Portugal's Economic Recovery Looks Real, But So Do the Warning Signs of Another Crisis

Last week, I went on a lovely trip to Portugal. I went cycling and surfing. I tried the extreme sport of coasteering for the first time. I got to try pastel de nata, bacalhau, and frango piri-piri. Being there for a week, I got notice the way things work, from public transportation and work ethic to housing and health care. 

Then you learn things like Portugal needed a €78 billion bailout during the eurozone crisis last decade. In response, Portugal was able to reduce its deficit spending and close the gap on its bond spreads with fiscal restraint. The Organization of Economic Co-operation and Development (OECD) recently called Portugal's fiscal performance "among the strongest in the OECD and the Euro Area in the past few years." Continued debt reduction, disciplined budgets, strong nominal GDP growth all help explain why both Fitch's and Standard & Poor's have a positive outlook for Portugal. 

These are certainly reasons to be hopeful. Yet there are some concerns about the Portuguese economy:

• Portugal has a birth rate of 1.4, which is well below the replacement rate of 2.1. 
• Portugal is the third country in Europe with the lowest proportion of young people, which makes it more difficult to pay for social programs and to keep the economy growing with a stable labor force. 
• A study from the University of Lisbon reminds us that brain drain is compounding these effects. Up to 40 percent of Portugal's graduates emigrate to other countries.
• A recent report from the European Commission found that Portugal has the most overvalued housing prices, which makes it that much more difficult for everyday Portuguese citizens to afford housing.
• If the conflict in the Middle East is prolonged, it could weaken economic growth and exacerbate inflation for Portugal. 

Portugal does not fit neatly into an optimistic or pessimistic narrative. On the one hand, Portugal has made impressive fiscal strides since requiring a bailout just over a decade ago. Compared to some larger European economies, Portugal's fiscal trajectory actually looks relatively disciplined. 

On the other hand, strong tourism, balanced budgets, and improved credit ratings do not solve deeper structural problems. Low birth rates, emigration of educated workers, and housing affordability issues could create significant economic pressures in the years ahead. Portugal seems to have escaped one crisis while gradually wading into another one. 

Moody's Boosted Italy's Credit Rating, But Does Rome Really Deserve It?

For the first time in 23 years, the credit rating agency Moody's upgraded Italy's credit rating, from Baa3 to Baa2. Moody's finds that Italy has a "consistent track-record of political and policy stability which enhances the effectiveness of economic and fiscal reforms and investment implemented under the National Recovery and Resilience Plan (NRRP)." Moody's also anticipates greater growth and fiscal consolidation, as well as a gradual decline in Italy's government debt burden. This is a small but significant vote of confidence from international markets that Italy desperately needs. At the same time, Italy's economic foundations and long-running economic challenges tell a more nuanced story. This begs the question of whether Moody's upgrade is in alignment with the economic reality in Italy. 

Short-Term Positives

Before delving into my skepticism of Moody's upgrade, I do want to address some of the positives in favor of the upgrade: 

• As the International Monetary Fund (IMF) noted in its most recent Article IV Consultation with Italy, Italy's economy has remained resilient and has shown modest GDP growth and output that has surpassed pre-pandemic levels (IMF, p. 4). 
• Given the political instability of frequent elections, it is refreshing to see policy stability relative to Italy's post-WWII historical norms. 
• Labor market reforms have led to a rise in permanent contracts. The permanent contracts contributed to an increase in the employment rate to a record of 62.7 percent (IMF, p. 5). 
• Volatility in Italy's financial markets in early 2025 has largely subsided (IMF, p. 8).
• The fiscal deficit shrunk by more than half to 3.4 percent in 2024 (ibid.), and the deficit is projected to shrink further (European Commission). Italy was able to return to a primary surplus, which helps contain the growth of government debt relative to GDP, though overall debt dynamics also depend on interest payments and growth. 

Long-Term Structural Issues

I am glad that Italy is putting in effort to avoid a disaster in the short-run. At least for now, Italy's economic stability helps the rest of the Euro Area since Italy is the third largest economy in the Euro Area. However, much like I detailed in 2018 when analyzing the Italian economy, Italy still has long-term structural issues that make it difficult to justify a long-term optimistic view:

• One of Italy's main issues to date is its large debt-to-GDP ratio at around 135 percent. Aside from Greece, it remains one of the highest in the developed world (IMF). A literature review and analysis released by the Mercatus Center this past October suggests that once the debt-to-GDP ratio gets above around 80 percent, investment may become hampered, interest-rate risk could become heightened, and long-term growth could slow down. This is not to say that Italy is disadvantaged, but Italy has its work cut out for it. 
• While it is not negative, Italy's GDP growth is modest, at 0.6-0.8 percent (Istituto Nazionale di Statistica). This is far from adequate if one of the main goals is to reduce debt burden or improve the living standards for Italian citizens. 

• Weak productivity growth has resulted in subdued GDP growth, below-target inflation, and high public sector debt, all of which create challenges for public finances (IMF, p. 4). 

• Industrial production has been on the decline. In March 2025, output was 1.8 percent lower than it was the previous year (OECD). This decline in output exposes a weakness in Italy's manufacturing base.
• Much of the growth in Italy's economy depends on the Recovery and Resilience Facility (RRF) financing the NNRP program (European Commission). It is plausible that the economic growth could falter after this time-limited investment. Even worse, if the investments are not properly implemented, the debt dynamics might reassert themselves.
• There is a further drag in the declining birth rates and decline in the working-age population (IMF, p. 10-11).

Postscript

Moody's upgrade is defensible from a short-term perspective since fiscal consolidation, NRRP investment, recovery in consumer demand, and stable macroeconomic conditions lower the likelihood of an immediate crisis. However, weak growth trajectory, high debt, and structural rigidity all indicate that any optimism for the Italian economy should remain cautious at best. The upgrade reflects improved resilience as opposed to a legitimate, lasting transformation. Italy earns one, maybe two cheers, for macroeconomic stability, especially given its history. Nevertheless, Italy has quite the hill to climb if it hopes to achieve true economic strength.

Is the Reign of the U.S. Dollar Coming to an End?: Assessing the Future of Global Reserves

Tariffs notwithstanding, the United States has fiscally been in such a tumult in recent years. Last month, the credit rating agency Moody's downgraded the United States from Aaa to Aa1. This downgrading is significant for two reasons. One is that the United States is the largest economy in the world. The second reason is that Moody's is the final major credit rating agency to downgrade the United States below its top credit rating. Much like with Fitch's downgrade in 2023, Moody's cited long-term debt issues fueled by the mandatory spending. Moody's anticipates that the United States' fiscal performance is to deteriorate at a faster rate relative to other highly-rated sovereigns. 

