El Niño: Fitch warns of potential economic and inflationary pressures until 2027

A Climate Episode of Unusual Magnitude Forecasted as Nearly Certain through 2027

According to projections from NOAA's Climate Prediction Center cited by Fitch Ratings, El Niño conditions are now established in the tropical Pacific. The probability that this episode will continue until the December 2026-February 2027 period is 96%, and the likelihood of it being classified as « very strong » is 63%.

This intensity level is rarely observed and would significantly increase the risk of extreme weather events: droughts in some producing regions, excessive rainfall, and floods in others. Fitch emphasizes the prolonged nature of this episode, with macroeconomic effects that could extend over several agricultural cycles.

However, projections related to El Niño are inherently uncertain: the actual extent of impacts will depend on local conditions and the public policy responses implemented by the exposed countries.

Emerging Sovereigns: A Direct Channel to Risk Premiums

Fitch specifically warns about the most weakly rated sovereigns that are structurally dependent on agriculture. The agency identifies three main transmission channels: a weakening of growth, widening budget deficits due to support for affected sectors, and increased pressure on external liquidity for net food-importing countries.

For investors in emerging sovereign debt, this framework adds to the already identified risk factors for these issuers. The agency notes that a significant climate shock on fragile public budgets can accelerate the deterioration of credit profiles, especially when budgetary leeway has already been reduced by recent shocks.

The challenge is also measured against the backdrop of global agricultural markets: Fitch points out that these are already under pressure due to disruptions in fertilizers and logistics related to the war in the Middle East, which are likely to amplify the transmission of a supply shock to international prices.

An Additional Factor in the Global Inflation Equation

The warning comes in a context where global price pressure remains driven by the energy component. Despite the decline observed after the announcement of the preliminary agreement between Washington and Tehran (Brent fell 7% to $80.70/barrel), the IMF estimates that oil prices remain about 30% above their pre-conflict levels.

This relaxation remains conditional: the agreement between the United States and Iran is still preliminary as long as the formal signing planned in Geneva has not occurred, and the effective reopening of the Strait of Hormuz could take weeks or even months.

For even the highest-rated economies, Fitch does not rule out inflationary effects via the global food channel. This climate dimension is added to the variables usually monitored by central banks, at a time when the Federal Reserve maintains its rate range at 3.50%-3.75% ahead of the June 16-17 meeting, the first under the presidency of Kevin Warsh.