Nadia S. Ouedraogo (United Nations Economic Commission for Africa)
The paper analyses the impact of climate change metrics (vulnerability and readiness) on the cost of government borrowing expressed as both sovereign bond yields and sovereign risk premium, in a panel of African countries over 2002–2020, using a range of econometric methodologies. The primary analysis employs the Generalized Method of Moments (GMM) to address potential endogeneity and measurement errors in the panel dataset. The GMM results indicate that a 1-unit increase in vulnerability raises spreads by 3.6% and yields by 4.4%, while a 1-unit increase in readiness reduces spreads by 3.1% and yields by 1.9%. Sensitivity analyses using Two-Stage Least Squares (2SLS), Feasible Generalized Least Squares (FGLS), Random Effects Models, and Panel Quantile Factor Models (PQFM) validate these findings. These methods help control for unobserved heterogeneity, heteroskedasticity, and capture effects across different quantiles. The robustness of the GMM results, confirmed by alternative models shows that climate-vulnerable African countries, exhibiting low climate disaster managerial abilities in mitigating the climate challenges pay a higher risk premium on their sovereign debt. The cost of government borrowing is significantly affected by climate vulnerability, even when accounting for other factors that typically influence the risk of a country’s debt, such as macroeconomic conditions and institutional factors. In other words, countries that are more vulnerable to the effects of climate change face a higher interest rate on their government bonds. Climate resilience also significantly impacts borrowing costs in a negative way. Countries with greater resilience to climate change experience reduced bond yields and spreads compared to countries more vulnerable to climate change impacts. Furthermore, the findings indicate that countries with limited financial capacity, impaired fiscal and economic indicators, are required to offer higher interest rates when issuing government bonds and experience wider differences in rates. This underscores the need for policy interventions aimed at enhancing readiness, reducing vulnerability, strengthening governance, promoting trade openness, maintaining adequate reserves, and fostering sustainable growth. These integrated strategies are crucial for lowering borrowing costs, improving financial stability, and supporting long-term economic resilience and growth.
About the RAMP University Network Seminar Series on the Economics and Finance of Climate Change Adaptation
The RAMP University Network Seminar Series provides a forum for discussion on the latest research related to the economics and finance of climate change adaptation, including amongst others, research on climate change and macroeconomic and financial stability, climate change and sovereign risk, adaptation finance, disaster risk finance and insurance, climate-sensitive budgeting and public financial management, costs and benefits of investing in climate resilience, and programme design.
About the RAMP University Network
The University Network for Strengthening Macrofinancial Resilience to Climate and Environmental Change was established to promote multi-disciplinary academic teaching and research in areas important for strengthening macrofinancial resilience to climate change. The University Network is a key part of the Resilience Adaptation Mainstreaming Program (RAMP). The objective of RAMP is to accelerate climate adaptation in developing countries by building capacity in ministries of finance, planning and economics to understand, plan for, and finance climate adaptation actions.
The RAMP University Network consists of global universities that seek to build capacities to carry out relevant high-quality teaching and research and acts as a strategic and knowledge partner of major international organisations working in this field. The University Network develops curricula and course materials and organises teacher trainings to enable universities in climate-vulnerable countries to offer high-quality graduate-level teaching and professional training. This will enable future and current leaders to effectively address climate-related macro-financial risks and vulnerabilities that threaten public finances, financial and macroeconomic stability, and economic development.
RAMP is a collaboration between the World Resources Institute and the Centre for Sustainable Finance at SOAS, University of London. The University Network is managed by a Secretariat hosted by SOAS.
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