Fossil fuel exporters face a loss of GDP, government revenue and export receipts from the transition to a lower-carbon economy over the coming decades, Fitch Ratings has said in a new report.
For the most-exposed sovereigns and those that do not adequately prepare for it, climate change stranded-asset risk is likely to lead to rating downgrades as the effects become clearer, closer and more material.
The extent and speed of decline in demand for fossil fuels are uncertain. Excess potential global supply will weigh on prices, potentially compounding the loss from lower volumes, said the report titled 'Climate Change: Stranded Assets Are a Long-Term Risk for Some Sovereigns.'
Coal will face a faster and fuller loss of market than oil and particularly gas. High-cost producers will be squeezed out first. Sovereigns with strong balance sheets and potential to diversify their economies are better-placed. Political instability and rising financing costs can amplify challenges.
Under a plausible scenario, the transition will be a similar shock to oil revenue as occurred in 2013-2016 and again in 2018-20. During this period, two oil exporters defaulted and a further three were downgraded by at least four notches.
Being much slower, it will give sovereigns more capacity to adjust but it will be permanent. A simulation on Fitch's Sovereign Rating Model suggests it can lead to a fall in the SRM output by around one rating notch by 2040 and two to three notches by 2050 for a major oil exporter.
"Ratings typically place more weight on current developments and we will be more circumspect in taking forward-looking rating actions the more distant and uncertain are future events," said Fitch.
( With inputs from ANI )
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