El Niño de Navidad: Impacts Across Emerging Markets

Understanding El Niño

An El Niño is a weather and climate phenomenon that occurs every three to seven years and forms when trade winds weaken, meaning warm surface waters are no longer pushed westwards across the Pacific Ocean and instead remain in the central and eastern Pacific. An El Niño occurs when the three-month running average of sea surface temperatures in the central Pacific rises at least 0.5°C above normal, with readings of 1.0°–1.4°C classed as moderate, 1.5°–1.9°C as strong, and 2.0°C or above marking a very strong, or 'super,' El Niño. This relatively small change in winds and ocean temperatures can have significant global implications, contributing to higher global temperatures as well as severe localised and regional weather disruptions across the globe. Estimates of the economic costs of El Niño vary greatly but run into the hundreds of billions of dollars globally, with the African Development Bank expecting the upcoming event to cost the African continent alone up to $US20 billion in gross domestic product (GDP). Exhibit 1 highlights the typical weather patterns associated with an El Niño event. The opposite phase of the cycle, known as La Niña, occurs when trade winds are stronger than normal and generally results in different weather outcomes, although this paper will focus on El Niño.¹

Exhibit 1: Typical El Niño Weather Patterns Across the Year

Sources: Ropelewski, C. F. and M. S. Halpert, 1989: Precipitation patterns associated with the high index phase of the Southern Oscillation. J. Climate, 2, 268-284. Mason and Goddard, 2001. Probabilistic precipitation anomalies associated with ENSO. Bull. Am. Meteorol. Soc. 82, 619-638. National Oceanic and Atmospheric Administration. “Understanding El Niño &Amp; ENSO.” Last modified June 10, 2026. https://www.noaa.gov/understanding-el-nino.

From Weather to Markets

There are five key takeaways we believe investors should keep in mind going forward. First, El Niño is a global phenomenon with highly localised impacts, meaning the weather and macroeconomic effects can differ materially across countries, within countries and from one event to the next. Second, a stronger El Niño increases the probability of typical impacts associated with these events, but it does not guarantee a proportionally larger weather and macroeconomic shock. Third, the macroeconomic effects often significantly lag, with inflation and growth impacts typically emerging up to 12–18 months after the weather event begins. Fourth, emerging markets are generally more exposed than developed economies, owing to their greater dependence on agriculture, hydroelectric generation and food within CPI baskets. Finally, multi-year El Niño events can have disproportionately larger macroeconomic impacts than the initial event.

What makes this El Niño particularly concerning is not only the severity of the event, but also the compounding impact the closure/partial closure of the Strait of Hormuz will likely have on agriculture and the passthrough inflationary impact. Beyond the direct effect on oil prices, the closure has materially disrupted fertiliser supply chains, raising input costs and further risks lowering crop yields, exacerbating the existing El Niño shock discussed in this paper.

Given the resulting upward pressure on local interest rates, we believe this more broadly supports a shorter-duration bias in local currency bonds. That said, the idiosyncratic nature of El Niño, and the fact that its impact can vary materially across regions, countries and even individual El Niño episodes, still reinforces the importance of a bottom-up approach to emerging markets investing. This requires focusing on country-specific details, from soil moisture and reservoir levels (South Africa appears to be starting this episode from a relatively favourable position) to the timing, location and magnitude of any monsoon shortfall in India. We are therefore paying particularly close attention to the inflationary impact across countries. This differentiated growth impulse also supports our positive view on Argentina, where the Southern Cone's broader agricultural and export benefit reinforces our constructive stance on both the credit and local bonds. Despite some similarities, Ecuador does not benefit in the same way, as its coastal exposure to El Niño typically brings flooding and disruption to shrimp and fishing output, weighing on growth and supporting our less-favourable view on the credit there. Notably, social risks will be elevated, which will likely spill over into fiscal and political risks over the coming period.