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Countries around the world are battling heatwaves and floods fueled by El Niño, the natural weather phenomenon that is 90% likely to persist into the second half of 2023, according to the World Meteorological Organization. The global impact could be enormous, but the stakes are higher for emerging markets, which are more exposed to swings in food and energy prices and production and often have smaller fiscal reserves that limit their ability to cushion the impact.
Below are five points that show the impact that El Niño – when waters in the central and eastern Pacific are warmer than normal – could have on key emerging markets.
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1- MORE VULNERABLE
India and Egypt are among the economies most vulnerable to the impact of El Niño this year, according to a Standard Chartered Bank index, taking into account the weight of the primary sector, the share of food in inflation baskets and the capacity to a country compensated through fiscal support.
Ghana, Kenya and the Philippines are also at the top of the list, while countries such as South Africa and Chile are among the least vulnerable – along with most developed market economies such as Germany or the United States. “We believe that the countries most at risk of an El Niño event this year are those that have relatively weak economic fundamentals and that experienced relatively weak agricultural production during the 2014-16 El Niño period,” said Eugene Klerk, head of ESG Research at Standard Chartered Bank.
2- AGRICULTURAL PRESSURE
Sudden changes in precipitation or temperature can wreak havoc on crops. With agriculture accounting for a larger share of the economy and employment in Africa and South Asia than elsewhere, these regions are especially vulnerable to the consequences of El Niño. “A sharp reduction in the volume of crops that can be exported could result in balance of payments strains for some economies,” according to a research note led by Jennifer McKeown, global chief economist at Capital Economics.
India has banned exports of a key rice variety, cutting overall supplies to world markets by a fifth. Almost 90% of rice is produced in Asia and threatened by dry El Niño weather, with the Philippines and Thailand also at risk. Other products in focus include cocoa from Ivory Coast and Ghana, sugar from India and Thailand, and coffee from Vietnam and Indonesia.
There are, however, exceptions – Argentina had a record soybean harvest in previous episodes of El Niño, according to Morgan Stanley.
“El Niño tends to be negative in emerging markets, although Argentina is an exception,” the bank’s Fernando Sedano wrote in a note, adding that “Argentina is probably the only net winner from El Niño.”
3- FRAGILE FOOD
Food prices represent a larger share of emerging market CPI baskets – up to 40% in many low-income economies – so the severity of El Niño should directly impact inflation.
Analysis by the European Central Bank suggests that a one-degree temperature rise during El Niño has historically raised global food prices by more than 6% after one year.
Southern Africa, Central America and the Caribbean and parts of Asia are “of particular concern” due to already high levels of food insecurity, according to the Food and Agriculture Organization of the United Nations (FAO). David Rees, senior emerging markets economist at Schroders, warned that a strong El Niño could push emerging market food inflation back into double digits by 2024.
4- THE HYDROGRAPHIC ISSUE
Significant changes in rainfall or prolonged droughts could also affect hydropower production and increase gas and coal prices, according to Capital Economics. “Several countries, mainly in Africa, depend heavily on hydroelectricity,” said the note. “Less rainfall could harm electricity generation and possibly lead to energy rationing.”
Energy prices are also a key driver of food inflation, they warned, while higher temperatures could increase demand for air conditioning.
5- CLOUDING THE IMAGE OF INFLATION
Central banks in Latin America were among the first to raise interest rates in the wake of COVID-19 to combat rising prices and are the first to begin easing, led by Chile and Brazil. But El Niño's impact on agricultural production and electricity generation could complicate disinflation and lead to higher rates for longer. “Colombia and Peru are the most exposed countries, followed by Chile and Brazil to a lesser extent,” said Antonio Gabriel, local market strategist for Latin America at BofA.
BofA estimates that El Niño would be “at least moderate in intensity this year”, but severe intensity could increase inflation by up to 2.5% in Colombia and 1.5% in Peru. “Mexico seems mostly isolated,” Gabriel added.
Source: Seane Lennon | agrolink
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