An economic report reveals the risks of climate change on “loan portfolios” in Morocco

A joint report issued by the Bank of Morocco and the World Bank on assessing climate risks in the Moroccan banking sector revealed the concentration of credit risks within a narrow geographical scope. This is because more than 60 percent of the total loans are concentrated in Casablanca, and the latter, Rabat, and Marrakesh together account for 77 percent of the total loans. In contrast, only 3.5 percent of loans are concentrated in the 50 smallest regions.

The first exploratory study of its kind in the Middle East and North Africa region showed the concentration of credit portfolios in limited sectors, while these geographical and sectoral concentrations of credit are linked to the repercussions of climate risks, noting that the new report included physical climate risks and those resulting from the transition towards a low-carbon economy.

This assessment measures the level of exposure of bank portfolios to drought and flood risks and their vulnerability to the adoption of a carbon tax. The study also includes an analysis of the extent of banks’ vulnerability in the event of hypothetical climate shocks, and highlights the challenges associated with the lack of sufficiently accurate data, and the complexity of understanding the interactions between climate, economic and financial factors.

Climate risks

Morocco is currently grappling with major challenges related to climate change. As one of the most water-stressed countries in the world, the Kingdom faces increasing pressures due to drought, which severely affects the agricultural sector in particular. In addition, the risk of severe and recurring floods looms in major urban areas and centres, while these climate shocks pose risks not only to the population, infrastructure and the economy in general, but also to the stability and safety of the Moroccan banking sector, which is a major driver of economic growth with assets amounting to 138 percent of the gross domestic product.

In this regard, Rachid Kassour, an economist specializing in public finance, explained that climate change could lead to a significant increase in the financial damage resulting from droughts and floods in Morocco, with noticeable effects on bank losses in the event of drought in particular, as more than a third of Bank loan portfolios are particularly exposed to material risks due to climate change, mainly due to lending in the agriculture, food industry and tourism sectors, and to livelihood lending to families in risk-prone areas.

Qasour stressed, in a statement to Hespress, that climate change forced the government to intervene over the past years, and this year in particular, given the negative expectations regarding the agricultural season (only 25 million quintals), in order to support banks through guarantees and incentives, as part of financing programs for companies. Small and medium sized businesses active in a group of sectors directly or indirectly affected by the repercussions of climate fluctuations.

The economic impacts of climate change, according to the joint report of the Bank of Morocco and the World Bank, on assessing climate risks in the Moroccan banking sector, in a variety of drought scenarios, range between 4 billion and 200 thousand dollars (a historical drought occurs once every 500 years), and 7 billion. dollars (a once-in-a-500-year drought in the extreme climate change scenario in 2050), a decline in GDP by 1.8 to 3.5 percentage points, with banks’ capital adequacy ratio reduced by 1.3 percent to 2.2.

The analysis also highlighted the multiplier effects of climate change across all scenarios, with floods also causing damage ranging between $8 billion (a historic rainwater flood wave once every 500 years) and $10.5 billion (the representative scenario in 2025), leading to To a decline in gross domestic product by 1.6 to 2.2 percent. In contrast to the long-term nature of drought, floods are short-term, with minor impacts on loan losses and bank capital.

Emission reduction impact

According to a report by the Bank of Morocco and the World Bank, the Moroccan banking sector could face risks related to the transformation process due to changes in policies and increased greenhouse gas emissions. Although Morocco’s emissions rate is weak at the global level (0.16 percent), these emissions in the Kingdom are on the rise, which may increase the risks associated with the transition in carbon-intensive sectors, such as electricity generation, transportation, mining, agriculture, manufacturing industries, and utilities.

The European Union’s carbon border adjustment mechanism, which imposes trade tariffs on some carbon-intensive goods, poses additional risks to industries such as cement and aluminium, taking into account the increased volume of trade exchange between Morocco and Europe.

The new report concluded that 24.3 percent of total loans, and 43.6 percent of loans provided to non-financial institutions, are directed to sectors and industries sensitive to the low-carbon transition, which is a relatively high percentage compared to other countries.

In the same context, the vulnerability assessment showed that imposing a carbon tax of $75/metric ton of carbon dioxide could increase credit risk by 8.4 percent of corporate and institutional loans, equivalent to 3.1 percent of the banking sector’s assets, while The new document warns that due to uncertainties in the estimates and methodological limitations, climate risk analysis results may be underestimated in association with issues related to modeling climate tipping points, and the overlap between macroeconomic, financial and climate impacts, while Deficiencies in data and diversity of modeling approaches can affect the accuracy of the assessment, so this assessment is a research work that can be updated as understanding of climate risks improves.

The report on assessing climate risks in the Moroccan banking sector highlighted that although it is possible to manage and manage the combined climate impacts on the aforementioned sector, the financial impact varies from one bank to another, which requires more attention on the part of financial institutions and the Bank of Morocco.

The impacts of physical and transition risks (towards a low-carbon economy) vary significantly between institutions, with low and high extremes depending on the geographical and sectoral concentration of loan portfolios.

The report stressed the need for Moroccan banks to integrate climate risks into their risk management and governance arrangements. At the same time, the Bank of Morocco is responding by developing more detailed supervisory guidelines for banks, especially with regard to stress testing and reporting, and is working to integrate climate risks into supervisory practices. With the aim of aligning with global standards such as the “Basel Committee Principles” for climate risk management and sustainability-related disclosure requirements within the framework of International Financial Reporting Standards.