El Niño Phenomenon Threatens Repayment Capacity in Agriculture and Livestock Sectors

On July 4, the World Meteorological Organization (WMO) confirmed the onset of the El Niño phenomenon after more than seven years without these climatic conditions. Notably, the most severe and one of the longest periods of El Niño, lasting over 17 months, occurred between 2015 and 2016, compared to the average of one year over the last 60 years. According to a recent Moody’s report, Latin American governments, businesses, and infrastructure may face reduced financial flexibility in dealing with this El Niño compared to the one that affected the region in 2016. This is due to slow economic growth, debt accumulation, higher interest costs, and escalating political risks.

While the short-term impact of El Niño on GDP depends on its intensity, long-term effects vary based on damages to infrastructure like roads, schools, and hospitals. The report explains that the challenges posed by El Niño to the region include the expense of reconstruction and an increase in borrowing costs.

Even though meteorological organizations expect El Niño to be moderate, Moody’s suggests that a severe event could jeopardize the repayment capacity in sectors such as agriculture, livestock, fishing, and mining. Added to this are the challenging macroeconomic conditions, which would prevent banking entities from reducing non-performing loans.

El Niño’s disturbances are not the same across Latin America. While there are severe impacts in certain regions, others experience “benefits.” Agriculture reflects this trend; while production will suffer in some areas, others will benefit.

El Niño primarily affects the agricultural sector, causing droughts in the north of Brazil, Colombia, Panama, and parts of Central America, while triggering heavy rains in Pacific coastal countries, including Ecuador, Peru, northern Bolivia, and Chile, as well as southern Brazil, Argentina, and Paraguay.

One of the most affected activities is fishing, as El Niño warms ocean temperatures, leading fish to migrate further from the coast or deeper into the water. This impact will be significant for the fishing industries of Chile, Peru, and Ecuador.

The drier climate also increases the likelihood of wildfires, particularly in Colombia’s Orinoquia and Amazonia regions, central Mexico, Venezuela, and the north and northeast of Brazil.

The report explains that the drier climate would lead to a higher incidence of wildfires compromising vast expanses of the Amazon rainforest, affecting air quality, and plant and animal life. Despite these conditions, the report notes that Brazil has fewer hydroelectric plants in the north and northeast, which are prone to drought, than in the south and southeast, and most of the country’s farmland comes from Brazil’s central-west region, an area with little risk from El Niño.