S&P says El Niño alone unlikely to trigger rating downgrades

Investing.com -- El Niño is unlikely to cause sovereign rating downgrades on its own unless the weather event becomes much worse than anticipated or governments implement expensive support programs, according to a senior S&P Global analyst.

Joydeep Mukherji, S&P's lead ratings analyst for Latin America, said the effect on credit ratings will depend on both the severity of economic disruption from potential droughts or flooding and how governments handle the aftermath.

"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."

The policy response from affected governments will likely be the main factor, Mukherji said. A limited fiscal response to assist affected populations is one scenario, but broader interventions such as controls on electricity or fuel prices could create additional budget pressures.

"Then suddenly you have a fiscal problem on the side, not just the disruption caused by natural events," he said.

Governments must decide whether to let households and businesses absorb part of the economic cost or take on a larger burden through increased public spending, wider deficits and more borrowing.

Countries with flexible exchange rates may be better positioned to absorb weather-related shocks, Mukherji said, pointing to Colombia and Peru as examples of nations where the economic impact could be substantial.

Economies without their own currencies, such as dollarized Ecuador, have fewer policy options to maintain competitiveness after a shock.

S&P does not currently expect El Niño to lead to widespread negative rating actions. Mukherji noted that uncertainty remains high regarding the scale of the phenomenon.

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