S&P says El Niño unlikely to trigger rating changes, for now

By Marc Jones

LONDON, July 29 (Reuters) - ‌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.

(Reporting by Marc Jones; Editing by Tommy Reggiori Wilkes and ‌Chizu Nomiyama )

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