Climate change is already affecting credit spreads in developing countries

Oil exporting countries will be hit harder than others, although climate change is likely to do more good than harm for Russia, Bank of America predicts.

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Climate change could lead to widening credit spreads between the most vulnerable developing countries and the sector average, analysts at Bank of America warn.

According to them, the economic and political consequences of climate change are already increasing the risk premium embedded in bonds of developing oil exporting countries. Since 2019, these securities have been trading at a discount relative to bonds of developing energy importing countries.

"This means that Saudi Arabia, along with some other countries, is facing a double challenge: the negative effects of rising temperatures and the effects of decarbonization," Bank of America analysts write. "Therefore, its bonds will perform worse than those of China, which has the same credit rating."

As a net energy importer, China is in a better position. In addition, renewable energy sources make up a large share of its energy mix. All this makes China less vulnerable to the effects of climate change than Saudi Arabia.

India, another net energy importer, is also in a better position with a relatively high share of green energy and a high ESG * rating. However, India remains vulnerable to rising temperatures.

* Responsible investing - an investment approach that seeks to incorporate environmental, social and governance factors (ESG factors) into investment decision making for better risk management and sustainable long-term return on investment (defined by PricewaterhouseCoopers, more about ESG investing can be read here)

For Russia, climate change is likely to do more good than harm: higher temperatures will boost productivity in the country's colder regions, the bank predicts.

Africa will suffer the most, where the effects of climate change could widen credit spreads by about 100bp. relative to the average for developing countries.

The second major outsider will be South Asia (India and Pakistan), predicts Bank of America.

Credit spreads in European EM countries are likely to narrow relative to the sector averages, thanks to their willingness to adapt to the changing environment. In addition, rising temperatures could be a positive economic factor for countries.