fra BNPparibas
First budget concessions: Italy’s freshly agreed mediumterm fiscal plan (DEF) kept the fiscal deficit target of 2.4% of GDP for 2019 but cut the deficit targets for 2020 (-0.3pp to
2.1% of GDP) and 2021 (-0.6pp to 1.8% of GDP;
It also projects a gradual decline in public debt to 126.5% of GDP in 2021 from 132% in 2017. We see revisions in the fiscal targets as positive. It signals some sensitivity in Rome to market volatility around recent levels and to EU pressure.
But probably not enough: The market’s view of the government’s credibility has been damaged, in our opinion, while recent comments by Deputy Prime Ministers Luigi Di
Maio and Matteo Salvini suggest limited scope for further concessions.
We also think the plan relies on a number of shortcomings:
Overoptimistic economic assumptions.
Still-wide deviations from previous commitments (at
1.8% of GDP, the 2021 deficit target is considerably
worse than the 0.2% surplus targeted previously).
Backtracking on structural reforms (eg, pensions).
Likely introduction of questionable offsetting measures.
We expect the EU Commission to raise some of these concerns after receiving the budget draft (by 15 October). If, as we expect, the government fails to deliver any significant
change to the 2019 strategy, the Commission is likely to reject the budget and eventually reopen an excessive deficit procedure.
Short-term fiscal boost, long-term pain: The DEF is expansionary, we calculate to the tune of 1% of GDP overall in 2019-21, based on the information available. Without progress in structural reforms, however, we would expect the boost to GDP to prove only temporary. Tighter financing conditions are also likely to counteract some of the impact.
Overall, we expect GDP to grow by 1.2% in 2019 after 1.1% this year. We see upside risks to the 2.4% 2019 deficit target and expect the public debt/GDP ratio to fall only slightly.
Market turbulence to persist: We expect rating agencies to react negatively to the DEF, starting with a likely one notch Moody’s downgrade by end-October. More broadly,
we expect initial relief in markets to be followed by greater focus on the budget details, with BTP volatility set to persist into year-end.
