El Niño is unlikely on its own to lead to sovereign rating downgrades unless the weather phenomenon proves significantly more severe than expected or governments respond with costly support measures, one of S&P Global's top analysts has said.
Joydeep Mukherji, S&P's lead ratings analyst for Latin America, said the impact on ratings would depend not only on the scale of economic disruption from the severe droughts or flooding that a potential 'super' El Niño could bring, but also on how policymakers manage the fallout.
"If it's a flooding or a drought that causes disruption in economic activity, you assume it's going to pick up in six months, 12 months' time," Mukherji said in an interview.
"Ratings should be able to withstand that kind of stress, if that's all that happens."
Instead, the key determinant is likely to be the policy response of the governments in hard-hit countries.
"If there's just a small fiscal response to help people who are affected, that's one thing," Mukherji said. But broader measures such as controls on electricity or fuel prices could create additional fiscal pressures.
"Then suddenly you have a fiscal problem on the side, not just the disruption caused by natural events," he said.
Governments face a choice between allowing part of the economic cost to be absorbed by households and businesses or taking on a larger share themselves through higher public spending, wider deficits and increased borrowing.
"Policy response is key here," he said. "Do governments spare or share the costs, or do they take a lot of it onto themselves into their balance sheet through higher deficits, higher debt?"
He also said countries with flexible exchange rates may be better placed to absorb weather-related shocks, citing Colombia and Peru - two countries where the economic impact could be "substantial" - as examples.
Economies without their own currencies, such as dollarised Ecuador, have fewer policy tools available to help maintain competitiveness following a shock.
For now, however, S&P is not expecting El Niño to trigger a wave of negative rating moves.
He cautioned that uncertainty remains high over the scale of the phenomenon.
