A ten-percentage-point increase in water stress reduces the sovereign credit ratings of lower-middle-income countries by nearly one notch, AIIB said in their latest Asia Infrastructure Finance 2026 report, Where the Water Flows.
The sovereign credit ratings of upper-middle-income countries are also affected, though at a smaller magnitude, while there is a limited impact on advanced economies.
These ratings are a benchmark of how likely countries are to repay their debt, with advanced economies having an average rating of A or A2 while lower-middle-income countries average B+ or B1. Downgrades in sovereign credit ratings increase the interest rates that the borrowing country has to pay.
“Since the average credit rating of the lower-middle income countries in the sample is lower…the magnitude of the findings is of economic relevance,” the report said. “Importantly, the findings imply that the countries most at risk of intensified water stress affecting their credit ratings are those already facing fiscal challenges.”
AIIB’s latest report builds on growing literature that shows the problem of water scarcity, which the United Nations has warned is evolving into “bankruptcy”, will hurt economic growth and worsen inequality.
“[Our] findings emphasise the need to improve water supply infrastructure in lower-income countries to secure reliable water access, thereby easing economic and social pressures,” AIIB said.
The report, which frames water as critical economic infrastructure, found that no economy is moisture-sufficient.
“Large rainforest nations like Brazil, the Democratic Republic of the Congo, and Indonesia generate roughly one quarter of global transboundary moisture flow despite representing only eight percent of global land area,” it said.
Given the transboundary impacts of water management, it can be difficult for national governments to think about how changes in their domestic watersheds could impact neighbouring countries, said Jang Ping Thia AIIB, lead economist and manager of the economics department.
“This is an externality that is difficult to address, but I think international communities can realise this externality and — particularly multinational development banks (MDBs) — find a way to provide financing for these few countries with large amounts of water and forest resources to conserve it,” he told Eco-Business in an interview.
Thia authored a chapter in the report on how the underpricing of “virtual water”, which is the water used to produce exported goods such as cotton, wheat and chocolate, has led to trade distortions and exacerbated domestic water stress.
“We see a big opportunity: if countries price water better, they can crowd in domestic finance (and) private sector investment,” he said. “It also has a beneficial impact of correcting a little bit of the global water trade. The people who have water should be producing the water-intensive goods, as opposed to the people who are water stressed.”
Pricing water correctly could therefore lead to “huge transfers” from advanced economies to developing economies,” said AIIB chief economist Erik Berglof in the same interview.
AIIB’s report said that MDBs can play a critical role in strengthening water resilience by investing across the hydrological cycle, which include maintaining natural ecosystems that regulate water such as forests and wetlands, upgrading built infrastructure, as well as strengthening data, planning tools and systems.
