Fitch Ratings: The formation of an El Niño weather phenomenon that is set to persist into early 2027 raises the risk of economic disruption in a range of sovereigns, says Fitch Ratings. Fitch is unlikely to link rating actions directly to El Niño 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 US National Oceanic and Atmospheric Administration said on 11 June that El Niño conditions had developed in the tropical Pacific. It added that forecasters predict a 63% chance of sea surface temperatures exceeding the threshold for a rare ‘very strong’ El Niño. The US Climate Prediction Center’s 8 June projections indicate a 96% chance that El Niño will continue through December 2026-February 2027.

El Niño brings unusually dry conditions in some regions and heavier-than-normal rainfall in others. Environmental conditions that hamper agricultural or economic activity could weaken the credit profiles of lower-rated sovereigns, especially those in the ‘B’ category or below with limited market access or a record of rising debt in crises. However, some regions may benefit, for example, where higher rainfall boosts agricultural production.

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 Niño phenomenon, potentially affecting inflation prospects even in highly rated sovereigns.

The full report “El Niño Could Add to Risks Facing Weaker Sovereigns” is available by clicking the link above or visitingwww.fitchratings.com.