As Italy’s new government prepares for negotiations over its first budget, financial markets have expressed uneasiness. The negotiations, which should result in a proposed budget by the end of September, are expected to be protracted and could heighten tension between Italy and the EU. However, if recent indicators are anything to go by, there are good reasons to believe that the country’s private sector is strong enough to weather a political storm.
Last year, Italian corporate debt issuance reached an all-time high of 42.5 billion euros. This is partly due to the fact that the ECB’s quantitative easing allowed firms to re-finance their debt at cheaper rates. Importantly, it also encouraged firms to extend the maturities on this debt. As a result, Moody’s predicts that Italian non-financial corporations will raise slightly more than half of last year’s amount in 2018, thereby limiting the scope for contagion from Italy’s sovereign debt market to its corporate sector.
It’s worth noting that Italy’s bond markets aren’t as deep as the those in the US and UK. Consequently, many companies tend to borrow from banks instead of from the market. Quantitative easing has also made this avenue for corporate borrowing more accommodative. For instance, lending to Italian businesses increased in the year to February 2018 by 1.2 percent. Significantly, these loans were dispersed with a historically low-average interest rate of 1.5 percent.
Italy’s banking sector has been bogged down by non-performing loans that have cast a shadow over the country’s financial markets. However, there are signs that Italian banks are moving in the right direction. For example, Italy’s third largest commercial bank by market capitalisation, UBI Banca, announced earlier this month that it had securitised 2.75 billion euros worth of bad loans and would sell a second batch of non-securitised bad debt in the following months. This should make it possible for the bank to reduce its total gross non-performing loan ratio to below 10 percent by the end of 2019 or early 2020.
On August 7, UniCredit, Italy’s only globally systemically important bank, reported its best half-year results since 2008. Since 2016 the bank has made a concerted effort to restructure itself by cutting jobs, selling off businesses, and closing branches. While UniCredit’s non-performing loans ratio improved in the second quarter, at just over one billion euros, its net profits were lower than last year. Nevertheless, this still beat analysts’ expectations of 975 million euros.
UniCredit’s successful restructuring efforts have not gone unnoticed. In July, Societe Generale suggested that the Italian bank may join STOXX50E, an index of 50 top Eurozone companies, in September. UniCredit’s inclusion in this index could help it attract new investors, thereby accelerating the clean up of its balance sheet.
Italy’s energy sector has also been performing well. Figures released last month showed Eni earned a net profit of 1.25 billion euros in the second quarter of 2018, compared to just 18 million euros over the same period in 2017. The company has seen production expand to 1.86 million barrels of oil a day and operating profit increase by 152 percent. As a result, Eni’s net debt is now the lowest in more than a decade.
Eni’s successful second quarter results can be attributed to a couple of factors. First, the company has benefited from a 38 percent increase in the price of oil. Second, the exploration and production side of the business more than tripled its contribution to the company’s profits. Lastly, around one-third of Eni’s sales are outside of Italy. This international outlook allows the company to diversify its revenue base and insulate it from economic instability at home.
While financial markets are still uneasy over Italy’s new government, its corporate sector should inspire more confidence in the Southern nation’s ability to drive growth amid political turbulence.