The GCC must tackle climate risk to protect credit lines

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As markets in the GCC issue more debt to diversify their economies, they should be mindful that climate risk may affect their creditworthiness.

Countries in the Middle East are increasingly supporting growth by tapping into new funding sources, developing domestic debt markets and refinancing maturing debt. This capital is sought to pay down fiscal debt, as well as to invest in government projects.  

Given its considerable current and future debt needs, the region needs to pay close attention to its “big three” credit ratings: S&P, Fitch and Moody’s.

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All three agencies are increasingly modelling climate-related security, such as water management or natural capital, to understand future debt risk.

So far, the UAE and Saudi Arabia have “AA” and “A” ratings respectively, with a positive or stable outlook. The agencies generally view the two countries’ policies to diversify their economies away from hydrocarbons positively. 

Nonetheless, just as insurance companies now warn of higher consumer premiums to mitigate against climate-related shocks unless adaptation measures are taken, the same is true of the credit agencies. 

Those countries that do not invest in climate adaptation strategies may face a downgrading of their credit and thus higher borrowing costs. 

These costs could affect government debt as well as corporate and consumer debt, especially in growing economies like the GCC. 

These extra climate premium costs could manifest themselves as effective but silent tax burdens and hamper economic development.

Temperatures in the GCC have been rising by 0.48C per decade since the late 1980s, much faster than the average in the northern hemisphere, at 0.37C. 

GCC cities are now subject to severe heat stress in the summer months, intensified by built environments with concrete structures.

Moreover, this year’s stormwater events in April again revealed infrastructural weaknesses across the region. Poor drainage facilities in Saudi Arabia and the UAE were overpowered by extreme weather and flooding.

The inconvenient truth is that many climate risk decisions may call for stricter regulation and government control

Conversely, the region also needs to produce more potable water, as well as to protect itself from stormwater. Multiple desalination plants must be built to protect against times of drought.

In addition, air quality from both natural and anthropogenic air pollution needs to be improved, because of its heavy toll on public health.

Finally, the region remains vulnerable to climate risk in food supply chains, because of heavy reliance on world markets. Addressing risk in food import supply chains is another key climate risk challenge. 

Fortunately, the GCC countries do not have to start from scratch when it comes to assessing the risks. 

Research on most of the aforementioned threats has been abundantly funded and promoted over the past few decades. Several world-class research institutions are already based in the region.

For anything that may be missing, there is ample research funding available, thanks to generous education budgets. Ministries have stepped up their work in the past years. Air quality and stormwater management, in particular, are high on the agenda.

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However, the inconvenient truth is that many climate risk decisions may inherently call for stricter regulation and government control. To comply with risk reduction measures, it is possible that some new project developments may need to be restricted or called off entirely.

Effective governance is one way to address environmental problems. This approach requires consensus building between the public sector, private sector and civil society. Citizens need to have their say before large-scale projects are implemented. 

The Bertelsmann Transformation Index, which measures global governance quality, considers only the UAE and Qatar as “good”. Saudi Arabia, Bahrain, Kuwait and Oman still have a long way to go to improve governance performance. 

Unless GCC countries strengthen their governance frameworks, they will find it challenging to address climate risk issues. Conversely, given the financial protection on offer, putting climate risk governance high on the agenda is a singularly worthwhile task.

Martin Keulertz is a lecturer in environmental management at the University of the West of England, Bristol