October 26, 2023 (MLN): Environmental stresses associated with El Nino weather conditions could add to the fiscal, growth, inflationary and external liquidity challenges faced by vulnerable sovereigns, according to the latest post by the Fitch Ratings.
The El Nino phenomenon can be associated with unusually dry conditions in some parts of the world and with greater-than-normal levels of rain in others.
Environmental conditions that dampen economic activity could hurt the credit profiles of vulnerable sovereigns that face tight access to financing or have a record of ratcheting up debt during crises.
Lower crop production may reduce exports or raise imports of food products, adding to external liquidity stress and possibly local inflation.
The impact on hydropower output could also be economically significant.
Highly rated sovereigns have more room to mitigate the effect of adverse weather conditions and their export sectors and economic activity are generally more resilient.
However, they may be affected indirectly. For instance, El Nino conditions could influence prices for globally traded food commodities, affecting their inflation and monetary policy decisions.
Governments can deploy subsidies or transfers to mitigate the effect of rising food prices, but this weighs on fiscal metrics.
Moreover, after the COVID-19 pandemic and subsequent periods of high global inflation, many governments have less fiscal headroom.
Nonetheless, the Food and Agriculture Organization of the United Nations expects global cereal production in 2023 to be slightly above the previous record in 2021.
If this bears out, it should provide a buffer against the risk of disruption to output in 2024 and suggests any impact from the El Nino on global food prices in aggregate should be limited.
