We also investigate potential heterogeneous impacts of extreme temperatures across industries and regions. This finding is consistent with the idea that extreme weather events have a negative impact on loan defaults of SMEs because these firms are less equipped to deal with extreme temperatures and they find it more difficult to access further credit in times of financial stress in LMIEs. By contrast, none of the specifications yields a statistically significant result for the case of large firms. For every 10 days of exposure to unusual extreme heat in a quarter, the delinquency rate of SMEs increases by 0.16 percentage point (8% of the sample mean). The results show that extremely hot days increase the delinquency rates of SMEs but not those of large firms (figure 1). The identification strategy relies on the assumption that these extreme temperature shocks (i.e., the number of anomalous days of extreme temperature) are exogenous after controlling for seasonality and time trends specific to each municipality, as well as for national-level changes in credit delinquency rates over time. We construct quarterly credit delinquency rates at the municipality level and relate them to the number of anomalous days of extreme temperature that occurred in a given municipality and quarter. In particular, our exposure variable is defined as the number of days in a quarter that minimum and maximum temperatures are below 3☌ and above 36☌, respectively, which correspond to the bottom 5 percent and top 5 percent of the daily minimum and maximum temperature distribution in the country. (2021) in measuring exposure to extremes. We exploit a data set with loan-level information on loans extended by commercial banks to private firms in Mexico between 20 and follow Addoum et al. 1 To the best of our knowledge, this is the first study on the impact of extreme temperatures on credit performance of firms of any size and, therefore, the first one to analyze credit delinquency of SMEs in a middle-income economy. Finance is vital for SME growth in developing countries where these enterprises are the primary source of employment and job creation. In a new working paper, we investigate the effects of extreme weather events on credit default and credit use of SMEs in Mexico, a middle-income economy. All in all, this suggests that SMEs may not obtain the financing they need to cope with the negative effects of extreme weather in LMIEs, and this impossibility may lead them to default on their loans. Furthermore, access to credit is more limited in LMIEs, where credit markets are shallow and institutions are less prepared to deal with informational asymmetries. SMEs have a more limited access to credit than large firms, and thus SMEs find it more difficult to cope with liquidity shortages. These impacts on costs and demand may create liquidity shortages for firms that may turn into solvency problems, especially for small and medium-sized enterprises (SMEs). There is evidence that these events diminish agricultural yields, reduce labor productivity, increase absenteeism, diminish local spending, and, when they induce adaptation, raise operational costs. In the economic arena, recent studies suggest that extreme weather events increase firms’ costs and reduce local demand. This outlook has increased concerns about the potential impacts of extreme weather, particularly in low- and middle-income economies (LMIEs), where the equipment to cope with environmental insults is scarce and the resources to invest in adaptive technologies are few. Global temperatures have registered the highest level in the past decade since the 1850s, and the frequency and intensity of extreme temperatures are likely to increase in the future with climate change.
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