Resilience, reform, confidence: the rise of a recovering Italy
The Banker, 10 February 2016
Italy has weathered a severe economic storm over the past few years but, with the help of foreign investment, the country is now on track to regain its strength and competitiveness, writes Fabio Gallia, CEO of Cassa Depositi e Prestiti.
If I were asked to describe what has happened in Italy since 2008 – during seven years of deep economic and financial crisis – I would not just make reference to the dramatic – a 10% drop in the country's gross domestic product (GDP) – but I would go deeper. I would make reference to other significant data points.
The number of new cars sold receded to levels last seen in the 1970s, and cement production decreased to levels reminiscent of the 1960s. Since the beginning of the crisis in 2008, some 800,000 jobs have been lost in the real estate sector. This is another way of looking at the past few years, and I believe it adds a stronger, bitter flavour, and helps others to understand how severe the crisis was in my country.
Moving forward to the present situation, I would prefer to use keywords to describe what Italy is doing now and how it is recovering. The three words I would use are resilience, reforms and confidence.
Resilience: a united front
Historically, the Italian economy has shown strong resilience. In the aftermath of the crisis, the 'export-led' growth model, which characterised the Italian economy in the entire post-World War II period, is still in place. Italian exports amount to about €400bn and are growing at an annual rate of 4.4%. The country's industrial base is strong, and it reacted positively to the adverse economic conditions and now continues to compete in the international markets. (Italian industry has the second largest market share in the euro area after Germany, while its overall export market share ranks third after Germany and France).
Households in Italy remain financially solid and hold low levels of debt, especially when compared to other European countries. The net wealth of Italian households is close to €9000bn, while their indebtedness is equal to about 80% of disposable income. The strong role played by families, through intergenerational support, allowed the country to withstand the crisis and resultant high levels of youth unemployment in a cohesive way.
The country has the highest number of Unesco heritage sites in the world, which makes it a key player in global tourism. In 2014, it ranked fifth in the world in terms of tourist numbers, with 48 million visitors, and sixth in terms of tourist expenditure.
Reforms: a work in progress
The Italian government is committed to an ambitious reform agenda, of which 70% is already said to have been implemented. The structural reforms, both complete and under way, involve the labour market, institutional and political framework, tax system, banking sector, judicial system, spending review process and a large privatisation programme of state-owned enterprises, among others.
The reforms are going in the right direction, and I am sure that once all in place, they will raise the efficiency of our economy greatly. Recent reforms to the pension system improved sustainability, by increasing the retirement age and reducing the gap between contributions and retirement income.
Thanks to the strong fiscal consolidation policies introduced by the government, and the willingness of the Italian population to make sacrifices, public finances are now under control, and the tensions we saw in the sovereign debt market at the end of 2011 are fortunately only memories of the past.
Even though the public debt-to-GDP ratio reached 133% in 2015, it is expected to decrease by 2016, thanks to the government budget deficit standing at less than 3% and a large primary surplus. This general improvement in public finance neutralised the fiscal stance, stimulating internal demand (i.e. private consumption and gross fixed investment) over the course of 2015.
Italy is not performing well in global competitiveness rankings, but I am confident that in a few years this set of reforms will ignite a structural improvement.
Confidence: growing steadily
Following three consecutive years of recession, Italy's economy is finally recovering. The real GDP growth rate is expected to be positive, if still weak, in 2015 (0.8%) with further growth predicted in 2016 (1.3%). In a boost to its ongoing recovery, Italy's growth forecasts have been constantly revised upward by the International Monetary Fund over the past 12 months, contrary to what is happening in other European countries.
At the end of 2014, Italian business, household and market confidence indicators reached the highest level in four years, showing that this renewed confidence is one of the main sources of the recovery. As a result, during the first 10 months of 2015, the number of new cars sold increased by 15%, while in September, the real estate production index grew by 0.4% year on year, the first sign of growth in four-and-a-half years.
Of course, there are also positive external factors that should be mentioned – the low price of oil, the weaker euro/dollar exchange rate and the very low long-term interest rates resulting from the European Central Bank’s quantitative easing programme – although some downside risks have been born out of the new wave of geopolitical tensions resulting from the recent terrorist attacks in Paris.
Foreign investors have perceived the positive signs of change, and are now willing to invest in Italy again. In 2014, investments by sovereign wealth funds in Italy amounted to $2.2bn, up by 50% compared with the previous year.
At the end of October 2015, the yield on the Italian BOTs (six-month government bonds) went into negative territory for the first time, confirming this positive perception of the Italian economy. Improved confidence in the country is also shown by the growing appetite for sovereign bonds issued by the Italian government: between March and July, net purchases by foreign investors amounted to €21bn.
Since 1850, Cassa Depositi e Prestiti (CDP), which is majority owned by the Italian Ministry of Economy and Finance, has played a key role in supporting the Italian economy, and it will continue to stimulate the economic growth of the country in the coming years. CDP is now launching a five-year business plan, with a 2020 end-date, in order to meet the changing and challenging needs of the Italian economy in the post-crisis landscape, aimed at sustaining the ongoing economic recovery with more effective financing tools, both from the debt and equity side.
As a long-term investor, CDP will be able to finance strategic projects, which have a higher impact on productivity in the Italian economy. Characterised by what it calls 'patient capital', CDP’s business model is less influenced by short-term strategies.
CDP will also try to address potential market failures, targeting positive economic and social returns, during a period during when public intervention is limited by severe constraints. In doing this, CDP will act as a catalyst for private resources and co-operate with the banking system, in the same way as other national promotional banks in Europe do, such as KfW in Germany, CDC in France, and ICO in Spain. It is the main Italian player in the Juncker Plan [the European Commission's Investment Plan for Europe].
It will invest in equity to increase the size of Italian firms, and support better governance and management, favouring stock exchange listings. Some estimates show that if Italy had 1000 listed companies, instead of the 350-odd companies currently listed, GDP could increase by up to 1.5%. CDP will invest in what I believe are the priority growth drivers for the domestic economy: internationalisation and exports; supporting enterprises, innovation and start-ups; public sector efficiency and infrastructure; real estate and social housing; and tourism. All this, with special attention paid to energy saving and environmental sustainability. Because of all the issues mentioned above, Italy, having lagged behind, is now finding a new equilibrium.
In many areas important changes have already occurred and Italy is on the right track to becoming even more competitive.
Fabio Gallia is CEO of Cassa Depositi e Prestiti.