the sustainability of sovereign debt, which has been known for some time. “The long-term risk to the sustainability of Italy’s debt remains the country’s low economic growth potential, aggravated by the stagnation of labor productivity over the last decade”, remarks S&P. Scenarios amplified by the economic consequences of the arrival of the Sars-Cov-2 coronavirus.

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The priority, concludes S&P, is an acceleration in structural reforms that have long been held back by a political climate that is not very prone to renewal. Several sectors considered crucial by the rating agency: judicial system, public administration, entrepreneurship, competition and tax system. All segments that have been the object of attention of the Draghi government in the design of the PNRR, which will go to Parliament on Monday and Tuesday. And that will have to be the first step for a new beginning of the Italian economy.

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