Fitch cuts Italy's rating to a notch above junk

The ratings agency expects Italy’s gross domestic product to contract 8% in 2020

A single table outside a restaurant in Rome - Italy is gradually opening up its economy. EPA

Fitch Ratings has downgraded Italy’s sovereign rating to one notch above junk status, reflecting its concerns about the country’s creditworthiness amid the coronavirus pandemic that has battered its already fragile economy.

Fitch slashed Italy’s credit rating by a notch to 'BBB-' but revised its outlook to stable from negative. The out-of-schedule rating action came as a surprise to investors as its next review was not due until July 10.

However, it said a “material change in the creditworthiness of the issuer” meant that it would have been “inappropriate for us to wait until the next scheduled review date”.

“The downgrade reflects the significant impact of the global Covid-19 pandemic on Italy's economy and the sovereign's fiscal position,” Fitch said in a statement.

The agency expects Italy’s gross domestic product (GDP) to contract 8 per cent in 2020. It assumes the coronavirus can be contained in the second of this year, which would lead to a "relatively strong economic recovery" next year.

“In the event of a second wave of infections and the widespread resumption of lockdown measures, economic outturns would be weaker for 2020 and 2021,” it said.

Italy has been the European country hit hardest by the Covid-19 outbreak, with more than 27,000 deaths – ahead of Spain and France, which have each reported over 23,000 fatalities. After weeks of stringent lockdowns that barred the movement of people and shuttered all non-essential businesses, Italy is taking tentative steps towards a gradual reopening.

The country's economy was already facing difficulties before the pandemic, growing at only 0.3 per cent in 2019.

The stimulus measures announced so far mean the country's gross general government debt-to-GDP ratio will increase to 156 per cent this year, Fitch said, adding that according to its “baseline debt dynamics scenario, the [debt] to GDP ratio will only stabilise at this very high level over the medium term, underlining debt sustainability risks”.

Its stable outlook partly reflects its view that the European Central Bank's net asset purchases will facilitate Italy's substantial fiscal response to the Covid-19 pandemic. It will ease refinancing risks by keeping borrowing costs at very low levels, at least over the near term.

“Nevertheless, downward pressure on the rating could resume if the government does not implement a credible economic growth and fiscal strategy,” Fitch said.

The economic policy response to the pandemic and recession will force a sizeable deterioration of the budget balance this year. Fitch expects Italy's deficit to reach close to 10 per cent of GDP in 2020 compared with the better-than-expected 1.6 per cent gap recorded in 2019.

The Italian government has already announced €25 billion (Dh99.8bn) of short-term fiscal support measures and rolled out €400bn credit guarantee schemes to the private sector – about 25 per cent the country’s GDP – which is considered a contingent liability for the sovereign, Fitch noted.