Climate change risk mitigation good for fiscal metrics

By Luz Wendy T. Noble, Reporter

RESPONDING to climate change risks will benefit the Philippines in terms of debt servicing, as well as boost its credit rating, an International Monetary Fund (IMF) official said.

“Joining the global effort to tackle the climate crisis will not only help protect the planet, but can also help strengthen public finances in the Philippines,” IMF Representative to the Philippines Yongzheng Yang said in an e-mail to BusinessWorld.

Although the Philippines entered the crisis with a “favorable” debt position due to its macroeconomic policies in the past, Mr. Yang noted the country’s debt level will inevitably rise along with other economies due to the pandemic.

An IMF paper published by economists Serhan Cevik and Joao Tovar Jalles found that countries that are less resilient to climate change risk may have to incur higher cost of government borrowing. It showed that an increase of 10 percentage points in climate change vulnerability is associated with an over 150 basis points increase in long-term government bond spreads of emerging markets and developing economies.

“These results highlight the importance of improving resilience to climate change in managing public debt sustainability, especially for emerging markets and developing economies,” Mr. Yang said.

In its 2019 Article IV Consultation and Staff Report for the Philippines, the IMF said the country faces “significant” risks from its standing as one of the most vulnerable to climate change.

While it noted the Philippines has taken some steps to combat climate change, the IMF said more can be done through the allocation of more resources and initiatives for climate change adaptation and mitigation. Boosting resilience against climate change could also help the country battle against a rise in poverty incidence, it added.

The World Bank estimated an average of P177 billion is lost in public and private assets due to typhoons and earthquakes in the Philippines every year.

Climate change risks are also considered by debt watchers in assigning credit ratings.

In a report released last Friday, S&P Global Ratings said their economic assessment on sovereigns include potential adjustment for volatility in economic output that could be caused by constant exposures to natural disasters or adverse weather conditions.

“Environmental risks are embedded in our assessment on the Philippines’ creditworthiness. Natural disasters may have an impact on a government’s fiscal position, especially where significant aid is distributed to hard-hit regions, and revenues are adversely impacted,” S&P analyst Andrew Wood said in an e-mail to BusinessWorld.

S&P in May 2020 affirmed its BBB+ long-term credit rating for the country, citing expectations for recovery in 2021 following the crisis caused by the pandemic. It expects the economy to grow by 9.6% this year following a record 9.5% contraction in 2020.

“The government has in the past maintained modest fiscal deficits, even in years where the Philippines suffered damaging weather events,” Mr. Wood said.

The country’s budget deficit in 2020 stood at P1.371 trillion, equivalent to about 7.63% of the gross domestic product. This is more than double the P660-billion gap in 2019 which is about 3.38% of the country’s economic output.

Finance Secretary Carlos G. Dominguez III, who is also the chairperson of the Climate Change Commission, has said the government’s recovery programs should be tailor-fitted to attract investments in domestic renewable energy, sustainable urban planning, and climate-smart agriculture.

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