Latin America better prepared for El Niño

Jul 1, 2014

Latin America is in a better position to face the effects of the climatic event El Niño, forecast for this year, than on previous occasions due to fiscal improvements in many of the region’s economies over the last decade, said Moody’s Financial Service in a report. Meteorologists say chances of an El Niño affecting the Pacific coast area are above 60% later this year.

The region, particularly the west coast of South America, was devasted by the last El Niño in 1998 – 1999.

Latin American countries such as Brazil, Colombia, Panama, Peru, Ecuador Chile, Paraguay and Uruguay have reduced their fiscal deficits and financing needs, said Moody’s senior VP Gersan Zurita.

“Access to funds to combat heavy rains, as well as bilateral and multilateral loans, will help these nations overcome damage to infrastructure and the costs of other emergencies that may arise from El Niño,” said Zurita.

Banks are in a strong position to face the negative effects of El Niño, having strengthened their ability to manage risks and prepare for a decline in asset quality stemming from severe climatic events, said Moody’s.

In addition, countries have vastly improved the infrastructure necessary to deal with the affects of El Niño. Ecuador is considered a leader in this regard.

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Should it occur, the impact of El Niño on agricultural production in the region will vary from place to place, with increased rainfall in some areas and drought in others.

Peru, as the world’s biggest producer of fish meal and fish oil, is likely to be hardest hit as elevated sea temperatures are expected to significantly reduce anchovy populations in its waters.

Higher temperatures in Peru are also expected to impact avocado production and other crops, while drought in other parts of Latin America is likely to reduce wheat, maize and rice harvests.

Effects could be similar in Ecuador’s coastal area. The banana and shrimp industries, which export worldwide, are particularly vulnerable.

Sugar production in Brazil could also be impacted, leading to a reduction greater than the 3% predicted by Brazilian sugar cane producer association Unica, said Moody’s.

Not all of the forecast effects of El Niño are negative, however. Soybean production in southern Brazil and northern Argentina should increase in 2015, which would in turn benefit logistics companies required to transport greater volumes.

El Niño could also have an impact on hydroelectric systems in the region, particularly in Brazil where dams supply 70% of the country’s power. Hydro dams in Ecuador, Peru and Chile could also be affected.

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