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Italy’s deputy leader Di Maio says he won’t change the country’s economic path

Italy’s Deputy Prime Minister, Luigi Di Maio, has told CNBC that his country will not change course despite fears of ballooning debt and struggling growth.

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Last week, Italy’s anti-austerity government cut its 2019 growth forecast to 0.2% from a previous forecast of 1%.

The country also raised its 2019 deficit to 2.4%, breaking a commitment given to the European Commission last year to stick to just over 2%. The government also predicted public debt would hit a fresh record high of 132.6% of gross domestic product (GDP).

After the announcement, the European Commissioner for Economic and Financial affairs, Pierre Moscovici, said “We could again have problems with Italy.”

Speaking to CNBC’s Dan Murphy in Dubai on Monday, Di Maio said he still had faith in his government’s plan to reject austerity measures preferred by lawmakers in Brussels.

“We are not going to change path.We are on this path for growth and we want to further improve Italian production compared to the the past,” he said.

The 32-year-old said Italy’s attempts to improve its economy had to be looked at in the context of the ongoing trade dispute between the United States and China as well as Britain’s drawn out exit from the European Union.

“When we forecasted 1% GDP growth, Germany forecasted to grow by 1.9%, now Germany is fighting to achieve 0.5% growth. So our targets are positive, compared to other European nations. We are not resigned to zero percent growth and we are passing a series of laws to boost growth in Italy,” he said.

The deputy prime minister added that while there had been some losses in value to Italian banks at the end of 2018, the volatility in markets had passed and he didn’t think there was a risk for Italian lenders at the moment.

“We are a country of savers, we have a lot of private savings and this is very important for our economy. So, in general, I don’t see any risk for the Italian banks, for the euro zone, and for Europe.”

To meet its deficit targets in 2020 and 2021, the Italian government agreed with the European Commission in December that it would raise value-added tax (VAT), or find other means to generate the cash.

Di Maio has maintained that the Italian government will not raise VAT to generate 23 billion euros ($25.9 billion) in 2020 and, at the same time, will deliver income tax cuts worth an estimated 12 billion euros. Fulfilling both of these promises may please voters but risks further boosting Italy’s eye-watering debt and angering Brussels.

Italy’s Finance Minister Giovanni Tria told CNBC Friday that despite no obvious alternative to raise the much needed cash, Rome would still look to avoid higher rates of value-added tax (VAT).

“We’ll find a balanced solution and we’ll form a fiscal system considering our budget constraint,” he told CNBC’s Joummana Bercetche at the IMF’s Spring Meetings in Washington, D.C.

Tria said that investors in Italian bonds should not take fright at Italy’s slipping budget as the country retained a “productive economy” and that current year indicators were predicting a growth recovery in 2019.

The ratings agency Moody’s has the rating on Italian government debt at Baa3 with a stable outlook. It has warned that while Italy’s revised macroeconomic forecast is realistic, its spending plans won’t help it reduce its deficit.

Di Maio said he didn’t expect downgrades because the country was on the “right track” to improving industrial production and growing exports. Describing his domestic policies of Universal Basic Income and pensions reform as the first phase of economic change, the Italian lawmaker said the county would now enter a second phase of investment in business and industry.

Moody’s chief credit officer for Europe, Middle East and Africa, Colin Ellis, told CNBC earlier Monday that despite Rome’s gloomier forecast for growth and debt-to GDP, he doesn’t expect any downgrade to the sovereign credit rating over the next 12 to 18 months.

“It is definitely something we look at but if we think that debt increase is more likely to be at least partly temporary rather than structural and last for ever then it is something we can look through and take a broader perspective,” he said.

Ellis said the market sell-off and flight away from riskier assets towards the end of 2018 did raise some measures of stress in the Italian corporate sector, particularly in banks.

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