In today’s Finshots, we explain how biodiversity can impact a country’s borrowing cost

The Story

You have a credit rating.

I have a credit rating.

But did you know countries have credit ratings too?

That’s right. If a country wants to borrow money from foreign investors then it should prove that it's creditworthy. And there are very specific companies that make this evaluation — credit rating agencies —  like S&P (Standard & Poor’s), Fitch, and Moody’s. They look at the country’s GDP growth rate, inflation, government debt, political stability, and the general state of finance and they assign a rating. This rating will then tell investors if it’s prudent to invest in the country’s government debt.

So typically, they assign this rating based on the country’s financial standing (current and projected). And you don’t see biodiversity featuring in this analysis. But the thing is — 50% of the world’s economic output, worth almost $44 trillion is significantly dependent on nature.

Hold on…we know we talk about climate change. But what’s this thing with economic output and biodiversity?

Well, let’s take bees for instance. It’s no secret that bees are vanishing at a rapid pace. And you can attribute this to the rampant use of pesticides and the destruction of wildflower habitats. With bees dying, you’re seeing a veritable dip in pollination. In countries like Tanzania, the absence of wild pollinators (like bees) has gravely affected crop production. This in turn has reduced crop revenues  by 29% on average. And you can see how this can impact the economy.

Anyway, it seems people are finally waking up to this very real threat. And for the first time ever, a new report has quantified how biodiversity-related matters can affect a country’s creditworthiness.

So, what did the researchers find?

Well, they looked at three different scenarios.

  1. “Status quo” —A situation where the country puts a full stop to destructive bio-diversity changes from here on in.
  2. A “business-as-usual” scenario where we continue along the same path without any intervention
  3. And the worst case is if we go berserk with the destruction and get to a point of “partial nature collapse” when the ecosystem reaches a tipping point.

After they outlined these three different scenarios, they looked at the economic fallout in each case.

So, let’s start with the worst-case scenario.

In this instance, close to 58% of all countries (from a sample set of 26) would see their credit ratings drop by a whopping 6 notches on a 20-point scale. The drop in credit rating would mean increased interest costs. Governments will have to spend an additional $28 to $53 billion in annual interest payments. And China and Malaysia will be the worst hit. With China alone adding $12 to $18 billion to its interest payments.

And mind you, it’s not just the government that will have to pay more. A bad credit rating affects companies operating within those nations too. China’s corporate sector for instance could see an additional outgo of nearly $30 billion as interest.

What about India, you ask?

Well, our rating will drop by 5 notches in this worst case. And that means around $5-$7 billion in extra interest payments — money that otherwise could have been used to build roads, schools, and hospitals.

And granted you can argue that this is the worst case. But the outcomes in other more optimistic scenarios aren’t looking very rosy either.

Here’s what a “business-as-usual” scenario would look like

China and Indonesia will see the largest downgrades (about 2 notches) and India will stand to lose a rating point. And no, a single rating point isn’t inconsequential. This drop could take us from “lower medium grade” to “speculative.” This could hit foreign investment flows in a big way.

But here’s the thing. Countries reading these reports cant just go, “Hey, I don’t want my borrowing costs to rise in a decade because of a loss of biodiversity.” You see, if a country wants to protect nature today, it’s not going to come cheap. Conservation efforts need money. And for countries that are already struggling with high levels of debt, spending on something that does not provide an immediate benefit might seem like a wasted effort. Even worse, borrowing for this endeavour alone could negatively impact their credit rating today and increase costs anyway.

So yeah, at the end of the day, countries have to figure out the trade-off — should they pay now and protect and invest in nature or should they pay later in the form of higher borrowing costs? It’s a tough one.

Until then…

Ditto Insights

For the first time ever in India, health services will now be under the ambit of GST.

A trip to the local private hospital would cost you an average of ₹30,000. And if you think that’s expensive — buckle up — because it’s only going to get worse.

The government has introduced various tax reforms to boost revenue collections — and hospital room rents seems to have made the cut.

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Until then...

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