Key facts
- A strong El Niño event is predicted, potentially impacting global food prices and economic growth.
- Emerging markets are particularly susceptible due to their reliance on agriculture and higher food expenditure.
- India, a major rice exporter and sugar producer, faces risks to its monsoon rainfall and crop yields.
- Several Asian economies have already hiked interest rates and may need to maintain tighter policies.
- Colombia and Peru are at risk of higher food and energy inflation due to El Niño's impact.
- African nations face potential strain on food supplies and increased inflation from drought conditions.
Emerging economies are bracing for a new wave of inflation and slower growth as a potentially powerful El Niño weather phenomenon looms, according to a Reuters report. The U.S. National Oceanic and Atmospheric Administration has predicted an 81% chance of a very strong El Niño event occurring between October and December, which could rank among the most significant since 1950. This weather pattern typically causes droughts in Asia and heavy rainfall in South America, threatening agricultural harvests and global food supplies. Emerging markets are particularly vulnerable because households allocate a larger portion of their income to food, and agriculture is a significant component of their economies. This situation raises the possibility that central banks may need to maintain restrictive monetary policies for an extended period. Gillian Edgeworth, a portfolio manager at Wellington Management, noted that many central banks initially expected to cut rates this year but are now pausing or even hiking them, suggesting that rapid rate cuts in emerging markets are unlikely in the latter half of the year. India, the world's most populous nation, is highly exposed due to its reliance on the monsoon, which provides nearly 70% of its rainfall. The India Meteorological Department has warned of potentially the lowest rainfall in over a decade, jeopardizing crop yields and increasing the risk of higher food prices. As the world's largest rice exporter and second-largest sugar producer, India's resilience to El Niño episodes has often been attributed to its substantial food stockpiles. However, with inflation already above the central bank's 4% target, analysts suggest a severe El Niño could compel tighter monetary policy. Across Asia, higher energy and fertilizer costs are impacting external balances and economic growth, complicating efforts by central banks to stabilize currencies and control inflation. Central banks in the Philippines, Indonesia, South Korea, Pakistan, and Sri Lanka have already implemented interest rate hikes this year. A severe El Niño could prolong elevated borrowing costs throughout the region into early next year. Gary Tan, an equity portfolio manager at Allspring Global Investments, stated that El Niño is expected to make inflation more persistent, particularly in South Asian countries like India, Indonesia, Vietnam, and Thailand, which are most affected. Weaker currencies in Asia exacerbate the risk of higher import costs if food and energy prices continue to climb. Indonesia's rupiah and India's rupee are near record lows, while the Thai baht, South Korean won, Philippine peso, and Sri Lankan rupee are projected to decline this year. In Latin America, Colombia is identified as one of the most exposed economies to El Niño-related weather shocks. Below-average rainfall could impact food supply and electricity prices, as the country's reliance on hydropower means low reservoir levels may necessitate more expensive thermal power generation, driving up electricity costs and inflation. Analysts caution that a severe El Niño could lead to prolonged restrictive monetary policy in Colombia. Dan Pan, an economist at Standard Chartered, highlighted Colombia's significant exposure to food and energy inflation fueled by El Niño disruptions, compounded by minimum wage hikes and elevated oil prices. Peru's central bank has also warned of potential inflation exceeding its target and slower growth due to high oil prices and El Niño's effects on fishing and agriculture. Conversely, Argentina might benefit from increased rainfall, potentially boosting grain output and export revenues. In Africa, the impact of El Niño is expected to vary. East and Southern African nations, including Kenya and South Africa, are vulnerable to agricultural production disruptions, with drought conditions potentially straining food supplies and increasing inflation. South Africa's central bank has previously identified El Niño as a significant inflation risk, with food prices being a key transmission channel during the last major event. Despite market expectations of a rate hike, the central bank maintained its interest rates in July. S&P Global has warned that climate-related shocks could negatively affect the creditworthiness of some African sovereigns. El Niño's impact on Central and Eastern Europe has historically been less pronounced, and investors anticipate interest rate cuts in Poland, Hungary, and Romania this year.