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COMMENTARY: Asia under El Niño

As tensions in West Asia ebb and flow, regional policymakers are likely to turn their attention to the skies next. In its latest update, the United Nation’s World Meteorological Organisation confirmed the onset and development of a likely very strong El Niño event over the next 9-12 months. The deeply negative Southern Oscillation Index (SOI) validates these observations.

No two El Niños are the same. The intensity and geographic distribution vary across episodes, though the period typically brings drier conditions to Southeast Asia and parts of South Asia, while increasing rainfall in some East Asian regions. China’s experience varies across the country, with higher temperatures and drier weather in the north, while the south experiences heavy rainfall, posing flood/typhoon risks. The last strong El Niño in 2023-24 was associated with an extended period of extreme temperatures, heatwaves, and dry conditions in some parts of the world, while others saw heavy rainfall. 2024 also earned the distinction of being the hottest year on record. Unseasonal conditions and heatwaves have already pushed selected food commodities higher, including cocoa, crude palm oil (CPO), coffee, and sugar.

For Asia, the first direct transmission channel is agriculture. Across much of developing Asia, the sector’s contribution to GDP has declined over the past two decades, though it remains economically significant as a source of employment, in countries like Indonesia, India, Thailand and Vietnam (see chart). Material slowdown or delays in rainfall or drought-like conditions will impact key crop-producing regions and hurt the output of rice, vegetables, cereals, foodgrains, and edible oils, etc. Countries are key producers of some varieties (ASEAN-6: Watching weather risks). For rice, Thailand and Vietnam are the second- and third-largest rice exporters globally, together accounting for ~30% of the global share, behind India. Indonesia and Malaysia dominate the world palm oil market, with a combined market share of more than 80%. Singapore and South Korea have, comparatively, smaller shares.

Inflation is the second direct transmission channel. Prima facie, food carries the highest weight in CPI baskets (see chart) in India, the Philippines, Thailand and Vietnam, suggesting that any weather-induced decline in crop output is more likely to translate into domestic inflationary pressures. By contrast, although Singapore assigns a relatively low weight to food in its CPI basket, its heavy reliance on imports makes domestic prices highly sensitive to movements in global agricultural commodity prices. Authorities have therefore long adopted a policy to diversify food sources to avoid supply disruptions.

The net impact on annual inflation in the year of El Niño is a function of not only farm output but also of the availability buffer stocks, administrative measures, the spatial distribution of rainfall, the fuel commodity price cycle, and severity of the weather phenomenon. Trends in 2023-2024 (see chart) highlight the asymmetrical impact. Annual inflation in 2023-24 (the year of a strong El Niño) was not uniformly higher than in 2021-22 in Asia due to the influence of other exogenous factors – post-pandemic supply constraints, high oil prices in 2022 that created distorting base effects, and the state of the economy.

The second-derivative impact of El Niño will be through a fall in reservoir/groundwater levels, power disruptions, renewable power generation (weaker wind circulation, lower hydropower, etc.), and natural calamities (wildfire-driven outages). 

Policy responses have also evolved, driven by government expectations that climate change will intensify seasonal swings in weather, temperature, and rainfall. Development and modernisation of agriculture have led to an increase in irrigated land, early warning systems, support for drought-resistant crops, and measures to address rural household incomes. A combination of other measures by way of release of buffer stocks, food import liberalisation, targeted subsidies and cash transfers to stabilise domestic prices. Central banks in the region are likely to acknowledge pipeline risks to inflation but not exhibit urgency to tighten in the face of a supply-driven shock.

In the region, India, Vietnam, and Thailand have larger proportions of their populations employed in farming, accompanied by a high food weightage. Administrative measures and the modernisation of farming techniques helped mitigate the impact of El Niño in recent years. Our six-factor matrix (link), including policy space and import dependencies, had highlighted the Philippines and Vietnam as being amongst the most exposed to this weather phenomenon.     

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