A view shows Milan's skyline during sunset in Milan, Italy, July 6, 2023. REUTERS/Claudia Greco

(Reuters) -DBRS Morningstar upgraded Italy's credit rating to 'A low' from 'BBB high' on Friday, underpinned by improvements that resulted in a more resilient economy and expectations that fiscal consolidation will help stabilise the public debt ratio.

"Cumulative improvements in Italy's banking system and external accounts have significantly reduced structural weaknesses and improved its resilience since we last downgraded Italy's credit rating in January 2017," DBRS said.

However, according to DBRS, Italy's credit ratings remain constrained by a very high level of public debt, a large and rising interest burden, and a potential weak GDP growth.

Italy's public debt, the second highest in the euro zone after Greece's, is projected by the Treasury to rise to 136.2% of GDP this year from 134.9% in 2024, and to climb further to 137.4% in 2026 before stabilizing the following year.

The euro zone's third-largest economy contracted by 0.1% in the second quarter from the previous three months and the government this month trimmed its growth estimates for this year and next to 0.5% and 0.7%, respectively, citing the impact of US trade tariffs.

DBRS added that despite slower growth momentum and increasing spending pressures over the medium term, the stability and track-record of Italy's government lends credibility to its medium-term fiscal consolidation plan.

"As a result of the constant work carried out over the last three years of government, Italy returns to the top flight with great pride," Economy Minister Giancarlo Giorgetti said.

The agency revised trends on all long-term ratings of Italy from 'positive' to 'stable'.

(Reporting by Nishara K.P in Bengaluru and Gavin Jones; Editing by Shailesh Kuber)