The frontier Mekong economies of Cambodia, Laos and Vietnam face varying degrees of environmental, social and governance (ESG) risks with moderately to very highly negative impacts on their current sovereign ratings, according to Moody’s Investors Service.

For one, the three economies are among the most vulnerable in the world to climate change.

Globally, the fallout from the Covid-19 pandemic and the Russia-Ukraine conflict will exacerbate ESG credit risks in 2023. Citing the trends that will shape credit quality this year, the rating agency says: “Access and affordability risks will remain elevated, corporate decarbonization pledges will face greater scrutiny, companies will face a complex regulatory landscape and the credit cycle will test issuers’ governance capabilities.”

Among the three Mekong economies, Laos has the weakest sovereign rating of Caa3-stable. Its overall ESG Credit Impact Score is “very highly negative”, weighed down by its equally negative exposure to governance risks which are driven by weak policy effectiveness.

“Weak transparency and accountability in government policymaking and poor rankings on control of corruption hamper the sovereign's capacity to respond to negative environmental or social pressures,” Moody’s says.

Exposure to social risks is “highly negative” given the country’s poor access to healthcare and other basic services, low and unevenly distributed income, and unequal access to good quality education. But its exposure to environmental risks is only “moderately negative” notwithstanding high exposure to climate and water risks, with increased frequency of droughts reducing the country’s hydropower potential.

Weather shocks

Vietnam, on the other hand, has the greatest exposure to environmental risks. Although its Ba2-stable rating is the strongest among the three, its overall ESG Credit Impact Score and environmental exposure are both “highly negative”, with the latter largely reflecting climate risks from its exposure to coastal flooding and heat waves.

“Over time, rising sea levels and increasing frequency of severe climate change-related weather shocks pose risks of significant adaptation and reconstruction costs, while potentially requiring resettlement of some urban populations,” Moody’s says.

The reliance of a big part of Vietnam’s population on agriculture for employment exacerbates the potential economic and fiscal impacts of weather-related shocks, such as flooding and storm surges, as well as pollution from its fast-growing manufacturing sector.

“At the same time, a highly negative exposure to water management risk also reflects the impacts of upstream hydropower development and pollution to agricultural production in the Mekong River Delta,” the agency says.

But Vietnam’s social and governance exposures are only “moderately negative” given favourable demographics compared with its peers along with “effective and improved economic policymaking” that has supported strong growth and boosted competitiveness.

Governance risks

Cambodia has a B2-negative rating. Its overall ESG Credit Impact Score is “highly negative”, with the country having equally negative exposures to social and governance risks.

“Despite a young and growing population, low per capita incomes and a poor provision of health and education services as well as weak access to other basic infrastructure have constrained human capital development,” Moody’s says.

As for governance, policy effectiveness is compounded by “relatively weak institutional arrangements, a high incidence of corruption, generally weak rule of law, and transparency issues”, the agency says.

Cambodia’s exposure to environmental risks  is only “moderately negative”. But its economy is subject to droughts and floods, which can disrupt the country’s major economic drivers – agriculture and tourism.

Moody’s issued its most recent comment on Myanmar, also a frontier Mekong economy, a month after the military coup on February 28 2021.