This got me thinking about a major topic related to all this mess. The United States dollar (USD) is the most held currency in global reserves. However, that clout has been declining over the years (see above). International Monetary Fund (IMF) data show that at the end of 2024, 58 percent of foreign exchange reserves are USD. Contrast that with the dollar being 65 percent a decade earlier. How legitimate is the concern that the percent of dollars in foreign reserves will continue to decline over time?  We should first ask what could replace the dollar as the primary global reserve. 

• Chinese yuan (人民币). China has the second largest economy and is continuing to grow, hence why it is a main contender. However, as long the Chinese central bank (中国人民银行) has exchange rate regime (currency manipulation), capital controls, and institutional weakness, the Chinese yuan will not be a global currency reserve. 
• The euro. The European Union rivals that of the United States and has political stability. However, it has internal economic issues that I have critiqued since 2010 and have done so since then (see here, here, and here). It is not only the lack of a common treasury or a unified European bond market, not to mention that its capital markets are inadequately integrated to muster the assets necessary to become a global leader. As a research paper from the European Commission points out, the euro zone crisis last decade resulted in the downgrade the credit rating of various European countries, thereby strengthening the dollar (Arroyo, 2022). 
• Other currencies. The Japanese yen, Korean won, Australian dollar, Canadian dollar, and British pound lack the scale and liquidity to pull it off. The BRICS countries cannot cobble together a currency basket to rival the U.S. economy because of the structural challenges that do not make their countries' central banks robust. 
• Digital and blockchain alternatives. This option could have potential in the future. However, given current regulatory hurdles and the fact that these alternatives are still relatively nascent, they are not viable options, certainly in the short-term.

There is still no viable contender to step in and replace the U.S. dollar in the short-term. The United States remains a large, powerful economy that accounts for 26 percent of the world's GDP with rule of law and investor confidence. Because it takes a lot of time, money, effort, and political willpower to change currencies, there is inertia vis-à-vis the network effects that are in the U.S.' favor. The U.S.' market for Treasury securities remains large and liquid. The dollar is still the dominant currency choice for international trade transactions because the dollar is so entrenched in global trade and finance. That being said, it is clear from the Moody's downgrading that the U.S.' fiscal situation is untenable and it is looking like there is a lack of political will to change things. 

In July 2024, the CFA Institute surveyed nearly 4,000 global financial professionals. Not only did 77 percent of respondents find that the U.S.' finances are unsustainable, but nearly two thirds had the professional opinion that the U.S. will lose its global reserve status (52 percent in a marginal way and 11 percent in a material way). It was also interesting to see the reasons that respondents thought this would happen. Debt was number one, followed by a downright default (see below).

What does this mean for the global reserves system? Going back to the CFA Institute survey, what the respondents believed to be the most likely systems to replace the dollar would be a multipolar currency system, a digital currency, and hard currency (e.g., gold). If I were to speculate, I would say the system is becoming more multipolar and there will be an emergence of digital currency in global reserves. I believe that the dollar's prominence will remain in the short term but also decline gradually, much like it has in the past couple of decades. The fiscal cliff is not imminent, but it is the direction in which the United States is heading.

What came as a result of the COVID pandemic and the lockdowns has taught me to be more humble with my educated guesses, especially when prognosticating beyond a year or so. What I can say with certainty is that that more the United States government avoids meaningful fiscal reform and adds on deficit spending, the more that dollar will lose its dominance. The question simply will be a matter of how much dominance is lost, what will take its place, and how ugly of a process it will be.

Moody's Downgrades U.S. Credit Rating, But Congress Still Chooses Insolvency Over Fiscal Discipline

As Congress debated Trump's tax cuts with the "Big Beautiful Bill," the credit rating agency Moody's delivered another coup to the U.S. government. Last Friday, Moody's decided to downgrade the U.S. government's credit rating from Aaa to Aa1. This is significant not simply because of the U.S.' economic clout or that Aaa is Moody's highest credit rating. All three major credit rating agencies (the other two being Fitch and Standard & Poor's) have downgraded the United States below their top credit rating.

Why did Moody's decide to make this call? It is due to "the increase over more than a decade in government debt and interest payment ratios to levels that are significantly higher than similarly rated sovereigns." It is not only what has led the United States to this precipice, but also what is to come. To quote Moody's once more: 

We do not believe that material multi-year reductions in mandatory spending and deficits will result from current fiscal proposals under consideration. Over the next decade, we expect larger deficits as entitlement spending rises while government revenue remains broadly flat. In turn, persistent, large fiscal deficits will drive the government's debt and interest burden higher. The U.S.' fiscal performance is likely to deteriorate relative to its own past and compared to other highly-rated sovereigns. 

Pro-Trump economist Stephen Moore questioned the timing of the downgrading. Trump thought it was a political hit job, even though he conveniently neglected to mention that Fitch Ratings downgraded the U.S. government's credit rating during the Biden administration. And while the Biden administration made some fiscally poor decisions (e.g., Inflation Reduction Act, American Rescue Plan Act), this is not the world trying to stick it to Trump, no matter how much Trump would like to think otherwise. 

For those who have been paying attention the United States' fiscal outlook, this downgrade does not come as a shock. This downgrade is quite frankly overdue given how the U.S. government has spent money as if it grew on trees. I have covered this topic about long-term government debt since 2013 and have covered it since (see here, here, here, and here). When a government consistently spends more money than it has and spikes its debt-to-GDP ratio in such a fashion, this is an example of "you reap what you sow." And as Moody's was correct to illustrate, Trump's income tax reduction extension from the Tax Cuts and Jobs Act (TCJA) is only going to exacerbate that ratio. If you need more information on how rising debt will have negative impacts on economic growth, jobs, investment, and income, you can read this report from the Peter G. Peterson Foundation that was released last week. 

The significance of Moody's downgrading is not simply about the exorbitant spending. As I brought up during the COVID pandemic when I wrote about how we should still be concerned about growing federal debt, there is a certain debt-to-GDP ratio that focuses more government expenditures on interest payments and less on other programming. Moody's is correct to point out that the United States has reached that level. As the Peter G. Peterson Foundation pointed out last January, interest payments have gotten to the point of surpassing what the United States pays in defense spending. This likely means that the days of the United States borrowing tons of money without dealing with inflation or higher interest rates is over, which will have ripple effects not only in the U.S. economy, but also the global economy. In the meantime, lagging economic growth and a debt spiral will ensue if Congress does not act.

