SPOTLIGHT ON ITALY : Italy’s Surplus Rises for Third Year

Italy’s trade surplus grew for the third year in a row in 1995, as the lower lira and a tight lid on costs helped companies sell more machine tools, textiles and cars abroad.

Every year after World War II, Italy ran a trade deficit--until 1993. Since then, the surplus has grown rapidly so that last year the $28-billion surplus equaled 2.3% of it’s gross domestic product, according to the government.

Among major economies, that’s impressive--second only to Japan’s 2.6%. It’s all the more dramatic because Italy’s GDP has been growing as well--indeed, in the last few years it has vied with Britain as the world’s fifth-largest economy after the U.S., Japan, Germany and France.

Whether the surplus will continue to grow divides Italian economists, investment bankers and executives.

In a first warning sign that it might not, the government said Italy ran a $185-million deficit with countries outside the European Union in January. It was the first monthly deficit with non-EU countries in two years.

“Exports are certainly going to grow less strongly this year,” said Lorenzo Stanca, chief of research at Credito Italiano International. “Part of it is the stronger lira, but the main reason is that demand is slowing in the main European economies.”

France and Germany accounted for 31% of Italy’s exports in 1995 and growth in both countries is slowing.

Still, no one expects Italy to run anything close to a deficit for all of 1996, and some analysts think it can improve on 1995’s record surplus.

What turned around Italy’s trade position was the lira’s exit from the European exchange rate mechanism in September 1992 and its resulting slide.

According to the Bank of Italy’s trade-weighted indexes, the lira has fallen 22.5% since 1992 against the currencies of its main trading partners.

In the second part of 1995 the lira did recover. From a low of 64 on the Bank of England’s trade-weighted index, it gained to a recent 75.

“When the lira rebounds, that is when you find out which companies are totally reliant upon the weakness of the lira and which have good products, marketing, distribution and the whole works,” said Stephen Peak, a fund manager at Henderson International in London, which oversees 13-billion British pounds in investments.

Among publicly traded companies, he said brake maker Brembo, machinery marker IMA, jeweler Bulgari, luxury goods company Gucci and tomato canner La Doria are likely to do well even with a stronger lira. They all export more than two-thirds of their production.

Italy’s exporters tend to be medium-sized family-run companies in the north of Italy making everything from machinery to jewelry to shoes to medical equipment.

“Currency is a swing factor, but I don’t think that will have a great effect,” Peak said. “It may dent their progress, but it won’t blow it offline.”

Giorgio Frigeri, the director general of Banca Popolare di Bergamo, said “we are getting signals that the stronger lira is starting to reduce exports of some companies, especially in the textile industry.”

“But it shouldn’t be dramatic,” he said. “Exporters were very smart to split the gains, and they’ve gained market share. I also think we will see them shift exports to Latin America and Asia.”

In 1995, Italy’s largest trade surpluses were with the U.S. Other surpluses were with France, Germany, Britain and Japan. Other Asian nations accounted for just 4% of exports.

Economists and executives say there’s more to the story of why Italy’s trade position improved so much in 1994 and 1995 than the lira. Other countries that saw their currencies fall in the same period, such as Spain and Britain, still run trade deficits.

“Italy’s economy is way ahead of Spain’s in terms of its flexibility,” said Ken Wattret, an economist at HSBC Markets in London. “Its wide range of small companies were much more adept than Spain’s at shifting production towards export markets.”

In addition, wage accords in 1992 and 1993 kept Italian industry’s costs down. In Spain, higher wages wiped out some of the competitive gains of the lower peseta. Italian wages have risen 8.5% since 1992, while Spain’s are up 15.7%.

Spain’s trade deficit narrowed in 1993, was little changed in 1994 and then widened in 1995.

On the import side, Italy’s trade balance benefited as the government raised taxes and cut spending. That’s kept domestic demand low. In Britain, a growing economy sucked in imports, even as exports rose to record levels.

To be sure, the lira has fallen more than other currencies. The Spanish peseta has fallen 18% since 1992 and the pound 12.5%, according to the Bank of England’s trade-weighted indexes.

Executives at Italian companies tend to downplay the effect of the lower lira, saying the lira’s initial fall in 1993 just corrected the overvaluation that had built up while the lira was pegged in the exchange rate mechanism. The further drop last year only partly helped, because it drove up the costs of the raw materials that Italy must import, they said.

“If we have a stronger dollar we are able to export more of our goods,” said Vittorio Tabacchi, chairman of Safilo, a Padua-based maker of eyeglass frames, which gets about 60% of its sales from the U.S. “But we are manufacturers and therefore the relationship between the cost of materials and finished goods matters.”

Italian industrial producer prices rose 7.9% in 1995.

Also, said Giancarlo Vaccari, chief executive officer of Bologna-based machinery maker Sasib, which exported about 80% of its sales last year: “Our clients aren’t fools. They know we have some advantage and they say: ‘My dear friend, let’s split this advantage.’ ”

For some Italian manufacturers, particularly larger companies that derive much of their revenues from domestic sales, the lira’s recent rise will bring some relief.

Olivetti, in warning of a greater-than-expected loss, blamed part of its expected losses on higher costs of unfinished goods. Fiat also said the lira’s devaluation crimped profits in 1995, even though it too used the lower lira to boost sales of its cars across Europe.

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Italy’s Economic Struggle

Italy has undergone a social and economic transformation since the end of World War II. In that time, it has gone from having an underdeveloped economy to one that is now the world’s fifth-largest. However, the nation is still plagued by political instability and budget deficits, high unemployment and corruption. A brief look at Italy’s economy:

Government turnover

Italy’s political system, consistently undermined by widespread corruption, is considered one of the most unstable in the world. Until it embarked on a reform program in 1993--designed to replace its revolving-door government with stable, anti-corruption administrations--Italy was ruled by an entrenched anti-communist democracy installed at the end of World War II. There have been 55 administrations since the war, with four governments since 1992 alone. The latest government, now 13 months old, has called for early parliamentary elections on April 21. Political maneuvering has kept officials unable to focus on problems dogging Italy’s economy, including rampant inflation, unfettered government spending and the need to privatize government-owned organizations.

Distribution of wealth

Residents of northern Italy are better off than those in the southern tip of the country. Per-capita income in the south is only 57% of that in the north. This discrepancy has caused problems for officials trying to remedy an overall unemployment rate in Italy of 12%. Regionally, unemployment ranges from 8% in the north to 25% in regions south of Rome.

Agriculture

In the last 50 years, Italy overall has shifted from a predominantly agricultural economy to one based on modern industries. Northern Italy is one of the most advanced industrial areas of Western Europe. But the south remains largely dependent on agriculture, and agricultural production is still considered an important part of the country’s economy. Grapes are Italy’s most valuable crop.

Manufacturing

Manufacturing accounts for almost a quarter of Italy’s gross domestic product. Industrialization has caused more than two-thirds of the nation’s people to move into urban areas. Small manufacturing businesses in the north, including the tile-making industry, which has grown over the last 30 years into the world’s largest, drive economic growth there.

Trade

Trade is the most dynamic portion of the country’s economy. A wealth of exports, including clothing, shoes, machinery and ceramic tiles, keeps Italy’s economy humming. Other major exports include motor vehicles, chemicals and fruits and vegetables. The nation’s top trading partners are Germany, France, the U.S., Britain and the Netherlands, respectively. Its major imports include machinery, petroleum, motor vehicles, textile yarns and metals.

Sources: World Information Services, Bank of America; Researched by JENNIFER OLDHAM / Los Angeles Times