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Germany faces fiscal risks from tight gas supplies

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The economic outlook for Germany has deteriorated in recent months due to high energy price inflation and rising gas security risks, the DBRS Morningstar

The sharp increase in global energy prices has weakened the purchasing power of domestic households and weighed on business costs and business and consumer sentiment, the rating agency said.

Moreover, high uncertainty about the future scale of Russian gas supplies has raised gas security risks particularly for the upcoming heating season, it said.

“A potential gas shortage in the coming winter might lead to disruptions in industrial production and, as a result, to higher public support needs for companies particularly in energy-intensive manufacturing industries,” the report said.

DBRS added that the recent increase in global gas prices is likely to necessitate additional government support measures either for households or domestic utilities.

Household gas heating bills are set to increase markedly over the next months as the strong increase in wholesale import prices for gas has so far not been fully passed through to domestic consumer gas prices.

“A potential gas shortage in the coming winter would raise the risks of costly government bail-outs for companies in energy-intensive industries as gas needs from industrial consumers are subordinated to those of households,” said Yesenn El-Radhi, Vice President of the Sovereign Group at DBRS Morningstar.

“These substantial downside risks for public finances, however, are mitigated by Germany’s ample fiscal space for absorbing a temporary increase in budgetary pressures.”

Strain for households

DBRS Morningstar said the eventual increase in total gas heating costs will be a substantial financial strain for low-income households.

“Therefore, we expect it to be partially borne by the government. This might take the form of support measures for (low-income) households in case high import prices are allowed to be fully passed through to domestic consumer prices.

“While a capping of domestic consumer prices would lower the financial burden for households, it would likely entail government support measures for gas wholesalers and utilities as the latter would bear the brunt of high import prices. The latter scenario was exemplified by the recently announced bailout of the energy company Uniper.”

Financial pressures at Uniper resulted from a sharp increase in gas procurement prices which could not be passed on to domestic consumers.

To conclude, DBRS Morningstar views the potential fiscal cost of support measures for the heating sector as clearly manageable due to Germany’s large fiscal space.