Letta Faces Investors in U.S. After Italian Bond SuccessAndrew Frye and Chiara Vasarri
Italian Prime Minister Enrico Letta, whose country has knocked more than 3 percentage points off its 10-year borrowing costs since Nov. 2011, is seeking a similar vote of confidence from equity investors.
The 47-year-old premier will make his pitch for more foreign direct investment in New York this week as part of a “Destination Italy” road show. The outreach marks a shift from the debt crisis-era U.S. visits by Letta’s predecessor, Mario Monti, which focused on winning support from bondholders.
Fixed-income managers were won over last year by Monti’s fiscal austerity and the European Central Bank’s pledge to protect the euro. In contrast, companies in Italy face difficulties enforcing contracts, getting credit and even getting electricity, showed the World Bank Ease of Doing Business survey, which ranked the country 30th of 31 high-income countries as of June 2012.
“There are fundamental reasons why Italy is such a poor performing country,” Ulrike Rondorf, an economist at Commerzbank AG in Frankfurt, said of its foreign direct investment inflows. “It’s one thing to have identified the problem, but it’s another to have solved it in Italy.”
Italy has attracted $68.8 billion of net inflows of foreign direct investment, or FDI, in the five years ended in December, according to the Organization for Economic Cooperation and Development in Paris. That is less than half the $143.5 billion that went to Germany and about a third of Spain’s $181 billion and France’s $185.6 billion. The U.K. had net inflows of $328.2 billion over that period, the OECD said.
“It’s not enough,” Letta’s Cabinet said of Italy’s 1.6 percent share of global FDI in a 59-page investors’ handbook the government published Sept. 19. The pitch reiterated his commitment to state-asset sales, tax cuts and infrastructure improvements. It summarized Letta’s plans to speed up the civil-justice system and bring the price of energy more in line with European averages.
The agenda, which the government plans to enact in coming years, lacks a labor-market reform capable of improving productivity and stimulating hiring, said Francesco Galietti founder of Rome-based research firm Policy Sonar. The agenda may be promising too much for Letta’s fractious parliamentary majority, said Raffaella Tenconi, an economist at Bank of America Merrill Lynch in London.
“It’s not a coalition that will be able to deliver anything nearly as bold as what the economy needs,” Tenconi said.
Letta’s alliance is fraying over the legal troubles of his ally, former Prime Minister Silvio Berlusconi. Letta’s Democratic Party is seeking to strip Berlusconi of his Senate seat due to the former premier’s tax fraud conviction. Berlusconi’s People of Liberty party has threatened to topple the government if the expulsion is carried out.
The Italian economy has contracted every quarter since the three months ended Sept. 30, 2011, and unemployment has risen to 12 percent. Letta’s Cabinet said last week that GDP will shrink 1.7 percent this year, more than the 1.3 percent previously projected, before expanding 1 percent next year. On Sept. 12, Italy said industrial production unexpectedly fell 1.1 percent in July after rising in the two previous months.
FDI inflows rose to 15 billion euros ($20 billion) in the 12 months ended in July, according to the most recent data from the Bank of Italy. It was the first time since 2011 that 12-month inflows increased for at least three straight months.
Foreign investors have taken control of some of the biggest Italian companies in recent years. Bulgari SpA, the jeweller, was bought by France’s LVMH Moet Hennessy Louis Vuitton SA for 12.3 billion euros in 2011. Milk producer Parmalat SpA and power company Edison SpA also went to French buyers. Cashmere clothier Loro Piana SpA agreed in July to be acquired by LVMH for 2 billion euros.
“Foreign investments are welcome, especially in industries where we have a lack of experience or a technological deficit,” said Giuseppe Ragusa, professor of economics at Luiss University in Rome.