BỘ GIÁO DỰC VÀ ĐÀO TẠO TRƯỜNG ĐẠI HỌC KINH TẾ TP. HÒ CHÍ MINH BÁO CÁO TÓNG KẾT ĐỀ TÀI NGHIÊN CỨU KHOA HỌC THAM GIA XÉT GIÃI THƯỞNG NHÀ NGHIÊN CƯU TRẺ UEH NĂM 2024 DOES LOW VULNERABILITY AND HIGH READINESS IN CLIMATE CHANGE REDUCE SOVEREIGN RISK AS WELL AS IMPROVE CREDIT RATING? Thuộc nhóm chuyên ngành:. Hồ Chí Minh, tháng 2/2024 1 ASBTRACT This paper delves into the consequences of climate change on the stability of nations, assessing this impact across 42 countries worldwide by employing 10-year bond prices and their respective credit ratings as primary indicators. Climate change has long been acknowledged as a pivotal driver of a country’s economic prospects.
However, given governments’ historical prioritization of economic concerns over environmental ones, climate change has continued to worsen over time, making it an issue of utmost urgency today. Consequently, it is no longer feasible to disregard this pressing problem. To gain a more comprehensive understanding of how climate change affects different regions, the study categorizes countries into smaller, characteristic groups. The research utilizes annual data spanning from 2004 to 2022 and employs fixed effects panel analysis alongside vulnerability and readiness indices tailored to climate change.
Additionally, the study conducts panel structural VAR analysis to ascertain the causal relationships and impact ordering among the various variables under investigation. Keywords: Climate change, Cost of Sovereign borrowing, Vulnerability, Readiness. 2 TABLE OF CONTENTS LIST OF TABLES AND FIGURES LIST OF ABBREVIATIONS CHAPTER 1.3 Scope of the Study.5 Research Methodology and Model.6 Findings and Contributions.7 Structure of the thesis.2 Sovereign Risk and Climate Change. DATA AND METHODOLOGY.2 Limitations and Future Research.54 4 LIST OF TABLES AND FIGURES LIST OF TABLES Table 1.1: The Climate Risk Index (CRI) for the Extended Duration.1: Previous studies about the effects of climate change vulnerability on sovereign risk.1: Variables Descriptive Analysis.3: Multicollincarily test results using VIF.4: Cross-section dependence test.5: Unit root test.6: Wcstcrlund test for cointegration.8: The determinants of sovereign bond yields.10: Robustness: The determinants of sovereign bond yields.11: The determinants of sovereign rating.12: Robustness: The Determinants of Sovereign Bond Rating.
44 LIST OF FIGURES Figure 2.1: Historical occurrences of extreme weather events in ASEAN.2: Average annual agricultural loss due to climate change as a percentage of GDP.3: Transmission channels of risk.1: Panel SVAR according to Cholcsky Order. 45 6 LIST OF ABBREVIATIONS ASEAN Association of Southeast Asian Nations A IC Akaike Information Criterion AMS ASEAN Member States CRI Global Climate Risk Index CO; Carbon Dioxide EME Emerging Market Economy GDP Gross Domestic Product GHG Greenhouse Gas FEM Fixed Effects Models FOLU The forestry and land use NDC Nationally Determined Contributions ND - GAIN The Notre Dame Global Adaptation Index SVAR Structural Vector Autoregression REDD Reducing emissions from deforestation and forest degradation in developing countries VIX The CBOE Volatility Index VIF Variance Inflation Factor 7 CHAPTER 1.1 Background In recent years, the growing awareness of climate change and its potential repercussions on global economies has placed a renewed emphasis on understanding its multifaceted impacts. Among the concerns that have garnered considerable attention is the intersection between climate change, sovereign risk, and credit ratings. Governments worldwide face the dual challenge of managing the risks posed by climate change while maintaining financial stability and creditworthiness.
This study exploration delves into the crucial question of whether adopting strategies that ensure vulnerability and readiness at a specific level to climate change can effectively influence sovereign risk and elevate credit ratings, with higher exposure to climate vulnerability, have higher sovereign risk (Beirner et al., 2021) The risk of economic activity disruption associated with natural disasters and extreme weather is one of the macroeconomic risks associated with natural disasters (Schuler Ct al. Climate change-induced events, such as extreme weather events, rising sea levels, and disruptions to agricultural patterns, have the potential to trigger far-reaching consequences. From heightened infrastructure damages to strained public finances and exacerbated social inequalities, the aftermath of such events can seriously impair a nation's fiscal health and, consequently, its creditworthiness in the international financial markets. Therefore, addressing the intricacies of climate change is no longer a matter of mere environmental concern; it has become an integral aspect of sound economic policy and responsible governance.
The outcomes of this investigation will provide valuable insights for policymakers, financial analysts, and researchers alike, guiding them toward informed decisions that harmonize climate action, fiscal stability, and enhanced creditworthiness in a rapidly evolving world. Climate change adaptation affects public budgets directly on the expenditure side (Bachner et al. Similarly, mitigation investment, such as clean energy investment, can strain public finances, while climate mitigation policies, such as 8 carbon taxes, can have an impact on revenue. According to data from the United Nations Conference on Trade and Development in 2019, it is projected that to fund essential investments aimed at achieving the Sustainable Development Goals related to poverty alleviation, nutrition, healthcare, and education, a cluster of 31 developing nations would need to increase their public debt-to-GDP ratios significantly.
Specifically, these ratios would need to grow from 47% to 185% Theseucial investments were to be funded primarily through borrowing. In a study conducted by Battiston and Monastcrolo in 2019, a financial pricing model was employed to demonstrate that countries with significant economic dependence on carbon intensive industries experience increased yields on their government bonds. Furthermore, a more recent research investigation conducted by Klusak and colleagues in 2021 reveals that a country's vulnerability to the impacts of climate change is likely to have a detrimental effect on its sovereign credit ratings. By investing in sustainable infrastructure, transitioning to low-carbon economies, and implementing robust adaptation strategies, nations can effectively shield their economies from the destabilizing impacts of climate change.
