How exposed is the Caribbean to climate change?

Moody's Investors Service commented on climate change and the growing threat the phenomenon represents to small island sovereigns, including multiple territories in the Caribbean.

The ratings agency said that all small islands faced some degree of raised susceptibility to the physical effects of climate change, which can be felt via shocks like storms and floods, as well as trends like higher global temperatures and rising sea levels.

"Based on an assessment of the proportion of low-lying land, size of landmass, scale of the economy and concentration in climate-related sectors, Moody's has identified 18 rated small islands as particularly susceptible to climate change," read the report.

On that list, the agency listed the following seven Caribbean territories: St. Vincent and the Grenadines (Aa2 stable), the Bahamas (Baa3 negative), Jamaica (B3 stable), Trinidad & Tobago (Ba1 stable), St. Maarten (Baa2, ratings under review), Barbados (Caa3 stable)and the Cayman Islands (Aa3 stable).

Moody's indicated that smaller and less economically diverse economies were particularly exposed, citing St. Vincent and the Grenadines as among the most exposed and least resilient, given its very small economy, high economic concentration (sea-based tourism), frequent natural disasters and low income levels.

The agency said the Bahamas is also highly exposed; "although, the situation is somewhat mitigated by higher income levels, while Jamaica has the lowest resilience due to low income levels and the government's limited fiscal flexibility."

Falling in the same subgroup as Hong Kong and Singapore, Trinidad & Tobago was designated among the least exposed, given the greater economic diversity and more favorable geographic location.

Slowly unfolding impact on credit

"These sovereigns are also supported by greater resilience owing to their fiscal strength and/or their higher levels of development," said Moody's.

The agency noted that the sovereign credit profiles of small islands take into account the medium-term vulnerabilities to climate change, primarily through weaker economic strength.

"As such, Moody's does not expect single climate shocks to have credit implications unless they are much more severe than its assessments of these sovereigns' exposure and resilience suggest," said the agency.

Given significant uncertainty over the impact of long-term climate trends and mitigating actions to raise resilience, slowly unfolding climate trends can affect credit profiles, according to Moody's.

"For instance, under current climate trend projections applied to research by DARA and the Climate Vulnerable Forum, the GDP levels of small islands could be 4% lower by 2030 compared to a world with no climate change," said Moody's.

Mitigating future impacts

Moody's suggested mitigating actions include investment in climate change-resilient infrastructure and technology. Higher income levels, economic diversification, participation in insurance funds, and access to foreign support would also improve resilience.

For instance, most of the Caribbean small islands in the Moody's study - with the exception of St. Maarten, which has strong Dutch support - are members of the Caribbean Catastrophe Risk Insurance Facility (CCRIF).

The facility pools resources and limits the impact of a disaster on a government's balance sheet and has been activated by events on multiple member territories by this year's hurricanes.

Moody's added, "The United Nations and the World Bank also actively support small islands in times of disaster. However, there is no global insurance initiative at present for small-island developing states in general."

There has, however, been at least one global initiative forwarded by the UN Economic Commission for Latin America and the Caribbean (Eclac), involving a debt-for-climate-mitigating-action swap. However, the project is still early in development.