This report does not constitute a rating action.
Institutional support and fiscal buffers mitigate the risk to some sovereign ratings of a potentially destructive Atlantic hurricane season. Access to extraordinary concessional support, like that received during the pandemic, can limit the fiscal pressure from severe storms. Strong fiscal buffers and solid infrastructure can also cushion the impact.
What's Happening
The Caribbean had its warmest winter on record, according to the National Centers for Environmental Information; while the Caribbean Institute for Meteorology & Hydrology forecasts that record-high sea surface temperatures and a waning El Nino could mean an early start to an active hurricane season in the Atlantic this year.
Why It Matters
Strong institutional support systems that bolstered creditworthiness during the pandemic will also likely limit downside risks during hurricane season for many sovereigns in the region.
- The possibility of extraordinary support from high investment-grade rated sovereigns such as the Netherlands (AAA/Stable/A-1+) or the U.K. (AA/Stable/A-1+) benefits our institutional assessment and is a rating strength for several regional sovereigns.
- Many of these countries benefited from similar support during the pandemic, which allowed them to enact countercyclical measures and limit the impact of higher debt burdens on their creditworthiness.
- At the same time, several rated sovereigns that have strong relationships with multilateral lending institutions (MLIs) also received extraordinary and timely access to concessional funding during the pandemic.
- Beyond access to concessional lending, many participate in the World Bank co-financed Caribbean Catastrophe Risk Insurance Facility's (CCRIF) multi-country risk pool providing parametric insurance. However, the facility's past payouts generally were small compared with the impact of natural disasters, and we expect any future payouts would be of a similar magnitude.
Beyond external extraordinary support, sovereigns with strong fiscal buffers will likely be more resilient to physical risks over the next six months.
- Such sovereigns typically have higher ratings. They have low net debt burdens or sizable liquid assets, strong economies, and solid infrastructure that will be more resilient to the potential impact that physical risks might pose in the coming months.
- S&P Global Ratings expects nations with these buffers would be better able to restrict the rise in debt or debt costs that could result from a natural disaster, therefore limiting downside rating risks.
What Comes Next
Hurricane season in the region begins in June and lasts through the end of November. Some sovereigns will likely be affected by severe storms in the coming months. However, institutional structures that support resiliency and strong fiscal buffers could limit the impact on public finances and ratings.
Background In Brief
- Of the 10 small island nations in the Caribbean or Atlantic listed above, only 60% are located in the most historically affected region of the hurricane belt, although hurricane patterns could be shifting with changing climate patterns.
- Despite the potentially active storm season, we expect several nations in the Caribbean and North Atlantic will benefit from continued growth in tourism and improved public finances. Over the past 24 months, we have revised the outlook to positive from stable on three sovereigns, to stable from negative on one, and raised the rating on two sovereigns in the region. Three of the sovereign ratings currently have a positive outlook. Many of these nations were able to mitigate the severe impact of the pandemic on their economies through income support measures. The ability to implement these programs was somewhat dependent on the availability of timely concessionary funding.
Related Research
- Sovereign Ratings List, May 17, 2024
- Sovereign Ratings History, May 17, 2024
- Sovereign Ratings Score Snapshot, May 7, 2024
- Sovereign Risk Indicators, April 8, 2024, An interactive version is available at http://spratings.com/sri
- Debt-For-Nature Swaps Are Gaining Traction Among Lower-Rated Sovereigns, Feb. 27, 2024
- Credit FAQ: How Would MLIs’ Participation In Sovereign Debt Restructurings Affect Our Preferred Creditor Treatment And Ratings?, Nov. 28, 2023
- Lost GDP: Potential Impacts Of Physical Climate Risks, Nov. 27, 2023
- Caribbean And North Atlantic Tourism-Dependent Sovereign 2022 Outlook: Rating Risks Are More Balanced As Economies Continue To Turn Around, Jan. 27, 2022
| Primary Credit Analyst: | Julia L Smith, Toronto + (416) 507-3236; Julia.Smith@spglobal.com |
| Secondary Contact: | Jennifer Love, CFA, Toronto + 1 (416) 507 3285; jennifer.love@spglobal.com |
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