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- NH12B-02: Climate Change and Sovereign Debt: Estimating the Impact of Tropical Cyclones and Rising Temperatures on Credit Ratings and Borrowing Costs in Developing Countries
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NOLA CC
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June Choi, Stanford University (First Author, Presenting Author)
Renzhi Jing, Stanford University
Christopher Callahan, Indiana University
Marshall Burke, Stanford University
Noah Diffenbaugh, Stanford University
Many countries face growing fiscal challenges due to high sovereign debt burdens and climate change. Weak credit ratings, large debt burdens, and high borrowing costs limit their ability to mobilize finance for climate action. We build on findings from an empirical model to estimate that, since 1990, tropical cyclones and warming have increased average debt-to-GDP ratios across all countries by over 30% and reduced GDP by approximately 10%. Impacts are greater among small island states, where nearly half of their current debt burden may be attributed to tropical cyclones. Using prediction models, we estimate that the most exposed countries are up to 20 percentage points more likely to hold below investment-grade ratings today, and that developing countries face borrowing costs three to five times higher than advanced economies. These costs constrain fiscal space and create trade-offs with investment in essential development goals. Without accounting for climate-driven debt impacts, efforts to mobilize finance will fall short of countries’ actual needs.
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