The US National Weather Service estimates the possibility of a “super La Niña” phenomenon occurring in the second half of this year. Experts warn that this could lead to increased food prices and inflation pressures in emerging markets, further hampering economic growth.
According to Reuters, the National Oceanic and Atmospheric Administration (NOAA) forecasts an 81% chance of a “super La Niña” phenomenon occurring from October to December this year. It is likely to be one of the strongest La Niña events since 1950, bringing extreme weather such as droughts and heavy rains, posing a threat to crop yields and food supplies.
Emerging markets are expected to bear the brunt of this phenomenon. As agriculture plays a crucial role in these economies and local households allocate a significant portion of their income to purchasing food, poor harvests could force central banks to extend monetary tightening policies.
Gillian Edgeworth, Portfolio Manager of Fixed Income Investments at Wellington Management, believes that due to the impact of the “super La Niña,” emerging markets may not swiftly cut interest rates in the second half of this year.
She stated, “At the beginning of the year, many central banks believed they still had room to cut rates, but now we see that central banks have stopped cutting rates, with some even beginning to raise them.”
As the most populous country globally, India is one of the areas most severely affected by the La Niña phenomenon, as nearly 70% of its rainfall comes from monsoons.
The India Meteorological Department has warned that this year’s rainfall may hit a new low in over a decade, raising the risk of food price hikes and forcing the country to tighten its monetary policy.
Central banks in countries such as the Philippines, Indonesia, South Korea, Pakistan, and Sri Lanka have already raised interest rates at least once this year. The super La Niña phenomenon may keep borrowing costs in the region persistently high until early next year.
Gary Tan, Stock Portfolio Manager at Allspring Global Investments, mentioned that the La Niña phenomenon will only make inflation more persistent. Markets are anticipating interest rate hikes in the second half of this year, especially in South Asian countries like India, Indonesia, Vietnam, and Thailand.
Colombia is one of the countries in Latin America most affected by the La Niña phenomenon, as reduced rainfall could impact food supplies and drive up electricity prices.
Colombia’s reliance on hydroelectric power makes water reservoir levels a crucial inflation indicator. Lower water levels may force the country to increase the use of more costly thermal power generation, thereby raising electricity prices and inflation.
Analysts warn that the super La Niña phenomenon could prolong Colombia’s maintenance of tight monetary policy.
The Central Bank of Peru has also warned that due to high oil prices and the impact of the La Niña phenomenon on fishing and agriculture, inflation rates may exceed expectations this year, and economic growth may be hindered.
In contrast, Argentina may benefit from increased rainfall, likely boosting grain production, export income, and foreign exchange inflows. It is expected that the central banks of Brazil, Mexico, and Chile will adopt a cautious approach to assess the impact of the strong La Niña on inflation and economic growth.
The extent of the impact on various regions in Africa is expected to vary significantly. Several East African and Southern African economies, including Kenya and South Africa, are vulnerable to weather-related factors, with droughts potentially tightening food supplies, slowing agricultural output, and increasing inflation.
Last month, credit rating agency S&P Global warned that if climate-related impacts intensify and drag down economic growth, public finances, and external balances, some sovereign states in Africa may face credit pressure.
Historically, the impact of the La Niña phenomenon on Central and Eastern European emerging markets has been relatively limited, with investors still expecting countries like Poland, Hungary, and Romania to cut interest rates this year.