Slovakia's energy dependence on Russia changes its Moody's outlook

The country's ratings affirmed at A2.

A gas pipeline station in Výrava, eastern Slovakia, near the Slovak-Polish border.A gas pipeline station in Výrava, eastern Slovakia, near the Slovak-Polish border. (Source: TASR)

Moody’s, a rating agency, has changed the outlook on Slovakia to negative from stable, while affirming the country’s ratings at A2.

The affirmation of the ratings demonstrates that the rating agency considers Slovakia’s economic growth to be solid.

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When it comes to the negative outlook, Moody’s decided to make the change due to Slovakia’s energy dependence on Russia, explaining that if Russia permanently reduced gas supplies to Slovakia, it would impact the country’s economy.

The agency has, however, noticed the Slovak government’s efforts to diversify its gas sources by booking capacity in several European liquefied natural gas terminals and by importing Norwegian gas.

Still, the negative outlook suggests an upgrade [with regards to the ratings] is unlikely in the near term, Moody’s added.

Exposure to energy supply disruptions

In its published decision, Moody’s points out that Slovakia is a landlocked country that imports all its oil and 75 percent of gas from Russia.

Read also: Slovakia bypasses Russia to secure gas for winter, but it will be costly Read more 

“As a result, Russian imports accounted for 57 percent of Slovakia’s energy mix in 2020, well above the European average of 24.4 percent,” the rating agency said, noting that Slovak economy is therefore exposed to severe energy supply disruptions and, potentially, energy rationing.

If the country, moreover, had to reduce its industrial production due to the disruptions, the risk of an economic recession would increase.

“Given Slovakia’s interconnectedness with the rest of the EU, which accounts for around three quarters of the country’s total exports, an economic downturn in the region would further intensify negative pressures on Slovakia’s economic activity,” Moody’s added.

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Read also: Russia curbs gas to Slovakia, catastrophe not imminent Read more 

In the long term, the agency noted, a permanent cut in gas supply could also affect the country’s public finances negatively.

Today, Slovakia’s levels of gas storage are at 68.8 percent of total capacity.

When it comes to Slovakia’s short-term supply of oil, this is unlikely to be affected over the next year, according to the agency. The country enjoys several exemptions under the sixth package of anti-Russian sanctions.

Moody’s forecasts Slovakia’s real GDP to grow by 1 percent this year, followed by 1.3 percent in 2023.

Drawing of EU funds poor

As for the A2 ratings, Moody’s praised Slovakia’s reform and investment projects within its recovery plan, which the European Commission has endorsed.

In June 2022, the Commission also approved the first payment for the country’s projects.

Nevertheless, Moody’s cites poor drawing from EU funds and a fractious political landscape, which are believed to be slowing down Slovakia’s ability to benefit from its recovery plan.

Moreover, the agency is rather sceptical when it comes to the legislation and the implementation of the pension reform.

It is said to help “mitigate the impact of ageing on Slovakia’s public finances”.

The draft law has not yet been passed in the parliament.

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