Moreover, international credit rating agencies' recognition of climate-conscious policies has added a new dimension to the discourse. Evidence suggests that nations demonstrating a commitment to reducing their carbon footprint and fostering climate readiness are more likely to receive favorable credit ratings. These ratings not only influence borrowing costs but also signal a government's credibility and ability to manage risks effectively, attracting foreign investments and bolstering economic growth (Peilin Cai et al. This study aims to examine case studies and empirical data from 42 economies from 2004 2022 to establish the linkage between vulnerability, readiness, climate change, sovereign risk, as well as credit rating.
Furthermore, it highlights the transformative potential of proactive climate policies in reshaping the global financial landscape, encouraging governments to adopt sustainable practices for the benefit of both their nations and the planet.2 Research Objectives This research aims to investigate the relationship between vulnerability and readiness in the face of climate change and their potential impact on sovereign risk and credit rating for nations. By analyzing empirical data, case studies, and existing literature, this study aims to provide valuable insights for policymakers, investors, and financial institutions based on these questions: 1. Does vulnerability and readiness in climate change affect sovereign risk? And are there any differences between regions? 2. Does climate change vulnerability and readiness have an impact on credit ratings? 1.3 Scope of the Study The primary objective of this research is to comprehensively assess the worldwide implications of vulnerability and readiness within the context of global financial markets.
A critical determinant for this study is the accessibility of historical data about 10-ycar sovereign bonds spanning the period from 2004 to 2022, which has been sourced from Investing. These countries, based on this data, have been categorized into three distinct subsets: Advanced economies, Emerging economies, and members of the Association of Southeast Asian Nations (ASEAN). The segmentation into these subgroups allows for a nuanccd examination of the unique repercussions and responses to vulnerability and readiness within each specific economic context. Data Description The selection of data for this research involves a meticulous process, with specific criteria to ensure the reliability and relevance of the information.
The author's approach focuses on countries that have comprehensive 10-year sovereign bond yield data available on investing.com for the period between 2004 and 2022. Adhering to these criteria, a total of 42 countries were chosen as the basis for conducting the research. Within this dataset of 42 countries, the author undertakes a deeper exploration of the impact of climate change, as previously mentioned. This exploration involves further 10 categorization, dividing these countries into three distinct groups.
This division allows for a more nuanced understanding of how climate change affects these nations. Additionally, the research incorporates supplementary data from various sources, including credit ratings and macroeconomic indicators of each country: current account/GDP, GDP per capita, Real GDP growth, Public debt/GDP, Fiscal balance/GDP, and VIX. This supplementary information is gathered from reputable sources such as The World Bank and the IMF. These additional datasets serve to enrich the analysis and provide a broader perspective on the economic and financial aspects that influence the research’s findings.5 Research Methodology and Model This research employs a comprehensive approach, utilizing panel data encompassing 42 countries, to examine the intricate relationship between climate change and various macroeconomic variables in the context of sovereign credit risk assessment.
Il employs two distinct methodologies to achieve this objective. Firstly, Fixed Effects Models (FEM) are employed to scrutinize the intricate connections between climate change and a range of macroeconomic factors, all of which collectively contribute to sovereign risk credit ranking. Secondly, Structural Vector Autoregression (SVAR) analysis is employed to discern the interdependencies and impacts between these variables. For SVAR, the study utilizes the Akaike Information Criterion (AIC) to determine the optimal lag structure, with a maximum lag of 2 suggested by the analysis.
The order of variables' response to Cholesky decomposition in the SVAR analysis is as follows: the 10-year bond price, the foundation of macroeconomics, and the multifaceted factors associated with climate change. The comprehensive and multifaceted methodology employed here enables an in-depth investigation of the complex and nuanccd interactions that form the foundation of the connection between climate change and the credit risk of sovereign nations, encompassing a wide array of countries in the analysis.6 Findings and Contributions Our findings show a statistically significant positive impact on climate change vulnerability in all of the group countries studied, with the greatest impact on ASEAN. Furthermore, 11 consistent with previous research, the author discovered a significant negative relationship between climate change readiness and 10-year sovereign bond yields, indicating that climate change readiness has a greater impact on EMEs or ASEAN countries than on advanced countries. Another relationship between macroeconomic fundamentals and sovereign risk is discovered in this study, which finds no discernible correlation between these variables, even within countries.
This will result from differences in economic development policies between countries. According to our research, the other determinants, as well as climate vulnerability and readiness, are found to correlate with Moody's country rating. The greater the vulnerability to climate change, the lower the Moody's rating, and vice versa. In light of the findings presented in this study, the primary goal is to underscore the far- reaching and transformative potential inherent in the adoption of proactive climate policies.
These policies hold the capacity to reshape the economic landscapes of nations across the globe, guiding them in the pursuit of suitable solutions and policies to effectively address the challenges posed by climate change, while also fostering economic readiness and sustainability.7 Structure of the thesis Based on the criteria of a standard research article, this study is also divided into 5 chapters as follows: Chapter I: Introduction: a brief introductory giving overview information of this research. Chapter 2: Literature Review: a more detailed analysis of climate change on other economic factors, presents more specific aims or hypotheses for this study. Chapter 3: Data and Methodology: a detailed description of the dataset and introduction that provides a justification and explanation of the methodological approach the author chose Chapter 4: Results: describe and present the outcome of the analysis 12 Chapter 5: Conclusions: summarize the main findings of the research. The author comments on the results and identifies any limitations of this study.