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Moody’s warns of climate change impact on sovereign ratings

Countries’ creditworthiness could be increasingly affected by climate change, with African and South Asian sovereigns most susceptible to the economic effects of global warming, ratings agency Moody’s said on Monday.

By contrast, Western Europe, North America and Australia as well as the huge landmasses of Russia and China were least vulnerable, Moody’s found.

“Climate change is expected to become an increasingly dominant factor in our analysis of the credit profiles of those sovereigns that are most susceptible to its effects over the coming decades,” it said in a new report.

Climate change has ramifications for countries’ credit profiles through potential economic impact, damage to infrastructure, rising social costs, and population shifts, Moody’s said.

For example, gradual desertification in Israel, Lebanon and Jordan caused by global warming is leading to land degradation and infertility. Authorities in Lebanon, rated B2 negative by Moody’s, predict the economic damage from climate change could reach more than $80 billion by 2040, or 1 1/2 times its current GDP.

Mozambique, which suffered heavy floods last year and is already on the brink of default at a rating of Caa3 , was calculated to be the most susceptible of any country Moody’s rates.

Jamaica and Belize, small countries with high debt and Caa2 ratings, are seen as the next two most vulnerable, while India is also seen as highly at risk from climate change, with 48 percent of its workforce in the agricultural sector.

Exposure and resilience

Moody’s measured sovereigns’ vulnerability by their “exposure” and “resilience” to climate change.

Exposure was determined by a sovereign’s geographic location and economic diversification, while resilience was measured by its adaptive capacity, fiscal flexibility and income levels.

Countries with large economies and landmasses like Russia and China experienced a higher frequency of natural disasters in the past decade but were also better insulated from their impact on GDP, the agency found.

More susceptible countries meanwhile tended to be lower rated already, an overlap which also reflects higher reliance on agriculture in the economy and weaker infrastructure quality.

“While climate change does not have near-term implications for sovereign ratings, it already exerts some influence on credit profiles of those sovereigns most susceptible to its effects,” Moody’s said, adding this influence would grow over time.

“We will monitor closely the evolving impact and will update and amend our credit assessment of sovereign exposure and resilience to climate change as needed.”

Governments are the first line of defence in responding to climate change, Moody’s said. It found institutional strength was correlated with lower susceptibility to climate change.

This leaves many emerging markets in a double bind of higher susceptibility to climate change combined with a weaker capacity to prepare for and mitigate the risks.

Natural disaster insurance or savings funds could help significantly enhance sovereign resilience to climate change risks, Moody’s said, highlighting the African Risk Capacity and Caribbean Catastrophe Risk Insurance Facility as examples of emerging markets’ regional cooperation on the issue.

The multilateral Paris Agreement on climate change, which entered into force on Nov 4, included a pledge to provide at least $100 billion of annual financing by 2020 to help developing countries mitigate and adapt to climate change.

Moody’s main rival Standard & Poor’s has also looked at the rating ramifications of climate change in recent years, calling it a “global mega-trend” that would affect sovereign credit risk through this century. (Reuters)

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