Fitch: Extended El Niño to disrupt PHL economy

By Katherine K. Chan, Reporter

THE PHILIPPINES could face renewed economic disruptions from a prolonged El Niño event that is expected to last until at least early 2027, posing risks to growth and price stability, Fitch Ratings said.

In a report on Monday, the credit rater said El Niño-driven environmental pressures could worsen the fiscal, growth, inflation and external liquidity headwinds already confronting vulnerable economies such as the Philippines.

“El Niño has formed and is set to persist into early 2027 at least, raising the risk of economic disruption in a range of sovereigns,” Fitch said.

“Fitch Ratings would be 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 more vulnerable sovereigns,” it added.

The Philippine Atmospheric, Geophysical and Astronomical Services Administration last week said El Niño conditions have begun to emerge in the tropical Pacific, with an 80% chance to develop into a full-blown El Niño.

The state weather bureau warned that the country may face a “strong” El Niño season from September to November, which could intensify into a “very strong” one between October and January next year.

The El Niño phenomenon is expected to strengthen the southwest monsoon and tropical cyclones as well as cause severe dry conditions to parts of the country.

If this materializes, the Philippines may suffer another round of inflationary pressures as the potential damage to the agriculture sector is expected to push food prices higher, analysts said.

“El Niño can significantly raise domestic inflation in the Philippines, with food-price increases often contributing around 1 to 3 percentage points or more to headline inflation in severe episodes, depending on the extent of agricultural losses and the effectiveness of policy responses,” Ser Percival K. Peña-Reyes, a senior research fellow at the Ateneo Center for Economic Research and Development, told BusinessWorld in an e-mail.

Food and nonalcoholic beverages carry the largest weight in the country’s consumer price index, comprising 37.75% of the total basket. This means that any change in food prices could significantly impact headline inflation.

“Emerging markets are more vulnerable than developed economies to consumer price inflation from domestic or imported food price shocks, because food generally accounts for a larger share of the consumer price index basket in these markets,” Fitch Ratings said.

The Department of Agriculture earlier said that the “super El Niño” could slash agricultural output by 20%-30%, as high temperatures will take a toll on local crops, livestock, fisheries and aquaculture.

In the first quarter, local farm production already contracted by 0.3% amid a decline in crops and fisheries.

INFLATION EXPECTATIONS
Beyond immediate price pressures, the looming El Niño season likewise risks stoking already elevated inflation expectations, according to analysts.

“(I)nflation expectations could unravel further given enough severity of this coming El Niño season,” Marco Antonio C. Agonia, an economist at the University of Asia and the Pacific, told BusinessWorld via e-mail.

“Consumers in particular may expect higher inflation as prices creep up in everyday things such as groceries and utility bills, which were already elevated coming out of the Middle East crisis,” he added.

Over the last three months, the local agricultural sector has taken a hit from high fertilizer prices and supply disruptions from the Middle East war, both of which fueled inflation.

Inflation has been above the Bangko Sentral ng Pilipinas’ (BSP) 2%-4% goal since the Middle East war erupted in late February, with the year-to-date headline print now at 4.5%.

The BSP expects inflation to average 6.3% this year and 4.3% in 2027.

Mr. Peña-Reyes said potential consecutive price shocks raise a “moderate” risk of inflation expectations becoming unanchored.

“The risk is meaningful but not necessarily high, and it depends on whether households and businesses begin to view the shocks as persistent rather than temporary,” he said. “If the recent energy-price pressures are followed by a significant El Niño-induced food shock, I would characterize the risk of inflation expectations becoming unanchored in the Philippines as moderate rather than high.”

Still, persistently high food and energy inflation spanning several quarters, rapid wage growth and sluggish policy response could lead inflation expectations to rise even further, Mr. Peña-Reyes noted.

“However, if the shocks are temporary, and authorities successfully stabilize food supply and communicate a credible anti-inflation stance, expectations are likely to remain broadly anchored even if headline inflation experiences another temporary surge,” he added.

This new set of inflationary pressures will also weigh on the BSP’s price stability mandate, putting the inflation-targeting central bank at an “increasingly awkward position,” said Mr. Agonia.

The BSP has been hawkish since the first month of the Middle East war, even reversing its monetary policy path to counter emerging inflationary pressures by raising the key policy rate.

In April, it delivered its first 25-basis-point (bp) rate hike in over two years, bringing benchmark borrowing costs to 4.5%.

The Monetary Board is again expected to tighten at its next policy review on Thursday, with 15 of 20 analysts polled by BusinessWorld anticipating a 25-bp increase to 4.75%.

“All told, I think the Philippines has moderate shock-absorption capacity,” Mr. Peña-Reyes said. “It is not in a position where a severe El Niño would automatically trigger a fiscal crisis, but recent oil shocks have reduced the margin for error. The country is likely capable of handling a single major supply shock through imports, targeted assistance, and monetary policy.”

However, Mr. Agonia warned that the country’s buffers have become limited following the recent fiscal measures implemented to address the energy crisis.

“Fiscal space remains constrained as financing was already allotted for the energy crisis response,” he said. “This highlights the growing need for long-term, supply-side enhancing capabilities to weather consecutive supply shocks such as these.”