What Moody's has to say should not be taken lightly. All major credit rating agencies are sounding the same alarm. The U.S. fiscal situation is unsustainable and what Congress is looking to do is only going to make matters worse. The American Action Forum accurately identifies Social Security, Medicare, and Medicaid as the major culprits since those programs account for the majority of non-interest federal spending. Not addressing that entitlement spending is also why DOGE's attempts to deal with government has been paltry thus far. There is not even an independent fiscal committee to deal with the matter. Whether the political will exists remains to be seen (I doubt it does), it is clear that not even Moody's is hopeful in the short-term. I will say that if Congress does not work to make important decisions now, the United States will go through some truly hard times as this century progresses. 

France Was Already Struggling with Government Spending. The Uncertainty with Macron's Snap Elections Did Not Help.

With French President Emmanuel Macron losing his grip on political power, he decided to disband the French Parliament and call for a snap election. Not only did his political party Renaissance lose a significant amount of seats earlier this month, but a loosely established coalition of the Left, the Nouveau Front Populaire, gained enough seats to hold a plurality. The Right-leaning party, the Rassemblement National, underperformed. Needless to say, this has thrown French politics into a frenzy. If you think that is unrelated to how the French economy fares, you would be wrong. Last week, the International Monetary Fund (IMF) released its Article IV Consultation for France in which the IMF analyzes the state of the French economy. Guess what the report revealed? This little gem:

"Heightened political fragmentation and rising policy uncertainty domestically could delay fiscal consolidation and reform efforts, weighing on confidence and raising fiscal risks. Social tensions could also materialize...Over the medium term, deepening geoeconomics fragmentation could expose France to trade and supply disruptions, increased protectionism, and rising input costs, lowering potential growth (IMF, p. 10)." 

This is not to say that everything was going swimmingly in the French economy and Macron's decision for a snap election made the economy topsy-turvy. Yes, the credit rating agency Moody's brought up similar concerns as the IMF, mainly that fiscal consolidation is unlikely to happen because of the new Left coalition in power. Its government spending was already on an unsustainable track, a point I made in 2014 which I chided France for its debt-to-GDP ratio and in 2018 when I illustrated how France's welfare spending is out of control.

It is not only a point I have made while blogging. It was a point made when credit rating agency Standard and Poor's downgraded France's credit rating from AA to AA- in May 2024 because France's deficits increased higher than anticipated, thereby driving the debt-to-GDP ratio. Standard and Poor's is also anticipating that interest payments will increase from 3.3 percent in 2023 to 5 percent in 2027, which is a major issue both for government solvency and quality of life for everyday citizens.

France's economy was struggling due to the COVID-19 pandemic, the energy crisis as a result of the war in Ukraine, and an underperforming economy in 2023 (IMF, p. 12). There are also increased spending pressures on pensions and retirement, which I commented on while  In 2023, commending Macron in 2023 for raising the retirement age for Social Security because French spend in Social Security is off the charts, even by European standards. 

While there seems to be some stabilization and recovery of the economy, it is not enough to bring down France's debt-to-GDP ratio. Whether France's economy stabilizes or ends up being successful remains to be seen. What is foreseeable is that much like with the United States, the extent to which France can get its government spending under control will play a major role on what that economic future looks like. 

Peru's Economy Seems to Be On the Road to Recovery, But It's a Bumpy Road

Last year was a tough year for Peru. First, there was the social unrest that resulted from the ousting of then-President Pedro Castillo. Then there were the climate-related shocks caused by El Niño. These phenomena were potent enough to cause a 0.6 percent contraction in Peru's GDP, one of the worst in the past thirty years, pandemic notwithstanding. At least for now, it looks like Peru's economy is on the mend. According to an International Monetary Fund (IMF) report released this past Tuesday, Peru's economy is projected to create a GDP over 2 percent starting in 2024 (p. 36). 

In spite of Peru's heightened inflation in 2023, Peru's contractionary monetary policy brought the inflation back down. Even with a shortfall in tax revenue, Peru was still able to keep its debt-to-GDP ratio low (IMF, p. 8) with its prudent fiscal policy (OECD), which is more than can be said for the United States. A favorable debt structure will at least help Peru not deal with any near-term financing pressures. The financial sector also remains strong with adequate capital, liquidity, and profitability (ibid.). There is also to be a strong recovery in fishing and agriculture, as well as a boost in the mining industry (IMF, p. 10). 

Although there are multiple factors in favor of recovery, there is one that is still getting in the way of economic progress: political turmoil. It is the reason why the credit rating agency Standard & Poor's downgraded Peru's credit rating last month to BBB-. Political gridlock and social unrest do a bang-up job of undermining both the government and economy's ability to perform. Since 2018, there have been six presidents, three Congresses, and 150 cabinet shuffles (Fitch). Ousting Pedro Castillo did not exactly give President Dina Boluatre a strong mandate to rule, especially with a weak representation in Peruvian Congress. It will be at least be before the next presidential elections in 2026 when Peru can see political stability once more. This in turn limits the government's ability to implement policies that boost investment and economic growth. Political stability would go a long way in ensuring investor confidence. 

While things are mainly looking promising, political instability creates a big unknown for how that recovery will look. Peru nevertheless has a history of corruption, weak institutions, and political unrest, as previously illustrated even in the past few years. Hopefully, Peru can pull itself out of its 2023 rut and develop macroeconomic stability for long-term growth. 

Sources Used

• Banco Central de Perú. Notas de Estudios. 
• BBVA Research. Peru Economic Outlook: March 2024.
• Fitch Ratings. Fitch Affirms Peru at 'BBB'; Outlook Negative.
• Heritage Foundation. Peru. 
• International Monetary Fund. 2024 Article IV Consultation. 
• OECD Economic Surveys: Peru 2023.

CBO 2024 Fiscal Outlook Is Grim: Will the U.S. Government Finally Address Rising Federal Debt?

Last week, the Congressional Budget Office (CBO), which is the gold standard of U.S. federal legislative analysis, released its Long-Term Budget Outlook. This outlook projects the nations' fiscal and economic outcome for the next three decades. What fun and joy does the CBO predict for the upcoming thirty years? 

Debt will reach 166 percent of GDP in 2054. As the CBO's graph shows below (p. 10), this amount will be significantly higher than World War II. It will be in 2029 that debt will reach its highest levels and go up from there. 

