Statement
Chair,
I have the honour to deliver the following statement on behalf of the Alliance of Small Island States (AOSIS).
For Small Island Developing States, credit ratings are among one the most significant external determinants of our development prospects. They directly influence not only sovereign borrowing costs, but also private sector financing, foreign investment flows, and overall economic confidence.
Yet the evidence clearly shows that the current system of ratings is not working equitably for SIDS.
Only 13 SIDS currently have sovereign credit ratings, reflecting significant barriers to entry, including high costs and administrative burdens. For those that are rated, the outcomes have steadily deteriorated. Between 2000 and 2022, the average credit rating for SIDS declined from 9.94 to 6.87, a drop of over 3 points. This decline is significantly sharper than those observed in other developing countries.
This trend is not driven by weak policy frameworks. Rather, it is closely linked to the intensifying impacts of climate change, which is not of our own making. The annual losses from climate- related disasters and other economic shocks translate directly into worsening fiscal and debt indicators, which are key inputs into credit ratings.
For example, SIDS account for two-thirds of countries experiencing the highest relative disaster losses globally. During the same period, external debt in SIDS rose from an average of 45 percent of GDP to 58 percent. Fiscal deficits also deepened from under 3 percent to an average of 5 percent.
As a result, our climate vulnerability is effectively being priced into sovereign risk, creating a self- reinforcing cycle. Climate shocks drive downgrades – downgrades increase borrowing costs – and higher costs constrain investments in resilience.
To break this cycle, AOSIS calls for the following.
First, credit rating agencies must better distinguish between structural vulnerability and policy performance. Today, the impact of climate shocks often leads to immediate downgrades: a hurricane or cyclone can depress fiscal indicators and push SIDS below “investment grade,” regardless of sound economic management.
For example, in 2004, Grenada’s credit rating fell sharply from 8.22 to 1.60 in a single year, following Hurricane Ivan, even though the government’s fiscal management remained stable.
Therefore, methodologies ought to adjust for exogeneous risks and recognize proactive risk management measures so that countries investing in resilience are not penalized.
Second, investments in resilience building, climate adaptation, renewable energy, and sustainable infrastructure should be considered as credit positive. Current frameworks treat these expenditures as costs, rather than long-term investments that reduce our future risk. By factoring these measures into ratings, rating agencies would provide a more accurate assessment of long- term sustainability and enhance market confidence, and crucially lower borrowing costs.
Lastly, in addition to reforms of existing methodologies, there is also a need for more long-term nuanced approaches tailored to the realities of SIDS. Such an approach, alongside conventional ratings could provide investors with a clearer understanding of risk.
This would enable markets and investors to make informed decisions without penalizing highly vulnerable countries, improve market access and stabilize investment flows.
Through these interlinked measures, the international credit rating system can align risk and resilience so that it supports, rather than hinders, sustainable development in SIDS.
I thank you.
