Viability of Capital Market Access for Developing Countries in the Context of Climate Vulnerability

Principal Investigator

• Professor Ulrich Volz (SOAS University of London)

Co-investigator

• Alex Dryden (SOAS University of London)

Funder

• GIZ on behalf of the German Federal Ministry for Economic Cooperation and Development

Duration

• 2024-2025

This research project aims to conduct a thorough analysis of the dynamics influencing access to capital markets for developing and emerging economies, particularly under the strain of climate change-related vulnerabilities. 

As these nations face escalating investment needs in climate adaptation and mitigation, their dependency on fluctuating international bond markets introduces significant fiscal and growth risks. The project is structured around two central research questions:

1. Under what conditions can developing economies access capital markets, and how do the associated financing terms impact their long-term debt sustainability?
2. How does climate vulnerability affect sovereign risk and the ability of these nations to maintain capital market access?

The research findings will detail the latest trends in sovereign lending, underscoring the crucial role that international capital markets play in bridging the climate change financing gap. However, excessive reliance on international capital markets exposes developing economies to significant roll-over risks, especially amid structurally higher global borrowing costs. 

Intermittent access to these markets also complicates the ability of governments to manage the fiscal challenges associated with climate change and the increasing intensity and frequency of climate disasters. These issues raise questions about the sustainability of capital markets as a means to bridge the climate financing gap and highlight the need for further discussion on alternative funding sources and policy recommendations.

Header Image credit: Luca Micheli via Unsplash.