Entitlement spending is why expenditures continue to outpace revenue. Until the government gets its spending habits under control, there will continue to be a growing deficit. Social Security and Medicare are the two largest culprits of this spending binge. By 2054, these two programs will account for 41.4 percent of federal spending (p. 4).

Interest outlays will more than double. The U.S. government already spends more on interest outlays than it does national defense. By 2054, we will be paying 6.4 percent of GDP (or 23.1 percent of government spending) towards interest payments (p. 10). As I have mentioned before, not only do higher interest payments hamper economic growth, but it means that we could spend that money on something other than interest outlays. 

Two silver linings. One is that the Old Age and Survivors Insurance (OASI) Fund with Social Security with Social Security will expire in 2034, which is one year later than previously projected. But still, it is not good (see below). Two, debt-to-GDP ratio projections are at 165 by 2054, which is 17 percentage points lower over a comparable period than when the CBO released last year's report. Nevertheless, as previously alluded to, it is still a perturbingly high amount of debt.

Postscript. All in all, this unsustainable fiscal path is a quagmire waiting to happen and it shows no signs of slowing down. It reminds me why credit rating agency Fitch's downgraded the U.S. credit rating last year. As the bipartisan Committee for a Responsible Federal Budget (CRFB) enumerates, high debt results in threatened economic vitality, increased budget strains, geopolitical challenges, punishing younger generations, and making it more difficult to respond to emergencies and recessions. Addressing the national debt needs to be a priority if the United States wants to continue being a beacon of economic prosperity. If policymakers continue to kick the can down the road, future policymakers will have to make difficult decisions similar to those that Argentinean President Javier Milei is having to make. I think Argentinean culture is by and large great, but fiscal irresponsibility is one feature of Argentina the United States should not emulate.

U.S. Credit Downgrade by Fitch's a Reminder of Deteriorating Fiscal State of Affairs

The COVID pandemic turned the global economy upside-down. As resilient as the U.S. economy was going into the pandemic, that does not mean the U.S. economy remained immune. Most states in the Union decided to lock down the economy in response to COVID, which cost the U.S. economy a whopping $9.2 trillion. Supply chains were thrown out of whack enough to create a supply chain crisis. If that were not enough, a combination of the Federal Reserve pumping trillions of dollars into the economy along with the government spending trillions on so-called "pandemic relief" caused the inflation spike we see to this day. This debt ceiling debacle earlier this year exposed how out of control the U.S. debt situation is getting.   

It seems that people have been noticing this dysfunction, including credit rating agencies. That would explain Fitch's downgrade of the U.S. government's formerly stellar credit rating of "AAA" to "AA+." This is the second downgrade from one of the major three credit rating agencies since the practice of credit ratings really took off in the early 20th century. The first downgrade was by Standard and Poor's in 2011. Why did Fitch's decide to downgrade now? According to its rating action commentary, Fitch's had the following to say:

"The rating downgrade of the United States reflects the expected fiscal deterioration over the next three years, a high and growing general government debt burden, and the erosion of governance relative to 'AA' and 'AAA' rated peers over the last two decades that has manifested in repeated debt limit standoffs and last-minute resolutions."

The good news is that Fitch's overall outlook is stable. That might have to with a well-diversified and high-income economy, dynamic business environment, and the fact that the U.S. dollar is still the predominant reserve currency. This means that for the time being, the United States still remains an overall trustworthy economic powerhouse. At the same time, there are legitimate concerns. In the short-term, the Federal Reserve is not finished with raising interest rates. This plays into why Fitch's is anticipating a mild recession later this winter.  

Fitch's bring up how the debt-related political standoffs and last-minute resolutions have eroded trust in the U.S. Congress of doing its job to ensure as basic of a function as fiscal management. This is not about mere discontent of how the U.S. government approaches the debt ceiling. It is about the bigger picture. There is no medium-term plan to deal with the country's fiscal challenges. As I have brought up more than once, the debt-to-GDP ratio is rising by government deficits and shows no indication of falling. We have doubled our debt in the past decade, which is a good way to corrode trust in future lenders. The national debt is projected to be double the size of the U.S. economy in thirty years, which does not inspire confidence. Not addressing these failings will have negative impact on U.S. economic growth, which will affect the lives of everyday U.S. citizens.

This downgrade in the credit rating may be temporary or the United States will be in a lot of hurt in the long-run. If the government wants to get a handle on its fiscal state, it would find real reforms for the three main drivers of U.S. public debt: Social Security, Medicare, and Medicaid. What I do know is that if the United States wishes to be the economic powerhouse it has been since the mid-20th century, it needs to get in touch with the tradition of fiscal discipline and fast. Otherwise, the likely path will be more credit downgrades and the United States economy ending up like that of Argentina or Greece.

How Is Myanmar's Economy Shaping Up for 2019?

Myanmar is mainly in the news for its internal ethnic conflict and humanitarian abuses. Much less frequently covered is its economic outlook, which might be in part because its economy is the 70th largest in the world. Whatever the reason, I would like to give it some coverage here, especially in light of the IMF's Article IV Consultation on Myanmar that was released last week.

While one could think of economic health and civil liberties as separate, the fact of the matter is there is some linkage. Yes, there has been some progress on refugee repatriation, although freedom of movement of returnees has been limited. This stalled progress decreases positive foreign sentiment, which has an impact on foreign investment in Myanmar (IMF, p. 4). Not only has manufacturing declined since mid-2018, but so have tourist receipts and consumer goods (IMF, p. 5). In spite of some of the shorter-term issues, the IMF is still optimistic about longer-term outlook because of demographics and its commerce with China, India, and Japan (IMF, p. 6).

The World Bank had similar mixed outlook per its December 2018 Myanmar Economic Monitor. The World Bank has concerns with declining foreign direct investment along with global risks being entangled with domestic risks. Nevertheless, services sector liberalization and the loosening on foreign bank lending provides World Bank with a more optimistic medium-term outlook. Even so, Myanmar is dealing with an agricultural sector with stunted infrastructure (which is significant because nearly 70 percent of Burmese work in that sector), and its garment industry might lose the European Union's generalized scheme of benefits (GSB) preference, which would be significant since its productivity in the garment sector was reducing its deficit. Growth in the tourism and transportation sectors have also slowed for Myanmar.

As some additional notes, the Asian Development Bank is anticipating 6.6 percent GDP growth for Myanmar, which is higher than its Southeast Asian peers. Oil and gas reserves at Myanmar's offshore banks are now approved for commercial activity. Myanmar also launched its updated Companies Law in August 2018, which had not been updated for nearly a century. This Law will allow for easier foreign capital flow.

