By Sara Rossi
MILAN (Reuters) - Ratings agency DBRS on Friday revised its trend on Italy to 'positive' from 'stable', saying it expected an improvement in the country's fiscal path, in a boost to Prime Minister Giorgia Meloni's government.
The upgrade to the outlook follows a similar one by Fitch last week and shortly after Rome reached an agreement with the European Commission on a seven-year budget adjustment.
"The 'positive' trend reflects DBRS' view that the improvement in Italy's expected medium-term fiscal path mitigates the risks associated with its public debt ratio, which remains very high," the agency said in a statement.
It confirmed the country's rating at BBB (high).
The Italian government last month revised down its targets for the budget deficit this year and next, to 3.8% and 3.3% of gross domestic product respectively, and said the deficit would fall below the EU's 3% limit in 2026.
DBRS also cited Italy's better-than-expected recovery from recent shocks, improved labour market performance, and signs of higher-than-historical potential output growth in the euro zone's third largest economy.
Italy's debt, on the other hand, which is proportionally the second highest in the 20-nation bloc, is forecast by Rome to climb from 134.8% of gross domestic product last year to 137.8% in 2026, before gradually declining.
The Treasury says the projected increase is due to costly home renovation incentives adopted in the wake of the COVID pandemic -- the so-called Superbonus.
Italy's high debt ratio constrains its credit ratings, DBRS said.
"The country's public debt ratio and interest burden make the country vulnerable to shocks and limit fiscal space for further government measures," it said.
The Italian economy expanded by 0.7% in 2023, and most analysts expect a similar growth rate this year, below the government's official 1% target.
In June the European Commission put Italy, along with six other countries, under a disciplinary procedure to enforce consolidation of its public finances, after Rome's 2023 fiscal deficit came in at 7.2% of GDP, the in the euro zone.
S&P Global last week confirmed Italy's rating at 'BBB' and left the outlook at 'stable'.
Italy faces further credit rating reviews in the next few weeks by Moody's (NYSE:MCO) and Scope Ratings.