El Niño and emerging markets: here are the effects in South America, Asia and Africa
Emerging economies are the most vulnerable to the effects of El Niño. Here is what analysts at the US firm Franklin Templeton have to say on the matter
Key points
Negative effects in countries such as Peru, Colombia, Ecuador, Venezuela, Panama, Indonesia, the Philippines and South Africa. Positive effects in Argentina and Paraguay, with ‘higher soya yields’ and, in the case of Paraguay, ‘increased hydroelectric capacity’. This summarises the impact of El Niño on emerging markets, according to research by Franklin Templeton. El Niño is defined as a situation where the quarterly moving average of sea surface temperatures in the central Pacific rises by at least 0.5 °C above normal. An anomaly of 1.0–1.4 °C indicates a moderate event, 1.5–1.9 °C a strong event, and at least 2.0 °C a very strong, or ‘super’, event. This El Niño is expected to be among the most intense on record.
The report
The report points out that an El Niño ‘potentially among the most intense ever recorded exposes emerging markets to risks relating to food and energy inflation and to growth. However, the impact varies significantly between countries and regions’. Economies most dependent on agriculture and hydroelectric power ‘are the most vulnerable’. The effects on inflation and growth are likely to be felt with a time lag and will be most pronounced over the next 12–18 months. For investors, a selective approach, based on country-by-country analysis, therefore remains essential.
The impact on inflation, monetary policy, growth and energy
El Niño ‘can have a significant impact on inflation, monetary policy and growth, both globally and in emerging markets. It is estimated that its fluctuations account for up to 20 per cent of the annual variation in global commodity prices, with possible knock-on effects on food prices and overall inflation. General weather conditions are relatively predictable.”
Given that macroeconomic repercussions emerge with a lag of 12–18 months, an event beginning in the summer of 2026 could therefore have a greater impact on inflation and growth in 2027, with effects extending into 2028 as well. The second transmission mechanism ‘relates to energy, particularly in economies that rely on hydroelectric power. Drought can lower reservoir levels and reduce output, forcing a switch to more expensive sources or causing shortages and rationing. As well as fuelling inflation, energy shortages can hamper growth and disrupt industrial production, mining activity and investment. In economies dependent on hydroelectric power, weather-related shocks can be rapidly passed on to prices and economic activity.”
From this perspective, as mentioned earlier, one of the countries best placed is Paraguay. Several central banks, including the Reserve Bank of India, the South African Reserve Bank, Bank Indonesia, the Banco de la República (Colombia) and the Central Reserve Bank of Peru, cite El Niño ‘as an upside risk to inflation, with possible implications for monetary policy decisions’.
