El Niño: South and South-east Asia’s 2023 wild card

Article tags Climate ChangeRiskAsia

• EIU believes that there is a very high risk of an acute El Niño event causing severe economic disruptions to Asia in 2023. The effects across the region will vary widely, with South and South‑east Asia more exposed to shocks in their agricultural sectors.
• Our 2023 real GDP growth forecast for India, at 6.1% currently, already considered a “mild” El Niño. However, a more severe El Niño could prompt no more than a 0.6-percentage-point downward revision in the forecast.
• Asia’s developed countries will also see extreme weather effects in case of severe El Niño via inflationary pressure, although more resilient economic structure—less agriculturally dependent—and institutional capacity will probably make them more resilient to shocks.
• Weak institutional capacity, poor governance and lack of fiscal space make emerging Asian countries particularly vulnerable to extreme climate change events and will adversely affect long-term regional economic growth prospects.

El Niño is a weather phenomenon that develops from abnormally warm water temperatures in the Pacific Ocean; dominant effects for many Asian countries include unusual precipitation patterns and more extreme droughts or floods. The US National Oceanic and Atmospheric Administration projects an above 60% chance of El Niño development during the second and third quarters of 2023. EIU believes that there is a very high risk that an acute El Niño will cause severe economic disruptions in many Asian countries. 

Economic disruptions will vary across Asia, reflecting a specific location’s distinct severity to El Niño patterns, economic structure, and the authority’s ability in responding to adverse climate challenges. In South and South‑east Asia, for example, we expect El Niño to strongly affect local agricultural and fisheries sectors. Poor or lost harvests will push up food inflation and hit rural household income—shocks which may be disproportionately severe in many of the region’s emerging markets, given the importance of agriculture to these economies. The broader effects of El Niño may be less pronounced in advanced North-east Asian economies like Japan and South Korea, where agriculture accounts for a smaller share of the economy and institutional capacity to respond to adverse weather effects is generally stronger.

Warmer weather will also push up power demand, alongside potential strains to local hydropower resources amid shallower levels of precipitation, across Asia. This could lead to power rationing that curtails industrial activity, as experienced by China and India in recent years. Industries heavily dependent on electricity and water resources, such as textile, construction, automotive and integrated circuits, could be particularly vulnerable.

How a severe El Niño will affect Asia’s largest economies

In India, our baseline forecast (at 6.1%) already considered a “mild” El Niño for 2023. A more “severe” El Niño could prompt a downward revision by no more than 0.6 percentage points. El Niño events have historically foreshadowed significant droughts in India, suggesting high risks to agricultural output and GDP growth this year. The Indian Meteorological Department has forecast a normal monsoon season for India in 2023, given climate patterns in the Indian Ocean, which should counteract the effects of a milder El Niño. Nevertheless, a severe El Niño can result in less than expected rainfall in the second and third quarters of 2023, causing severe disruptions to agriculture output.

Drier weather conditions will exacerbate India’s inflation trajectory for perishables. Although our current forecasts already assume high consumer price inflation as a result of climate-inflicted agricultural disruptions this year, a more severe than expected El Niño phenomenon could easily push cost-of-living pressures beyond our current expectations. This could force India’s government to respond with consumer subsidies for poorer sections of the population, thus straining the already wide fiscal deficit, or impose export restrictions that could spur global resentment.

For China, a severe El Niño could shave no more than 0.3 percentage points off our real GDP growth forecast for 2023 (currently at 6.1%). This relatively benign assessment, based on the public announcement of economic loss from past natural disasters, partly reflects a much smaller share of agricultural sector as a share of GDP (7%, vis‑à‑vis India’s 15%). Additionally, the Chinese government has had experience in handling increasingly common adverse weather shocks in recent years; a relatively strong bureaucracy will assist in both disaster preparedness and crisis mitigation.

El Niño shocks would probably be unevenly distributed across different regions and sectors, posing varied challenges for different local governments. Northern China could experience severe droughts, for example, while southern China, particularly in the Yangtze River basin, could face heavy rainfall and flooding. 

Agricultural output would fall, but we do not view severe risks to China’s food security or inflationary pressure under an acute El Niño, given institutional capacity aforementioned, as well as high national stockpiles of staple foodstuffs.

Institutional capacity remains key for climate change mitigation

Many emerging markets in South and Southeast Asia, where agriculture commands a higher degree of importance to local economic output, are much more vulnerable to El Niño disruptions. In Vietnam, for example, an inclement weather event of a similar scale to the 2015‑16 El Niño could push up inflation to 1 percentage point higher than our baseline for 2023‑24, primarily as a result of weaker yields in agricultural and fishery output. 

Compounding these risks is the fact that many of these emerging markets suffer from differing degrees of poor administrative coordination, weak governance and high levels of corruption. The assessment for the region is therefore varied. Indonesia, for example, has taken proactive steps to respond to potential El Niño disruptions. On April 5th it announced plans to import 2m tonnes of rice in 2023, up from 320,000 tonnes in 2022, as a result of expected shocks to local crop yields. 

The outlook for Sri Lanka, by contrast, is dimmer. Sri Lanka is particularly vulnerable to El Niño as a result of flooding: during the country’s last El Niño event in 2016, higher rainfall both depressed tea production and increased local incidence of dengue fever. Rising dengue cases—at already more than 31,000 by early 2023—suggest that a severe El Niño may further worsen the situation. Sri Lanka’s ongoing political and economic turmoil, however, will prevent a co‑ordinated government plan to respond to a more severe El Niño, suggesting deeper economic shocks than our current assumptions. 

Asia is not prepared for extreme weather and climate shocks

The growing intensity of El Niño events in recent decades represents the broader impact of climate change on constraining regional economic growth. We estimate the long-term loss in real GDP among many emerging Asian countries—primarily South and South‑east Asia—as ranging from 2% to 6% of GDP in the period to 2050, given factors ranging from lost economic output to heightened fiscal expenditure tied to climate change adaptation costs. 

Many emerging economies do not possess the fiscal resources and the policy tools for disaster preparedness, crisis mitigation, and tackling long-term climate challenges. We advise businesses to review their commercial insurance coverage against operational disruptions brought by extreme weather and adverse climate challenges. They should also create a disaster response plan, including backup electricity generation facilities, and water and food storage for emergency usage.

Thu, 11th May 2023 Article tags Climate ChangeRiskAsia