Climate change threatens to escalate financial damage in Morocco

A new report by the World Bank (WB) and Morocco’s Bank Al-Maghrib (BAM) paints a concerning picture of how extreme weather events like droughts and floods could significantly worsen Morocco’s financial situation, particularly in the banking sector.

“These climate shocks pose risks not only to the population, infrastructure, and overall economy but also to the stability and soundness of Morocco’s banking sector – a key driver of economic growth with assets totaling 138 % of GDP,” the report says. 

Morocco is already one of the world’s most water-stressed countries that is facing a growing threat from climate change. 

The report, the first of its kind in Africa, analyzes the vulnerability of Morocco’s banking sector to climate risks. 

The report said that over a third of bank loans are exposed to these risks, particularly in agriculture, food processing, and tourism – sectors heavily reliant on predictable weather patterns. 

The analysis projects potential economic losses ranging from $4.2 billion to $10.5 billion, depending on the severity of droughts and floods. 

These events could impact GDP and weaken banks’ capital adequacy, making them less able to absorb financial shocks.

The report also explores the “transition risks” associated with climate change policies. Morocco, though a small emitter of greenhouse gases, could face challenges as countries around the world move towards cleaner energy sources. 

For example, the European Union’s Carbon Border Adjustment Mechanism (CBAM) could impose trade barriers on Moroccan exports from carbon-intensive industries like cement and aluminum. 

This, coupled with potential carbon taxes, could increase credit risks for banks with significant exposure to such sectors.

The report acknowledges limitations in its estimates, but the findings are a wake-up call for Morocco’s financial sector. 

The World Bank and BAM recommend that banks integrate climate risks into their risk management strategies. This includes stress testing to assess vulnerability and adapting governance structures to deal with a changing climate. 

BAM is working on supervisory guidelines for banks, aiming to incorporate climate risks into their practices and align with international standards.

The World Bank is set to support Morocco and other countries in managing climate-related financial risks. This collaboration is crucial for building resilience in financial systems and ensuring they can withstand the increasing threats posed by climate change.