• Government targets 0.3 percentage point decline in debt-to-GDP
  • Economy to grow 1.2 percent this year, 1.4 percent next

Italy will fail to reduce its debt load this year as much as previously targeted due to lower than expected economic growth.

The debt ratio, the euro region’s second-highest, will slip to 132.4 percent of gross domestic product this year from 132.7 percent in 2015, according to a draft of the government budget obtained by Bloomberg. That’s higher than the 131.4 percent target for 2016 published by Prime Minister Matteo Renzi’s administration in September.

Finance Minister Pier Carlo Padoan, who is struggling to speed up growth after a record-long recession, has staked the government’s credibility on reducing Italy’s debt. This might prove to be difficult due to lower-than-expected economic expansion.

"In a certain sense it’s better for the government to be honest because the previous number seemed optimistic," said Marc Ostwald, a strategist at ADM Investor Services International Ltd in London. Still, "there are a lot of people who will doubt whether it will be achieved," he said.

The budget plan, to be discussed at a meeting of Renzi’s cabinet later on Friday, shows the government targeting economic growth of 1.2 percent this year and 1.4 percent in 2017, down from previous projections of 1.6 percent for both years.

It targets a decline in the budget deficit to 2.3 percent of GDP this year from 2.6 percent in 2015, according to the draft. For next year, the government aims to narrow the gap to 1.8 percent of GDP.

Last year, Italy emerged from its longest recession since World War II as both domestic demand and exports increased. To keep up, and counter a slowdown in global trade, the Italian economy will have to be more competitive and investments will have to accelerate, Padoan said in an introduction to the budget draft.

So far, the ECB’s quantitative easing has shielded Italy from an even worse fate, according to a study by the country’s central bank. "The Italian recession would have ended only in 2017 and inflation would have remained negative for the whole three-year period" of 2015-2017, Ignazio Visco, an ECB Governing Council member and Bank of Italy Governor, said in a speech in Frankfurt on Thursday.

“What Italy needs is more inflation and more growth to help get debt levels down,” Kit Juckes, global strategist at Societe Generale said in an interview. Societe Generale sees debt-to-GDP under 130 percent in 2020 with GDP growth remaining under 1 percent per year.

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