If we're looking strictly at GDP growth, things look good for Myanmar. However, an economy is more than its GDP. With a developing economy that could be easily shaken by global events, I am concerned about such potential issues as Brexit. It makes prognosticating an overall direction more difficult. If Myanmar can get past its internal conflict and improve growth in key sectors, I think that Myanmar can expect an increasingly healthy economy.

A Look at Projections for the Argentinian Economy in 2019

I recently vacationed in Buenos Aires for about a week. It was the first time that I traveled abroad by myself, and I have to say that I quite enjoyed myself. Not only did I get to see the sights of Buenos Aires, but it gave me an opportunity to talk to Argentinians. One of the common themes that came up in conversation with the people I met was the economy. Inflation is not as bad as it is in Venezuela, but it's bad enough where inflation for food went up 3.7 percent between December and January. While I was down there, they had announced on the news that year-to-year inflation went up by 49.3 percent.

This inflation is the latest in ongoing Argentinian economic woes. In the 2000s and early 2010s, Argentina was run by the Kirchners. During the Kirchner administrations, inflation was at 40 percent, unemployment was high, and Argentina endured a recession. In response, the Argentinian people elected Mauricio Macri in 2015. Unfortunately, Macri didn't do enough to fight off economic issues. An increased reliance on external financing got so out of hand that the Argentinian peso (ARS) devalued by nearly half (see my 2018 analysis here). At the beginning of 2018, the exchange rate was about 14ARS:$1USD. When I was on vacation, the peso devalued to about 40ARS:$1USD. From my conversations while I was on vacation, it does not seem like things have gotten better for Argentina. Looking at the current data and economic projections, I wanted to see if things were getting better, worse, or if it is more of the same.

Fitch Ratings: Fitch affirms its rating for Argentina at B. However, in November, it changed its outlook from stable to negative. Weaker prospects for economic growth, as well as uncertainty surrounding fiscal consolidation and market financing availability, drove Fitch's more pessimistic outlook. Fitch does not expect a positive outlook, and even a stable one is unlikely. Strengthening in external liquidity, recovery in economic activity, and complying with IMF's near-term fiscal targets would provide Fitch with more optimism. The political uncertainty of the elections and potential macroeconomic instability could make matters worse. While macroeconomic adjustments take place, investors are likely to be cautious in 2019. On the plus side, Fitch anticipates that sovereign financing needs will be covered in 2019.

Banco Central de la República Argentina: According to its Resultados del Relevamiento de Expectativas del Mercado (also see here), the Argentinian central bank is predicting 28.5 percent inflation in 2019. GDP growth is varied for 2019 (-1.2%), 2020 (2.5%), and 2021 (2.5%), although it looks like 2019 will be the worst of it for the medium-run. The exchange rate is looking to take a hit. It is expected to go from 38.3ARS to 48.0ARS to the dollar.

Heritage Foundation Economic Freedom Index for 2019: Argentina's economy continues to be classified as "Mostly Unfree" under this Index (also see here). The Index's metrics of Property Rights and Monetary Policy improved year-to-year, whereas Government Spending and Fiscal Health decreased. Government spending has amounted to 41.6 percent of GDP, which is problematic when the Macri government is using austerity (i.e., less government spending and higher taxes) to close the fiscal gap.

International Monetary Fund (IMF): In December 2018, the IMF released its latest report on the stand-by agreement it made with Argentina earlier in 2018. As of October 2018, Argentina met the IMF's program targets, and is projected to meet the 2019 targets. The economy is expected to rebound in the second quarter of 2019 because the agricultural sector will pick up after the drought of 2018 (p. 7). Global financial conditions are of worry, as are the results of the 2019 presidential election. Conversely, increased trade with Brazil could help stabilize (ibid.). Another plus is that demand for Argentinian bonds has strengthened and sovereign risk is on the decline. Monetary policy is also geared to bring down inflation (p. 12).

Organization for Economic Cooperation and Development (OECD): In its November 2018 economic forecast, the OECD expressed concern that fiscal and monetary tightening will keep Argentina in a recession through 2019. On the other hand, what will be a drag on short-term growth will help Argentina deal with fiscal and current account imbalances in the longer-run, as well as restore confidence in the Argentinian economy. While it is expected to be painful for Argentina in 2019, developing stronger macroeconomic fundamentals will help Argentina in the future.

Standard and Poor's: The renowned credit rating agency downgraded Argentina from B+ to B in November 2018 (France24) due to inflationary issues and lack of economic growth. Standard and Poor's does predict that if the economy can stabilize and the upcoming presidential election doesn't take Argentina off course, there should be a recovery in the next year or so.

World Bank: In its January 2019 Global Economic Outlook, it predicts that the Argentinian economy will contract 1.7 percent in 2019, followed by 2.7 percent GDP growth in 2020 (World Bank, p. 83). The 2019 GDP growth prediction is in line with the IMF's prediction (IMF, p. 25).

My Concluding Thoughts: The agreement that Argentina made with the IMF in 2018 is putting the Argentinian economy through some short-term pain. That much I witnessed firsthand when I was in Argentina. Argentina has an unusual economic history in that it went from being an economically developed country in the early 20th century to becoming more undeveloped since the mid-20th century. Argentina has decades of subpar public policy that has shaped its economy into the mess that it is today. It is discombobulated enough where there is no easy solution if Argentina wants a long-term remedy. The hard truth is that if the Argentinian economy not only wants to recover but also become a fully developed economy, it needs to deal with the austerity in the short-term.

That is a difficult thing to convince Argentinians of, especially when there is a presidential election later this year. Although Argentinians are having to deal with lower incomes, higher interest rates, and higher unemployment in the short-run, President Macri might have less to worry about than anticipated, as is outlined in this analysis from the Council on Foreign Relations. Aside from security being an issue that is as important to Argentinians as the economy, there is no great alternative to Macri. The best bet right now is former President Christina Fernández de Kirchner. Her policies were the ones that got the Argentinians in this economic quagmire in the first place. Even better, Kirchner is currently wrapped up in a corruption scandal.

This is not to say that Macri has the election secured because another economic downturn shortly before an election would most probably undo his current advantage. That being said, I understand that what the IMF is asking Argentina to do on a macroeconomic level is politically unpopular. But if the next president of Argentina undoes the progress made, not only would that erode global confidence in Argentina, but it would prevent Argentina from much-needed macroeconomic adjustment. If Argentina could stay the course with the IMF agreement, it would do wonders for the Argentinian economy in the medium-term. It is easy to say "no pain, no gain" as a distant observer who does not have to worry about his cost of living skyrocketing because of tight fiscal and monetary policy. At the same time, short-term pain is exactly what Argentina needs to go through if it wants to stop repeating its history of substantial economic downturn.

