Climate Change Will Spur Future Sovereign Ratings Downgrades: S&P

Thailand’s credit rating downgraded by two levels. Dominican Republic lowered one grade.

These are not real news headlines yet, but could be, according to scenarios outlined by Standard & Poor’s. The rating agency has concluded after a study that if the damage to the environment continues unabated, there is no way global economic activity, trade or national budgets will stay unaffected.

In other words, climate change will cause credit-rating downgrades.

Using data from reinsurance company Swiss Re AG on the potential damage from extreme tropical storms and floods that are expected only once in 250 years, S&P constructed simulations of their consequences for national economies. The research showed that climate change increases the risk of downgrades of sovereign borrowers by 20 percent, the ratings company said.

In the S&P announcement, Mrsnik noted that S&P’s “results confirm that a larger [amount of] insurance coverage against natural hazards is on average associated with more likely mitigation of adverse economic implications of any climate change impact.“

“We expect the significance of the climate change mega-trend in assessing sovereign risk to only increase over coming decades,” S&P credit analysts led by Marko Mrsnik wrote in a report dated Nov. 25. “As evidence of the economic implications of climate change and extreme weather events becomes ever more concrete, sovereign ratings could gradually become more at risk as well.”

Emerging Nations

The impact of climate change is far more intense for emerging markets than advanced nations, S&P analysts said. The riskiest events include tropical cyclones in the Bahamas and elsewhere in the Caribbean, and floods in Thailand.

Nevertheless, developed countries will also suffer to some extent. The potential fallout of tropical cyclones in the U.S., New Zealand and Japan would be significant, S&P said.

The report found that in the most affected sovereigns, the per-capita income losses would range from about 1.6 percent in Bermuda to 8.5 percent in Thailand compared to a simulation with no climate change. Climate change alone would increase government debt by between slightly more than 4 percent of gross domestic project in Vietnam to 42 percent in the Bahamas.

The research covered 38 sovereign borrowers and 44 natural catastrophes, and didn’t cover all the risks associated with climate change, S&P said.

“The actual ratings impact of climate could, therefore, be larger still.”