ROME, Oct. 21 (Xinhua) -- Fitch Ratings has affirmed Italy's sovereign rating at 'BBB' with a stable outlook, citing political risk as one of the downside factors, the agency said in a statement,according to ANSA news agency on Saturday.
"The political landscape (in Italy) remains highly fragmented, with risks of weak government, and of populist, Eurosceptic parties influencing policy after elections due by May 2018," Fitch analysts wrote in the statement on Friday.
"Current opinion polls imply a wide split of seats and difficult coalition dynamics, with a possibility of minority government," said the ratings agency.
While the current proposed electoral reform would lower the probability of a non-mainstream party heading the government, Fitch analysts "continue to view the medium-term prospects for substantial structural reform as weak."
The electoral bill, which cleared the Lower House last week, would increase proportional representation, introduce a minimum threshold of 10 percent for coalitions and 3 percent for single parties, and abolishes bonus seats. It now goes the Senate, where the ruling coalition has a slimmer majority.
Fitch also cited Italy's high public debt and ongoing banking sector weakness as risk factors. It forecast general government debt will increase to 132.5 percent of GDP in 2017, from 132 percent in 2016, partly due to banking sector interventions earlier in the year totalling 0.6 percent of GDP.
Among these interventions were the precautionary recapitalization of Monte dei Paschi di Siena lender and payments for the liquidation of Banca Popolare di Vicenza and Veneto Banca, which added a total of 10.2 billion euros to public debt this year, according to the ratings agency.
Fitch forecasts the government deficit-to-GDP ratio will drop to 2.2 percent this year from 2.5 percent in 2016, while domestic demand should drive a GDP expansion of 1.4 percent in 2017, up from 0.9 percent last year.
However Fitch expects 2018 growth to slow to 1.1 percent, as a further pick-up in investment to 3.2 percent will only partly compensate for a drop in private consumption due to a fall in real wages.
It praised government efforts to cut down the load of Italian banks' non-performing loans (NPLs), which fell to 9.5 percent of total loans in August from a peak of 10.9 percent in April, with the capital provisioning ratio broadly unchanged at 62 percent.
"Fitch expects a further, albeit more gradual, reduction in the NPL ratio over the next year," its analysts wrote.
On the upside, Fitch analysts cited Italy's "diversified, high value-added economy", low private-sector indebtedness, sustainable pension system, and low government bond yields.
While economic activity has gained momentum, Fitch continues to view Italy's medium-term growth prospects as weak, the statement said.