2018 Analysis of the Spanish Economy: There Is Economic Recovery in Spain, But...

The global financial crisis reverberated throughout the global economy. Some countries were able to recover more quickly. Much like Greece, the Spanish had a terrible time getting past its recession. It is true that the Spanish Economic Crisis technically ended in 2014. It nevertheless took until this year for the Spanish economy to make a full recovery, as the International Monetary Fund's (IMF) latest Article IV Consultation report illustrates released earlier this week, as did the upgrading of Spain's credit rating from Moody's and Standard & Poor's earlier this year. That was the upside from the IMF report: the Spanish economy is on the mend.




The Spanish economy has many good things going for it. Employment growth is exceeding that of the rest of the Euro area (IMF, p. 4). Employment decreased to 14.7 percent in 2018 from 26.1 percent in 2013 (IMF, p. 5). Monetary policy is accommodative enough to help correct remaining imbalances (OECD). Any economic impact from the uncertainty surrounding Catalonia has been largely confined to Catalonia (IMF, p. 5; also see my 2017 analysis on Catalonia). Low financing costs and improved profit margins are boosting business investment (OECD). Spain became the second most visited country in 2017, even surpassing the United States (IMF, p. 6). Property prices are recovering from a low level (IMF, p. 7), which is important considering one of the major causes of the Spanish Economic Crisis was due to the housing market. The number of non-performing loans is declining, a fact that is in contrast to an Italian economy that is dealing with the adverse effects of a high percentage of non-performing loans.

In spite of these indicators, there are some concerns regarding the Spanish economy. Spain is still dealing with major long-term unemployment and youth unemployment issues (OECD). GDP growth is expected to moderate (IMF, p. 4). Public debt remains at 100 percent of GDP, and doesn't show signs of significantly diminishing (IMF, p. 1). The IMF recommends considerable financial consolidation so the problem does not get out of hand (IMF, p. 10). I hope the Spanish government deals with its fiscal issues so it does not open itself to the craziness the contagion effect from Brexit or the Italian budget debacle.

For more reading on the state of the Spanish economy, please consult the links below.

Major Sources of Information
Banco de España Economic Analysis (in Spanish)
BBVA Research
European Commission
Focus Economics
Heritage Foundation
IMF Article IV Consultation report
Organization for Economic Cooperation and Development (OECD)
Rabo Research

Greek Economy Still a Mess Even After IMF-EU Bailout Ends

This past Monday was as historic of a moment for Greece as Alexander the Great conquering much of the known world......okay, maybe not that great. Nevertheless, it is relatively historic in modern Greek history because the recession that Greece endured was the longest financial downturn since the Great Depression. Actually, it was arguably longer and deeper than the Great Depression was (see below). After eight years of bailouts from the International Monetary Fund (IMF) and the European Union, the emergency financial support came to an end this past Monday. Greece has been deemed in good enough financial shape where it can finally stand on its own two feet. Should we be celebrating the end of this previsionary emergency money?

On the one hand, one of the stated aims of this funding was to help Greece restructure its debt and to pass fiscal policy reforms in order that it avoided defaulting. The IMF Article IV Consultation released in July points out the Greek economy has stabilized is that the Greek government has largely eliminated macroeconomic imbalances (IMF, p. 5). According to the OECD's 2018 Economic Survey on Greece, fiscal consolidation led to primary surpluses well above target, which is why Greece has fiscal credibility (OECD, p. 5). In June 2018, Standard and Poor's upped Greece's credit rating from B to B+. Moody's was nice enough to upgrade Greece's credit rating two levels in February 2018. Greece also has a cash buffer of over $27 billion, which means that they probably won't need market help for about two years (assuming favorable market conditions). What this means is that investors have gained confidence in Greece, Greece has access to capital markets, and can raise money on its own. These are definitely positive indicators. Although Greece seems to endured the worse of it (at least for now), the Greeks are not done with its crazy fiscal Odyssey.

The IMF was not optimistic in its outlook on the Greek economy:

"As the country exits the program era..., crisis legacies and an unfinished policy reform agenda in most areas weigh on Greece's prospects. High public debt, weak bank balance sheets, reliance on capital controls and emergency liquidity assistance, and worrisome social indicators, inducing still-high unemployment, all weigh on growth and social cohesion. "

I could stop there, but let me press on as to why the Greek economy is in calamity. For one, Greece's GDP was about a third smaller in 2017 than it was in 2010. If you look at Greece's GDP growth since 2010 (OECD), it's no wonder that this primary macroeconomic indicator is damning.

Greece still has an unemployment rate of 20 percent, and has one in four of its citizens living below the poverty line (OECD, p. 10). Greece maintains an unemployment rate that is above its European peers (OECD, p. 13). Don't forget that 48 percent of Greece's loans are non-performing, which is about 10 times higher than the rest of the European Union.

Plus, Greece is expected to maintain an average primary surplus of 2.2 percent of GDP until 2060. Given that economies go through boom and bust cycles, is it realistic to expect that Greece can maintain that growth level without inflicting financial pain on its citizens? Just take a look at what is happening in Italy or Turkey, and tell me that Greece will not somehow be affected by neighboring markets. The IMF is not confident that Greece will make it in the long-run without further debt relief (IMF, p. 10). And this doesn't take into consideration that the upcoming Greek elections increase uncertainty of fiscal reform (IMF, p. 6).

I could analyze other economic indicators, but I want to conclude by asking this: Did the bailout prevent something worse? I would like to think so. Given the IMF's well-deserved reputation of "lender of last resort," it is more than plausible. As much as I would like to think that the end of the bailout is the end of Greece's woes, I have more than a feeling that we could see another Greek tragedy on our hands.

For more information, please consult:

• The Hellenic Statistical Authority
• IMF Article IV Consultation
• OECD 2018 Economic Survey
• European Commission
• Foundation for Economic and Industrial Research
• Governor of the Bank of Greece
• Coface Group

Turkish Lira Crisis: Why Care About Turkey's Current Account Deficits?

