Moodys warns climate risks can affect credit ratings

FILE PHOTO: Smoke rises above a factory at sunset in Rugby, Britain February 10, 2021. REUTERS/Matthew Childs/File Photo

Moody’s Investor Service warned emerging markets (EMs) like the Philippines against the negative impact of physical climate risks to their credit ratings.


In a report released on Thursday, it said, rising sea levels, droughts, floods and wildfires are credit negative for most of its rated sovereigns, particularly emerging markets (EMs).


“Over time, repeated climate-related natural disasters risk weighing on investment, productivity growth and economic strength.”


Moody’s said weaker economic activity due to increasingly frequent climate-related events will weigh on fiscal revenue and may lead to an increase in transfer payments and welfare expenditures, particularly in the event of climate shocks.


Many countries are also exposed to at least one climate hazard.


Moody’s said Four Twenty Seven’s climate data showed that EM sovereigns exhibit higher exposure to climate hazards than their advanced economies (AEs) counterparts.


For instance, the average flood score for EMs is near the 53rd percentile globally, above the 41st percentile average for AEs. In other words, the average EM has more of its population, gross domestic product and agriculture exposed to flooding risk more than 50 percent of the world’s countries.


“EMs in APAC (Asia Pacific) stand out for their exposure to flood risk, which is highest in Cambodia, the Philippines, and Thailand,” it said. These EMs also score above the 95th percentile globally.


The quality of a country’s infrastructure is also likely to influence sensitivity to climate change since low quality infrastructure may be more severely damaged, hindering recovery from natural disasters, Moody’s added.


It added that despite the diverse set of adaptation measures undertaken by many sovereigns to boost the climate resiliency of their economies, institutional constraints such as lack of budget and technical capacity to introduce and employ environmental monitoring processes and related strategies still persist.


“Overall, many adaptation strategies have yet to be tested. As such, it remains unclear if the scale of individual country adaptation efforts, as well as the funding available for them, match a given country’s adaptation needs, which can be large for the most climate- vulnerable sovereigns.”


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