El Nino to persist till 2027, poses inflation risks: Fitch Ratings

Fitch Ratings warns El Nino is likely to persist until early 2027, raising risks of economic disruption and inflation. It could impact sovereign credit profiles, especially for vulnerable nations, amid existing crop yield uncertainty.

At a time when global crop yields face uncertainty due to rising fertiliser prices amid the ongoing West Asia conflict, the likelihood of El Nino persisting through 2027 has increased, posing risks to inflation even in highly rated sovereign economies, according to Fitch Ratings.

"The formation of an El Nino weather phenomenon that is set to persist into early 2027 raises the risk of economic disruption in a range of sovereigns," it said.

Impact on Sovereign Credit Profiles

El Nino is a phenomenon that brings unusually dry conditions in some regions and heavier-than-normal rainfall in others.

As per Fitch Ratings, environmental conditions hampering the agricultural or economic activity could weaken the credit profiles of lower-rated sovereigns, specifically "those in the 'B' category or below with limited market access or a record of rising debt in crises."

Meanwhile, some regions could benefit from changing weather patterns, particularly areas where increased rainfall supports agricultural output, improves crop yields, and strengthens food production.

Conditions for Rating Action

While Fitch is unlikely to downgrade or change a country's credit rating only because of El Nino. However, if El Nino-related impacts become severe enough to hurt a country's economy -- such as weakening growth, increasing inflation, worsening government finances, or putting pressure on foreign exchange reserves -- then it could affect sovereign ratings, especially for more vulnerable countries.

"Fitch is unlikely to link rating actions directly to El Nino unless the effects are clearly reflected in credit metrics, but related environmental stresses could intensify fiscal, growth, inflation and external liquidity pressures for sovereigns that are more vulnerable," the report said.

Long-Term Projections and Amplified Risks

Noting "US Climate Prediction Center's 8 June projections indicate a 96% chance that El Nino will continue through December 2026-February 2027," Fitch said sustained shortages will likely "amplify risks to globally traded food commodity prices."

"Global crop yields already face uncertainty due to higher fertiliser prices on supply disruption associated with the US-Iran war. Sustained shortages could amplify risks to globally traded food commodity prices posed by an El Nino phenomenon, potentially affecting inflation prospects even in highly rated sovereigns," it added. (ANI)

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