SOAS University of London

Developing countries face rising debt payments due to climate change

3 July 2018

Developing countries face additional debt payments of up to $168 billion over the next ten years as a result of their vulnerability to man-made climate change.

A new study co-authored by SOAS researchers Gerhard Kling, Yuen Lo, Victor Murinde and Ulrich Volz found that climate risks are increasing the cost of capital for developing countries. The researchers found that for every ten dollars these countries pay in interest payments, an additional dollar is due to climate vulnerability.

The study shows that over the past decade, a sample of developing countries have endured $40 billion in additional interest payments on government debt alone. The researchers estimate that these additional interest costs are set to rise to between $146bn and $168bn over the next decade and exacerbate the economic challenges already faced by climate vulnerable developing countries around the world.

The researchers also found that investments in climate resilience can help improve fiscal health at the national level. Dr Ulrich Volz, Head of the SOAS Department of Economics and one of the lead authors of the study, said: “Investments that enhance the adaption capacity and resilience of climate vulnerable countries are crucial. They will not only help vulnerable countries to better deal with climate risks, they will also help to bring down the cost of their borrowing. So far markets are placing the wrong value on efforts that mitigate climate risks. Such a market failure implies that the hurdle rate for such projects are too high, and the returns on such projects are commensurately greater. Helping people address climate risk is a good investment.”

The research identifies several market and policy initiatives that could play a role in reducing the burden. The researchers found that to be effective from a financial perspective, climate adaptation initiatives must accomplish at least one of three imperatives: reduce the total economic costs of the impact of climate change, improve the speed of economic recoveries, and/or cost-effectively transfer climate-related financial risks.

The study was commissioned by UN Environment with financial support from the MAVA Foundation and prepared by a team of researchers at SOAS and the Centre for Climate Finance and Investment at Imperial College Business School. It is the first study to explore the relationship between climate vulnerability, sovereign credit profiles, and the cost of capital in developing countries.

To download a full copy of the report or the executive summary, visit the SOAS project website.

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Image: Panellists at the launch event on 2 July (from left to right), Sonia Medina (Executive Director at the Climate Children’s Investment Fund Foundation), Michael Wilkins (Managing Director and Head of Sustainable Finance at S&P Global Ratings), Zoë Knight (Managing Director and Group Head at HSBC Centre of Sustainable Finance) and Victor Murinde (AXA Professor in Global Finance at SOAS).