This study aims to examine the impact of climate risk on financial stability in the Maldives, focusing on banking stability, credit availability and tourism revenue.
This study uses the nonlinear autoregressive distributed lag (NARDL) model to analyze the asymmetric effects of climate risk on financial stability in the Maldives. Climate risk is measured via temperature variations and government relief spending, while financial stability is assessed using Z-score, non-performing loans (NPLs), credit availability and tourism revenue. Quarterly data (2012Q1–2024Q1) is analyzed, with cointegration tests, asymmetry analysis and robustness checks using the state-space model (Kalman filter) to distinguish climate-driven fiscal responses.
This study reveals asymmetric effects of climate risk on financial stability in the Maldives. Temperature levels do not directly impact financial stability, but government relief spending during disasters increases banking risks (lower Z-score), reduces credit availability and disrupts tourism revenue. However, reduced relief spending does not improve financial stability, highlighting fiscal policy asymmetries. NPLs remain largely unaffected by climate risk. The banking sector is more vulnerable to economic downturns than it benefits from growth. These findings underscore the need for targeted fiscal strategies and financial resilience measures to mitigate climate-related financial instability in small island economies.
This study provides a novel perspective on climate risk and financial stability by focusing on the Maldives, one of the world’s most climate-vulnerable economies. Unlike prior research that broadly examines macroeconomic impacts, this study uniquely measures government relief spending as a proxy for climate risk response. By applying the NARDL model, it captures asymmetric effects of climate shocks on banking stability, credit availability and tourism revenue. The findings offer policy-relevant insights for small island nations, emphasizing the need for adaptive fiscal strategies to mitigate financial instability caused by climate-related disasters.
