Several countries in the Asia-Pacific region are highly exposed to physical risks from climate change, while their capacity for adaptation is limited, particularly those with lower GDP per person, weaker governance and infrastructure preparedness.
Fitch Ratings believes international financing for adaptation and green transition purposes may help fill funding gaps for some countries at the margins, but this is likely to be a small portion of overall funding needs.
We think South Asian and Southeast Asian populations and economies are the most exposed to flooding risks in Asia-Pacific. Data from Inform, an EU-backed forum for quantitative analysis to support decision-making on humanitarian crises, shows that Vietnam stands out among Southeast Asian nations as being highly prone to flooding risks, while the Philippines is one of the most exposed to risks from storms such as tropical cyclones. In South Asia, Bangladesh is the most prone to the risk of flooding.
The materialisation of climate risks in these regions could lead to significant economic losses. The resettlement of people and buildings from flood-prone areas could give rise to significant fiscal costs for some countries, in particular Vietnam.
Sovereign credit ratings usually put more weight on the near to medium term, which is more relevant for creditworthiness. The impact of the physical risks of climate change is likely to lead to more rating changes when these effects become clearer and more material. The degree of materiality of physical risks differs across countries.
For instance, the Maldives faces an existential risk from a rise in sea levels. Countries more vulnerable to physical risks, with weak adaptation capacity, are likely to be under negative ratings pressure. This puts many countries in South and Southeast Asia at risk of negative ratings action, with Singapore the exception.
Fiscal buffers are constrained for most economies in South and Southeast Asia, as their government debt is close to, or above, the peer median and revenue mobilisation is weak. This could become a negative ratings driver as climate risks become more severe.
A bird's eye view shows a partially flooded network of roads in Yala in southern Thailand, which faced widespread inundation last month. Yala Public Relations Office
FLOODING RISKS
Climate change physical risks include, but are not limited to, the potential risk and impact from floods and landslides, extreme heatwaves, droughts, storms, a rise in sea levels, ocean acidification and loss of biodiversity.
Flooding has been identified as one of the most common types of natural disasters. Coastal flooding usually occurs when low-lying areas near the sea are flooded by seawater, while inland flooding occurs mostly from the widening of rivers or streams from heavy precipitation, or melting of glaciers, among other factors.
Flooding can also occur from heavy rainfall in the higher reaches of major rivers, inadequate physical infrastructure to deal with such events, including the lack of proper drainage systems and flood defences, and storm surges.
Most Southeast Asian countries are island economies or have long coastlines, leaving them highly exposed to the risk of coastal flooding.
The Mekong River is an important waterway. The Inform flood risk index identifies Vietnam as the most exposed to flooding risks in Southeast Asia, both coastal and inland.
Bangladesh is most prone to flooding risks in South Asia, attributed to the country's large rivers and low average elevation.
However, the floods in Pakistan in 2022, which led to damages that were unprecedented since the 2010 flood, highlight that even if a country is not low-lying, it may be prone to flooding because of factors such as unusually high levels of precipitation and the melting of glaciers.
We expect high economic growth in most of South and Southeast Asia with increasing urbanisation, which means their populations' vulnerability to flooding risks is likely to increase. Populations tend to be centred near water.
In Vietnam, for instance, two major cities -- Ho Chi Minh City and Hanoi -- are located near two highly flood-prone deltas: the Mekong and Red rivers, respectively.
Manufacturing production is also likely to be heavily affected by flooding risks, given the proximity of industrial facilities to population centres. This has a near- and medium-term impact on economies from the direct shock to output and on potential supply chain and foreign direct investment (FDI) decisions if a particular country is viewed as more prone to such risks.
Vietnam's FDI prospects are strong over the medium term. However, the location of manufacturing zones close to flood-prone areas could pose a risk to production if these risks materialise.
EASING FUNDING CONSTRAINTS
Several countries have entered into agreements to support their transition to a greener economy. These agreements aid the countries' access to finance.
For instance, the Just Energy Transition Partnership (JETP), which was signed by Vietnam and Indonesia, aims to mobilise US$20 billion in public and private funding. Vietnam's JETP allotment of $15.5 billion is targeted at mobilising international finance and technologies that would enable a switch from coal to renewable energy and new energy sources such as green hydrogen.
Vietnam has received funding of $138 million for projects through the Green Climate Fund, the world's largest climate fund aimed at supporting developing countries in meeting their emissions targets and building greater climate resilience. Other beneficiaries include the Philippines ($138 million), Indonesia ($497 million) and Bangladesh ($441 million).
Bangladesh was the first country in Asia to receive funding -- $1.4 billion -- under the IMF's Resilience and Sustainability Facility, which is aimed at supporting climate-vulnerable countries in reducing and managing macro-financial risks stemming from climate change.
Entering into financing for energy transition may lead to higher debt for some countries, albeit at lower financing costs. Indonesia and Vietnam are among the economies that have greater flexibility to borrow based on their still-moderate debt compared with the peer median.