Do you have those moments when you observe a situation, think it cannot get any worse, and then it gets worse? That is how I felt earlier this week when I saw international investors trade out Turkish lira for other currency. The Turkish lira plunged by 11 percent against the dollar on Monday, which proceeded a 20 percent decline last week. This is hardly the first downturn for the Turkish lira. Since the beginning of 2018, the Turkish lira lost 45 percent of its value, which is not good considering that Turkey is the 18th largest economy in the world. What the Turkish lira is undergoing a similar currency crash to the Argentinian peso, a topic that I covered back in May of this year. While there are some similarities to the Argentinian peso crisis (e.g., inflation, currency depreciation), there are some differences that make the Turkish crisis a notable one.

Source: XE Corporation

Although Turkey has multiple causes to its latest currency crisis, one feature that stands out is its current account deficit. In short, what a current account deficit means is that a given country is a net borrower from abroad. The current account includes three parts: the trade deficit, net primary income from abroad, and net cash transfers.

CA = (X-M) + NY + NCT

In spite of what President Trump has to say on the topic, trade deficits are not a bad thing. It is not so much that Turkey is running a deficit, but rather the size of the deficit and an inability to pay back the deficit incurred. Turkey's current account deficit has widened to 5 percent, which, as the International Monetary Fund [IMF] points out in its most recent Article IV Consultation (released in April), is higher than its peers (IMF, p. 4). Then there is the currency depreciation that caused the inflation (IMF, p. 5). Not only did this sharp currency depreciation fuel inflation, but it put pressure on local banks and undermined economic growth (Bloomberg). Turkey's projected growth for 2018 dropped from 7.4 percent to 4.8 percent, a projection that Fitch pointed out during its credit rating downrating of Turkey. Standard and Poor's followed suit in downgrading its credit rating this year and deepening Turkey's junk bond status, citing the volatility of Turkey's exchange rate and deteriorating outlook on its inflation.

Turkey's external financing needs for this year amount to $200 billion (or 25 percent of its GDP), and as such, Turkey is going to need the backing from an organization such as the IMF that could finance the current account deficit. The problem is that Turkish President Recep Tayyip Erdoğan is probably going to ask for help. I'm not saying it's impossible. After all, Argentina historically has a relationship with IMF that could hardly be considered smooth sailing. If anything, it was nothing short of a miracle that Argentina was able to sit down with the IMF and negotiate a three-year stand-by agreement. Nevertheless, Erdoğan probably will not ask the IMF for help. This goes beyond looking weak or incompetent after recently winning the presidential election. Asking the IMF for help would mean repairing damaged relationships with the United States, who happens to be the IMF's primary backer. President Trump doubling Turkish steel tariffs and the politics behind Pastor Andrew Brunson's imprisonment indicate that U.S.-Turkish tension is not likely to abate anytime soon.

What happens if Erdoğan doesn't feel like going to the IMF? He has a few other options, but they are not going to be pretty. Erdoğan could raise interest rates to help the fact that Turkey has a low savings rate (IMF, p. 26), except that he considers high interest rates "the mother of all evil." There is the possibility of a currency board to get Turkey out of this mess, but there is concern over whether Turkey has the theoretical conditions to make it a reality. Bloomberg already dismissed the possibility of capital controls working for Turkey because, as economist John Cochrane points out, government debt is the problem. What will Turkey do? That is a good question, and largely up to Erdoğan. If the European Central Bank and Bank of Japan are indicative of anything, it could be the path of least resistance. Erdoğan has some political incentive to not shake things up too badly, but given the direction it is heading, that wouldn't be the wisest decision. The longer that Turkey waits to do something significant, the more likely Turkey sets it up for failure, as well as be more likely to trigger a global economic disaster.

Peso Depreciation, Inflation, and Interest Rate Hike: Is Argentina Looking at a 2018 Recession?

Panic is a word that one could use to describe the Argentinian economy right now. The Wall Street Journal recently referred to it as a death spiral. The value of the Argentinian peso (ARS) fell 6.6 percent relative to the U.S. dollar on May 3. This devaluation has been occurring for quite some time, although this decline was the largest. In order to stop further depreciation, the Argentinian central bank (Banco Central de la República de Argentina) raised the interest rate to 40 percent a little over a week ago. For context: less than a month ago, the interest rate was 27.5 percent. It is bad enough where the Argentinian government asked the International Monetary Fund (IMF) for a bailout loan. I thought the IMF would not have given Argentina money considering that Argentina defaulted on an IMF loan in 2003. However, an agreement for a $30 billion loan of emergency aid is underway. What I have to wonder is what is the magnitude of the problem here.

Positive Economic Indicators

• Inflation fell from 40 percent in 2016 to 24 percent in 2018. 
• Argentina has recovered from its 2015 recession, although at a slower rate than the last two recessions (IMF, p. 4).
• Argentina is in a better position to accept an IMF adjustment program since it no longer has its peso pegged like it did in the 1990s.
• The public sector is projected to reach its deficit target of 3.2 percent (BBVA).
• Argentina's economic volatility is balanced by high per-capita income, a large and diversified economy, and improved governance scores (Fitch).
• The GDP is expected to grow considerably and inflation is expected to slow down (IMF, p. 9).
• "The removal of foreign exchange controls...resolution of the dispute with bond holders, and realignment of utility tariffs have corrected Argentina's most urgent macroeconomic imbalances (IMF, p. 4)."

Negative Economic Indicators

• Argentina will experience forex (foreign exchange) pressure from an unsustainable current account, lack of central bank credibility, and worsening external financial conditions (BNP Paribas). 
• Currency risk for companies based in Argentina is going to be high through mid-2019, according to Moody's.
• A combination of a high interest rate and currency depreciation will make further capital outflows costly. 
• Argentina has a budget deficit of 6 percent. Without new budget measures, the budget will increase precipitously. 
• Because of the increase of foreign financing and low global risk premier, there has been an upward pressure on the real exchange range. This has left the Argentinian peso overvalued by 10 to 25 percent, thereby exacerbating external imbalances (IMF, p. 9). 
• The low percent of exports will make it more difficult for Argentina to recover from its external debt (Council on Foreign Relations; IMF, p. 7).
• 30 percent of Argentina's foreign exchange reserves are non-transferable letters of credit (letras intransferibles). This means it will be more difficult for Argentina to pay off its liabilities or withstand a currency crisis (American Institute for Economic Research).

What Will Happen?

