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7 Aug, 2022 07:43

Three EU economies downgraded by Moody’s

Agency sees 'negative' outlook for the economies of Italy, the Czech Republic and Slovakia
Three EU economies downgraded by Moody’s

Moody's rating agency on Friday changed its outlook on the economies of Italy, the Czech Republic and Slovakia from ‘stable’ to ‘negative’, citing energy supply challenges and the countries’ dependence on Russian gas among the reasons for the downgrade.

The main drivers for lowering GDP growth forecasts for the Czech Republic are soaring energy costs and uncertainty on energy supply from Russia weighing on business investments, higher than initially expected consumer price inflation that is denting private consumption, ongoing global supply-chain frictions and a continuous weakening of the growth outlook in Czech Republic’s main trading partners, in particular Germany,” Moody's said.

The situation in Slovakia could be even more dire, the agency stated, explaining that the landlocked country imports all of its oil and 75% of its gas from Russia.

Home to a large manufacturing sector (22.2% of GDP in 2021 against 17.5% in the euro area), Slovakia's economy is hence particularly exposed to severe energy supply disruptions: an abrupt cut from Russian gas deliveries, the likelihood of which has increased over the past few months, could lead to energy rationing.”

This could result in a halt in energy-intensive industrial production and raise the risk of an economic recession, the agency states.

Italy, although not as dependent on Russian energy as the other two that were downgraded, would also suffer in the event of a cessation of Russian gas imports, as almost 50% of the country’s electricity is generated from gas, meaning the “the impact would be felt through the wider economy.”

Italy is better positioned than other vulnerable European countries… thanks to its LNG terminals and pipeline linkages to North Africa, Northern Europe and Central Asia, which allow Italy to use alternative gas supply sources… Although the lower reliance of Italy's industry on gas reduces the economic risks of the disruption, the use for electricity generation and by households will result in higher domestic energy prices, fueling inflation and causing a significant confidence shock,” Moody’s predicts. Political developments in the country, including the fall of Mario Draghi’s government earlier this month and the upcoming elections in September, “increase political and policy uncertainty” and could affect the implementation of necessary structural reforms, which would also affect the economy, Moody’s says.

Earlier this week, the EU Council approved a plan to combat the unfolding energy crisis by reducing gas consumption throughout the bloc by 15% over the coming months. This is designed to help build up storages ahead of the heating season amid the reduction of gas deliveries from Russia. Proponents of the measure believe that the plan will help EU member states cope with a possible complete shut-off of Russian energy imports.

Russian gas flows to the bloc have been declining for months. Gas transit via Ukraine dropped by 60% in May when Kiev blocked one of the two transit stations through which the gas was being delivered from Russia to the EU, while Gazprom has on several occasions been forced to reduce the pumping capacity of the Nord Stream pipeline due to sanctions preventing a crucial turbine from being returned to the company following maintenance in Canada.

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