El niño impacts on Latin America: a headwind for Brazil

El Niño is a climate pattern that makes Pacific Ocean waters warmer and, consequently, triggers extreme weather conditions in Latin America (LatAm) economies. However, its impacts among the LatAm countries varies. In some regions, this climate phenomenon causes severe droughts, impacting agricultural output; in others, it causes excessive rains, which in some cases could be beneficial to certain agricultural production. However, the impact of these severe rains can cause significant damage to agriculture productions and flood some cities. El Niño started in the first half of 2023 and is expected to endure until the end of 2024, with some forecasts suggesting it could be a strong El Nino.

Figure 1: Headline CPI on LatAm Countries during 2015/2016 (Y/Y, %)

Source: Thomson Reuters

The last time El Niño occurred was in 2016-17, and inflation mostly accelerated in Brazil and Colombia. Those countries are usually affected by drought conditions in the north and northeast of the country, posing a headwind for agriculture supply. In Peru, Chile, and Mexico, the impact on inflation was more controlled. The stronger rains have actually helped agricultural production, and no inflationary surge was observed. In Argentina, it is difficult to analyze the impact; indeed, the presence of El Niño made the country conditions wetter, improving agricultural output. However, macroeconomic imbalances were already manifesting, causing an increase in inflation. In terms of output, it is tougher to estimate the El Niño impact. Most of the impact comes from weaker exports for some countries, especially in the Andean regions, while city infrastructure could also be affected, as some cities could experience flooding.

Below, we dissect the impact for the three major LatAm economies

Brazil:

Brazil is the country that could be most impacted by El Niño. The northern region of the country is already experiencing a strong impact in terms of droughts. Fortunately for Brazil, most of its agricultural products (such as soybeans) are produced in the center-west and south of the country. We expect a reduction in agricultural output for Brazil, especially for corn. Most of the food in Brazil is produced locally, and some effects are likely to be felt in the prices of rice, wheat, and corn. However, we don't foresee a strong rise in inflation. Demand will be more controllable, and monetary policy will continue to be tight. One doubt lies in the hydroelectric plants; the regions in which hydroelectric plants are situated are not affected by droughts. Actually, those hydroelectric plants are more affected when La Niña occurs. Our 3.6% (year-on-year average) for inflation already incorporates the El Niño effects, and our 1.2% projection for growth already incorporates the lower agricultural production for 2024

Mexico:

The impact of El Niño in Mexico typically manifests as a significant increase in rainfall in the northern part of the country. El Niño usually has favorable effects on agricultural production, primarily located in the northern region. This is expected to result in a positive outlook for food prices in Mexico, albeit with some risk of flooding. What will mainly drive Mexico growth in 2024 is the strong demand of the U.S., domestic inflation and a looser fiscal policy. In terms of inflation, the biggest risk are a pass-through from wage inflation to core CPI and a possible overheating of the economy, with El niño representing a secondary risk. Our 2.4% GDP growth and a 3.8% inflation (Y/Y average) forecasts are aligned with this view.

Argentina

In Argentina, El niño will actually be favourable for the country. In 2023, a severe drought has led to a contraction in the agricultural production which is set to be reversed in 2024, leading to a 13% growth in this sector. Additionally, the growth in the Agricultural sector will lead to a recovery on the Argentine FX reserves and improve slightly the outlook on inflation. However, major risks are the dollarization attempt by the new government and a new IMF deal under tougher conditions. We forecast a 1.4% growth for Argentina in 2024.