Emerging market economies worldwide face a significant challenge as El Nino, a natural climate phenomenon, is expected to persist with a 90% probability in the second half of 2023, warns the World Meteorological Organization.
The impact of El Nino can be immense. Still, it poses particular risks to emerging markets, which are more susceptible to fluctuations in food and energy prices, and often have limited fiscal buffers to cushion the blow.
A vulnerability index by Standard Chartered Bank highlights India and Egypt as the economies most at risk from El Nino’s impact this year.
The index considers factors such as the importance of the primary sector, the share of food in inflation baskets, and a country’s ability to offset the impact through fiscal support. Ghana, Kenya, and the Philippines also rank high on the vulnerability list, while countries like South Africa and Chile, along with the most developed economies, appear less vulnerable.
The sudden shifts in rainfall and temperature brought on by El Nino can wreak havoc on crops, especially in regions like Africa and South Asia, where agriculture plays a significant role in the economy and employment.
A reduction in crop exports may strain the balance of payments for some economies. For instance, India has banned exporting a key rice variety, cutting overall supplies to world markets by 20%.
Other products at risk include cocoa, sugar, and coffee from various countries in Asia and Africa.
Food prices comprise a substantial portion of the consumer price index (CPI) baskets in emerging markets, with some low-income economies seeing up to 40% allocation.
Thus, El Nino’s severity is set to impact inflation in these regions directly. According to a European Central Bank analysis, historical data shows that a one-degree temperature increase during El Nino raises global food prices by more than 6 after one year.
The Food and Agriculture Organization of the United Nations (FAO) expresses concern for regions like Southern Africa, Central America, the Caribbean, and parts of Asia due to their already high levels of food insecurity.
Besides its impact on agriculture, El Nino can also affect hydropower output, potentially leading to power rationing in countries heavily reliant on hydroelectricity, mainly in Africa.
It may boost gas and coal prices, further complicating disinflation efforts in Latin American countries that have already taken measures to combat rising inflation.
As El Nino unfolds in the coming months, countries like Colombia, Peru, Chile, and Brazil may experience higher inflation rates, while Mexico appears to be relatively isolated from its effects. The situation demands careful economic management and preparedness in emerging markets to mitigate the risks and challenges posed by this climatic phenomenon.