It might be fun to prognosticate, but at the end of the day, this is still speculation based on economic analysis. Nevertheless, I'll give it a go. I know that these economic shifts will both undermine Macri's economic policy of gradualism and diminish his odds of re-election. With the Argentinian central bank depleting its foreign reserves, there is little it can do to stop the capital outflow, which is worrisome. The silver linings are that Argentina is not anywhere near defaulting, and that the private sector-denominated debt is low. Even so, there are a few ways that Argentina can proceed. BNP Parnibas suggests that because of the trap of fiscal dominance, either fiscal adjustment (lowering the budget deficit) or further depreciation of the peso are the main options. Another option is currency reserve management and making sure Argentina buys enough local currency. Years of populist and protectionist policy will make any adjustment painful. What will make this more painful is that this is the canary in the emerging market coal mine. I don't think there will necessarily be a recession by the end of the year, but I anticipate a tough road ahead for the Argentinian economy. 

For more reading, read the main sources here:
- IMF's 2017 Article IV Consultation for Argentina
- Banco Central de la República Argentina [BCRA] (Report of Financial Stability, First Half of 2018)
- BBVA Research
- Heritage Foundation Economic Freedom Index

A Look at the Italian Economy and Ramifications of the 2018 General Election

Last week, Italy had its General Election for its parliament members after the Italian Parliament was dissolved by President Sergio Mattarella. No single party won the majority, and there is not even enough consensus at the moment to form a coalition government. Even so, it became clear that the influence of the center-left is greatly diminishing in Italy, and that anti-establishment populism is surging, much like it has in other developed countries. While the hung parliament is figuring out what sort of coalitions to build, I would like to take a look at the state of the Italian economy. Over the years, I have heard criticism about the Italian economy, but have never personally taken a particularly deep look at the economic data to make my own determination. Today, I would like to take a look at the Italian economy because it is the third largest economy in the Euro Zone. Italy took a particularly huge hit since its economy shrunk by nine percent and subsequently dealt with a triple-dip recession. If the Italian economy takes a downturn, its effects on the Euro Zone, as well as the global economy, would make Greece's government-debt crisis look like a cake walk in comparison.  With that being said, I would like to examine the state of the Italian economy, followed by a preliminary take on what the elections could mean for Italy's economic future.



Italy is in the process of a recovery that is gaining traction. As the OECD points out in its November 2017 report, the growth in business investment and export demand has helped the Italian economy (p. 178). Lending to non-financial rate corporations has are also helping with the recovery, as is Italy's booming manufacturing base. What's nicer is that the Italian government is repealing the value-added tax hike (which is good considering how high it is already) and providing businesses with tax incentives to invest in the Italian economy. Standard and Poor's felt confident enough in the Italian economy that in October 2017, it raised Italy's credit rating to BBB, the first such increase in three decades because of greater economic growth, growing investment, and increased employment.

Nevertheless, I do have concerns about the Italian economy. The OECD finds that Italy's greatest vulnerabilities are the high levels of non-performing loans (NPLs) and its high level of public debt (p. 180). Italy has a higher NPL ratio than its European counterparts. In its 2017 report, the European Systemic Risk Board (ESRB) covers the topic of NPLs and why they are a risk to the stability of the European financial system. At the very least, tying up resources in NPLs detracts from investing in productive sectors of the economy. More to the point, high levels of NPLs stifle lending and investment. If it does not get better, banks would be less likely to give loans, which could reverse Italy's progress. The quicker the resolution to Italy's NPL problem, the better.

The OECD also views debt-to-GDP ratio as a threat. The bad news is that Italy's debt-to-GDP ratio is already high. The good news is that the OECD does not anticipate the debt-to-GDP ratio getting higher. Nevertheless, the OECD realizes that Italy is prone to higher interest rates, which is why it recommends that "continuing pro-growth reforms and gradually raising the primary surplus are key to reducing the public debt ratio (ibid.)."

Dismal levels of GDP growth have fed insecurity. Demographics imply that Italy could use more immigrants based on its really low fertility rate of 1.34. However, given how the elections went and how anti-immigration sentiment has been growing in Italy, good luck with that! That set aside, the Italian GDP grew 0.4 percent last quarter. Although that is better quarter-to-quarter growth than in recent years, it is still below the Euro Zone average (Banca d'Italia), not to mention that its GDP is still below pre-crisis levels. While IMF, the European Commission, and Banca d'Italia are anticipating higher short-term GDP growth (see EC projections below), Fitch is anticipating lower medium-term GDP growth due to economic slack, declining wages, and a highly fragmented political landscape.

The International Monetary Fund (IMF) points out additional concerns in its July 2017 Article IV Consultation for Italy. The IMF is concerned that the risks to Italy are significant, most notably because of weak productivity and low aggregate investment. Much like the OECD illustrated, the IMF points out that until Italy can deal with its NPLs and high debt-to-GDP ratio, economic growth in Italy will be stalled (IMF, p. 4). And as much as Italy has maintained its debt-to-GDP ratio, which is the second-highest in the EU, there is no sign of Italy being able to slow down the spending buildup that has amassed over the years (p. 10). At least from the IMF's point of view, risks are significant and tilted to the downside because of political uncertainty, financial fragility, and possible setbacks to reforms (p. 11).

Conclusion: What does this mean for the Italian government? That remains to be seen. It is difficult to speculate on what exactly the parties would compromise in order to form their coalitions. Some of the larger parties had Euro-skepticism as part of their party platform. The good news is that Italy is most probably not going to cause volatility by leaving the Euro Zone. Brexit shows us that it is difficult enough to leave the European Union when you're not even part of the Euro Zone. Italy would have an even more difficult time doing so since it is part of the Euro Zone. Limiting its contagion effect on the global economy is always nice. There is also the worry that the Italian economy could tank and crash out of the Euro Zone, as this report from the American Enterprise Institute alludes (Lachman and Nabil, 2018). To reiterate, so much of this depends on the coalitions formed and how they enact economic policy.

I still wonder if it would have a major impact on the Italian economy itself. After all, Italy has a habit of churning through governments. Italy has had 65 governments since 1945, which suggests that changes to the economy might not be so everlasting. A coalition government means that the Italian parliament will have to compromise more, which means less likelihood for more drastic economic policy. This is not to say that Italy does not need economic reforms because it clearly does. However, given the major parties that won a plurality of the votes, it is unclear as to how much of that reform would be in Italy's favor. The greatest challenge for the Italian government post-election is to ensure economic and financial stability. As the OECD already pointed out, that includes pro-growth reform and keeping the debt-to-GDP ratio low. If Italy could manage to do that without doing anything radical, the results of the Italian election should not be particularly worrisome.


Main Sources
Organization for Economic Co-Operation and Development (OECD)
Banca d'Italia [see here and here]
International Monetary Fund (IMF)
European Commission (EC)