Daily Management Review

How soon will Italy's populist parties scare investors away?


05/21/2018


Goldman Sachs has removed one of Italy's most famous companies from the list of companies whose shares are recommended for purchase because of approaching establishment of a populist government.



pixabay
pixabay
Italy has been living virtually without a government for more than two months after the unconvincing outcome of the March elections. However, the Five Star Movement and the League of the North parties have now agreed on the basic terms of the ruling coalition's operation.

The mood of the coalition made Goldman worry about the state-owned company Enel, which supplies utilities.

Both the Five Star Movement and the League of the North are committed to the use of renewable energy sources, which could damage Enel, as it is likely to lead to lower energy prices and lower profitability of the company. "The plans presented by the Five Star Movement and the League of the North may prove deflationary, since they will reduce electricity bills by about 15% according to our estimates," the team of Goldman analysts wrote.
 
Goldman excluded Enel from its "list of companies", which presents the most profitable shares. Nevertheless, despite the fact that Enel has been excluded from the list, it still keeps a recommendation for "buying" in the stock market.

The Five Star Movement, which will become a senior partner in the government, is particularly interested in using renewable energy sources for energy production in Italy and advocates for the protection of the environment.

The very name of the party is based on five main problems, and four of them are related to environmental issues: water, environmentally friendly transport, sustainable development and environmental protection.

Although the change in Goldman's attitude towards Enel reflects only fundamental problems associated with how certain politicians affect the company, it can also be considered a broader sign that Italy will become less attractive for investment within the Five Star Movement and the League of the North.

European politicians and economists fear that the coalition government of Italy may create prerequisites for the next crisis in the euro area.

Both parties want to challenge the EU's restrictions on government loans and expenses. The EU rules set a limit on the state budget deficit (3% of GDP) and debt (60% of GDP) and oblige governments to achieve balanced budgets.

For a long time, Italy has been causing concern among euro zone politicians because of debt of about 132% of GDP and slow economic growth.

To reduce debt, the League decided to ask Eurostat not to take into account the € 250 billion debt held by the European Central Bank in calculating Italian debt levels for the purposes of EU budgetary rules. However, EU officials rejected this idea, saying that since Italy was the issuer of debt, it does not matter whether it’s held by private investors or the ECB.

The country’s debt under the coalition government can continue to grow. Luigi Di Maio stated that "the recipe for reducing public debt is investment and expansionist policies."

The Five Star Movement offered a universal basic income for the poor. Implementation of this initiative is expected to cost € 17 billion a year. Meanwhile, the League of the North proposes to set a fixed tax rate of 15% for companies and individuals. As a result, it is expected that tax revenues to the budget will be reduced by € 80 billion a year. 

The plan to abandon the unpopular pension reform will cost € 15 billion. Another € 12.5 billion will be spent on a decision not to raise sales tax in the next year.

source: businessinsider.com






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