World - Why Climate Change Vulnerability Is Bad for Sovereign Credit Ratings?

Climate change can have deep consequences on a country’s finances, a recent report from the IMF showed. According to the report, a country’s vulnerability to climate change can impact its creditworthiness, borrowing cost, and, ultimately, the likelihood of debt default.

Climate change can have deep consequences on a country's finances, a recent report from the IMF showed. According to the report, a country’s vulnerability to climate change can impact its creditworthiness, borrowing cost and ultimately, the likelihood of debt default.

"The destruction wrought by heatwaves, droughts, hurricanes, and coastal flooding doesn’t stop with the toll on human lives and livelihoods—it can also have deep consequences for a country’s finances,” the report said.

While the economic consequences of climate change have been known to us, its effects on sovereign risk have been largely unexplored. However, these risks are actually felt by developing economies – the ones that are not adequately prepared.

Why is it important?

A sovereign credit rating is an independent assessment of the creditworthiness of a country. Understanding the effects of climate change on credit ratings could guide countries to borrow safely, while understanding its costs.

What are the conclusions?

IMF analysed vulnerability and resiliency data developed by the Notre Dame Global Adaptation Initiative. It includes data of 67 countries from 1995 through 2017.

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