Physical Climate Change Risks and the Sovereign Creditworthiness of Emerging Economies

61 Pages Posted: 3 Sep 2020

See all articles by Hannes Boehm

Hannes Boehm

Halle Institute for Economic Research

Date Written: August 2020

Abstract

I show that rising temperatures can detrimentally affect the sovereign creditworthiness of emerging economies. To this end, I collect long-term monthly temperature data of 54 emerging countries. I calculate a country's temperature deviation from its historical average, which approximates present day climate change trends. Running regressions from 1994m1-2018m12, I find that higher temperature anomalies lower sovereign bond performances (i.e. increase sovereign risk) significantly for countries that are warmer on average and have lower seasonality. The estimated magnitudes suggest that affected countries likely face significant increases in their sovereign borrowing costs if temperatures continue to rise due to climate change. However, results indicate that stronger institutions can make a country more resilient towards temperature shocks, which holds independent of a country's climate.

Keywords: Climate Risks, Sovereign Creditworthiness, International Finance, Emerging Market Economies, Institutions

JEL Classification: Q54, Q56, G15, H63, O13

Suggested Citation

Boehm, Hannes, Physical Climate Change Risks and the Sovereign Creditworthiness of Emerging Economies (August 2020). Available at SSRN: https://ssrn.com/abstract=3663846 or http://dx.doi.org/10.2139/ssrn.3663846

Hannes Boehm (Contact Author)

Halle Institute for Economic Research ( email )

P.O. Box 11 03 61
Kleine Maerkerstrasse 8
D-06017 Halle, 06108
Germany

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