In its latest report on Morocco, the World Bank estimates that the materialization of climatic risks – physical or transitional – would have a considerable impact on the Moroccan banking system. For the risks to the physical climate, linked to droughts and floods, the exposure of the country’s banks is estimated at around 35% of total assets. They would lead to a significant increase in non-performing loans, with a significant decrease in the capital adequacy ratio. For their part, the financial risks that could arise from the transition to a low-carbon economy would also affect banks, mainly due to losses on their credit and investment portfolios. Although climate risk management is one of Bank Al-Maghrib’s priorities, the micro-prudential framework continues to be limited by the limited information available to monitor and monitor financial risk exposures.
The materialization of climatic risks could have considerable impacts on the Moroccan banking system. While these impacts remain manageable, a stronger regulatory and supervisory framework would help mitigate them. This is what emerges from the report on the climate and development of Morocco published on 3 November by the World Bank (www.lematin.ma). According to this important study, Bank Al-Maghrib (BAM) has already identified climate risk management as a priority and is working to fully integrate these risks into its supervisory practice. A directive on the management of financial risks for the climate and the environment has already been published. However, the micro-prudential framework continues to be limited by the limited data and information available to monitor and monitor financial risk exposures. Furthermore, according to Moroccan banks, data limits represent a major challenge for internal climate risk assessment.
The new report from the Bretton Woods Institution presents the main findings of a vulnerability assessment conducted jointly by the Central Bank of Morocco and the World Bank. This is an exploratory exercise aimed at giving an idea of the orders of magnitude on the exposure of the Moroccan financial sector to climate risks, as well as a quantification of the impacts that the materialization of the various scenarios could have on banks’ balance sheets.
According to the World Bank, climate-related risks can be grouped into two categories: physical climate risks, which are financial risks resulting from the gradual impacts and shocks related to climate change (mainly droughts and floods in the case of Morocco) and climate transition risks, which are financial risks that can arise from the transition to a low-carbon economy.
What impact on assets?
The direct and indirect exposure of Moroccan banks to physical risks is estimated at around 35% of total assets. Direct exposure reaches 8% of assets and covers loans to the agriculture, agribusiness and agribusiness sectors. Furthermore, the tourism sector and household loans are indirectly exposed to physical risks, reaching a further 27% of assets.
The catastrophic scenarios (drought / flood) simulated in this assessment exercise would lead to an increase in non-performing loans and a decrease in the capital adequacy ratio. For the case of drought, the increase in non-performing loans at system level would be between 2.1 and 3.3 percentage points (horizon 2050), while the decrease in the capital adequacy ratio is between 2.1 and 3.3 percentage points estimated between 1 and 1.6 percentage points. In turn, flood scenarios result in an increase in non-performing loans at system level of between 1.2 and 1.7 percentage points and a decrease in the capital adequacy ratio of 0.4 to 0.6 percentage points.
Losses on credit and investment portfolios
Furthermore, “transition risks would also affect financial institutions mainly through losses on their credit and investment portfolios. In particular, if not anticipated by the market, political changes, technological disruptions and consumer preferences related to the decarbonisation effort could increase non-performing loans by reducing corporate profitability and debt service capacity, “the report explains. transition to a green economy can also impact banks’ investment portfolios by reducing the value of their shares and bonds they hold in affected companies.
Therefore, the overall credit exposure of the sectors defined as highly and moderately sensitive to the transition represents respectively 11 and 13.3% of total loans. The highest exposures are in the manufacturing sector (9% of total loans), electricity (5% of total loans) and agriculture (4%).
Note that highly transition sensitive sectors are defined as those with an intensity of emissions greater than 300 tons of carbon dioxide (tCO2) per million dollars produced, compared to 100-300 tons for moderately sensitive sectors.
Finally, the World Bank report highlights that the introduction of a carbon tax could increase the share of corporate loans with increased credit risk. This assessment assumes that rising carbon prices directly reduce companies’ earning potential in proportion to their level of emissions. According to this static exercise, a carbon tax of $ 25 / tCO2 and $ 75 / tCO2 would increase the total share of firms at risk of over-indebtedness by 1.1 and 3.2 percentage points, respectively. Therefore, it is estimated that 1.9% of total corporate lending (0.7% of banking sector assets) would have increased credit risk after the introduction of a carbon tax of $ 25 / tCO2, a share which would reach 8.4% (3.1% of the banking sector assets) in the scenario of $ 75 / tCO2 ”, explains the World Bank.
Read also: World Bank: $ 200 million to support Morocco’s climate transition
