Italy Business Forecast Report Q4 2012

Executive Summary
Core Views
Major Forecast Changes
Key Risks To Outlook

Chapter 1: Political Outlook
SWOT Analysis
BMI Political Risk Ratings
Domestic Politics
Monti Legacy Secure Despite Rise In Populism
Our core view is that the centre-left Democratic Party will emerge as the largest party at the Italian election in spring 2013 Although
populis t posturing will increase as the election approaches, we do not expect the Monti government's reforms to be rolled back
However, we emphasise that the electoral outlook is highly uncertain
TABLE: ITALY POLITICAL OVERVIEW
Long-Term Political Outlook
Fiscal Rebalancing To Weigh On Social Cohesion
Italy faces a sink or swim situation that will determine the political and economic agenda for the coming decade Policymakers face two
enormous challenges: reviving economic growth through a competitive adjustment; and preventing a crippling debt crisis from unfolding
Notwithstanding the end of Silvio Berlusconi's time in frontline politics, we highlight the risk that relations between political parties will
remain tense

Chapter 2: Economic Outlook
SWOT Analysis
BMI Economic Risk Ratings
Economic Activity
Economy To Flatline In 2013
We have revised our real GDP forecast for Italy down from -2 1% to -2 3% in 2012 and from 0 1% to 0 0% in 2013 as the result of new
austerity measures implemented by the government We expect the Italian economy to return to growth around mid-2013 as the spike
in funding costs across the economy caused by the sovereign debt crisis eases, combined with base effects and recovering demand
from the eurozone as the bloc's real GDP growth increases from -0 6% in 2012 to 1 0% in 2013
TABLE: GDP BY EXPENDITURE, CURRENT PRICES BREAKDOWN
Fiscal Policy
Fundamentals Do Not Justify Bailout, But Risks Elevated
We do not believe that Italy's fundamentals imply an imminent bailout However, the country's large public debt load makes it vulnerable
to a loss of confidence Although the Italian sovereign can survive extended periods of high borrowing costs, the knock-on effects on the
real economy lead us to believe that the government would opt for a bailout relatively quickly if yields spiked again
TABLE: FISCAL POLICY
Balance Of Payments
C/A Deficit To Narrow Substantially
We expect the current account deficit to narrow from 3 2% of GDP to 1 3% in 2012 and 0 5% in 2013 as imports contract sharply in
response to the ongoing Italian recession and non-EU demand keeps export growth positive There are also tentative signs that capital
outflows are easing
TABLE: CURRENT ACCOUNT
Regional Monetary Policy
Another ECB 'Game Changer' Fails To Deliver
As expected, the European Central Bank (ECB) announced a new framework for purchasing government bonds at the September
monetary policy meeting but fell short of achieving a lasting resolution for the crisis Although there is scope for markets to rally in the
near term as has been the case in the past when the ECB has met (though not surpassed) expectations, this will fizzle out as investors
realise that the ' Draghi put ' is still somewhat elusive
Regional Exchange Rate Policy
US$/EUR – ECB Delivers Temporary Reprieve For Euro
Under pressure from escalating capital flight and a surge in short speculative positions in recent months, the euro dropped to a 2012 low
of US$1 2061/EUR on July 24 – its weakest reading since 2010 European Central Bank (ECB) President Mario Draghi subsequently
ratcheted up the rhetoric by hinting at a shift in monetary policy towards government bond purchases, which has buoyed the euro over
the last month Following the announcement at the September 6 monetary policy meeting of a new framework for buying sovereign
paper, the euro punched through resistance at US$1 2600/EUR and is trading at US$1 2781/EUR on September 10
TABLE: EUROZONE CURRENCY FORECAST

Chapter 3: 10-Year Forecast
The Italian Economy To 2021
We believe that the Italian economy will continue to face a fairly modest rate of growth over the longer term, weighed down by lower
credit availability and a weaker external environment We also warn that major challenges, such as the government debt load, a
deteriorating demographic profile, structural decline in productivity and potential political instability pose threats to longer-term economic
prosperity
TABLE: LONG-TERM MACROECONOMIC FORECASTS

Chapter 4: Business Environment
SWOT Analysis
BMI Business Environment Risk Ratings
Business Environment Outlook
Institutions
Infrastructure
Market Outlook
Operational Risk
TABLE: BMI BUSINESS AND OPERATION RISK RATINGS
TABLE: BMI LEGAL FRAMEWORK RATING
TABLE: LABOUR FORCE QUALITY
TABLE: TRADE AND INVESTMENT RATINGS

Chapter 5: Key Sectors
Pharmaceuticals
PHARMACEUTICAL SALES INDICATORS 2008-2016
PATENTED DRUG MARKET INDICATORS 2008-2016
PRESCRIPTION DRUG SALES INDICATORS 2008-2016
Telecommunications
GENERIC DRUG SALES INDICATORS 2008-2016
TABLE: MOBILE – HISTORICAL DATA AND FORECASTS, 2009-2016
TABLE: FIXED LINE – HISTORICAL DATA AND FORECASTS, 2009-2016
TABLE: INTERNET – HISTORICAL DATA AND FORECASTS, 2009-2016
TABLE: MOBILE ARPU – HISTORICAL DATA & FORECASTS (EUR)
Other Key Sectors
TABLE: AUTOS SECTOR KEY INDICATORS
TABLE: FOOD AND DRINK SECTOR KEY INDICATORS
TABLE: OIL AND GAS SECTOR KEY INDICATORS
TABLE: PHARMA SECTOR KEY INDICATORS
TABLETELECOMS SECTOR KEY INDICATORS
TBALE: FREIGHT KEY INDICATORS
TABLE: DEFENCE AND SECURITY SECTOR KEY INDICATORS

Chapter 6: BMI Global Assumptions
A Pivotal Autumn Approaches
TABLE: GLOBAL ASSUMPTIONS
TABLE: DEVELOPED STATES REAL GDP GROWTH FORECAST
TABLE: REAL GDP GROWTH CONSENSUS FORECASTS
TABLE: EMERGING MARKETS REAL GDP GROWTH FORECAST 49