Trinidad and Tobago set to include climate in risk assessments

The Central Bank of Trinidad and Tobago has issued its annual financial stability report which recognises that climate risks are “increasingly important” and may pose macrofinancial challenges in the medium-to-long term.

The report signals the bank’s ongoing commitment to incorporate climate concerns into its risk assessment and financial sector supervision frameworks, and to close climate data gaps.

Though climate risks are not considered an “immediate systemic risk” by the report’s authors, a recent working paper by the central bank recognised that climate change is a “pressing issue” and there is a need for urgent action to transition to a low-carbon economy.

The financial stability report sees the foremost challenges to financial stability coming from spillovers from geopolitical tensions, European and US banking shocks, liquidity risks, inflationary pressures, increasing cyber attacks and rising interest rates.

As a hydrocarbon-exporting economy and small island developing state (SIDS), Trinidad and Tobago is vulnerable to both physical and transition risks. Its economy is also exposed to volatile international gas prices and saw a rapid escalation in public debt to GDP ratios during the 2021 energy price crisis. This compounded losses related to Covid-19 and saw the debt ratio rise to around 80% in 2021.

The government has stepped up targets to increase the share of renewables from 15% to 30% by 2030. Keith Rowley, prime minister and former representative governor for the Inter-American Development Bank, said earlier this year that diversifying energy is “vital” to long-term energy security and supply sustainability.

Oil and gas currently contribute 37% of the nation’s GDP and the government recognises the need for an orderly and just transition to protect transition-vulnerable households. According to Trinidad and Tobago’s draft policy to achieve a just transition, significant resources are also needed to retool and reskill its advanced industrial and energy system, and compensate climate-related losses.

A potential solution is climate-sensitive debt relief which could empower Trinidad and Tobago and other climate vulnerable Caribbean SIDS to invest in such adaptation measures during periods of rising rates.

But although the region is facing high sovereign debt – averaging 91% in 2021 – and heightened climate vulnerability, the high or middle-to-high income classification of most Caribbean SIDS means they are largely bypassed in existing climate debt relief programmes.

Meanwhile, extreme weather creates a cycle of disaster and recovery which can leave SIDS fiscally weakened and less able to implement resilience strategies. The Caribbean region contributes just 0.2% of annual emissions, yet it is exposed to some of the most severe effects.

For this reason, a meeting of Caribbean nations earlier this month highlighted the need for targeted debt relief. The IMF’s managing director, Kristalina Georgieva, has also spoken in favour of “timely debt relief” for countries suffering from extreme weather. She said debt-for-climate swaps, concessional finance and grants could increase global climate and financial resilience.

In addition, the Economic Commission for Latin America and the Caribbean’s debt for climate adaptation initiative is exploring various tailored debt relief programmes, such as a climate resilience fund, to address the specific vulnerabilities of the region.

Trinidad and Tobago has outlined its ambitions to attract private investment to its green industrial transformation. Failure to address the nation’s debt servicing costs will adversely impact budget allocation which, the government says, poses a threat to the “transformational changes required to facilitate the transition”.