Citi expresses concern on El Niño impact

Citi said the El Niño weather conditions would have a negative impact on the Philippines, India and the rest of Asia.

“A prolonged dry spell has important implications on agriculture output, especially for countries like India and the Philippines,” Citi said in a report.

The last two severe El Niño episodes (1997-98 and 1982-83) caused significant crop damage and a surge in food prices. However, other El Niño episodes were mild and last year’s warnings ended up being a false alarm, helping explain why prices of food staples haven’t reacted.

Food inflation on average had been decelerating and inflation surprises in Asia are mostly negative.

“However, we are wary of risks to reverse base effects, especially going into the first quarter of 2016 although the food inflation in the first quarter this year was unseasonably low,” it said.

On the monetary policy and inflation front, Philippines, India and Indonesia look relatively vulnerable, Citi said.

Monetary policy would likely be affected in places where inflation sensitivity to food is relatively high, where inflation is close to or higher than the respective central bank’s inflation targets, the report said.

Serious El Niño poses more growth worries.

Indonesia and Vietnam are the most exposed. – Thailand, India and the Philippines are the next countries most exposed to the negative impact of the weather phenomenon, as they rely on agricultural incomes, thus impacting on consumption.

“We think Thailand and India will be the most sensitive to further downside risk given the disappointing pace of economic growth so far. In reality, growth outcomes are hard to predict as it depends on geographic distribution of drought,” Citi said.

It further reported that commoditydriven inflation risks are still too early to factor in given significant uncertainties, lighter positioning and much- reduced rate-cut expectations in many curves.

“But we will track inflation surprises carefully. El Niño concerns, thus reinforce our view to pay in inflation- sensitive curves, especially where too many cuts are priced in,” it added.

El Niño is an unusual ocean warming off the Pacific coast of South America which creates various ripple effects. These include exceptionally dry conditions in parts of Asia; farm-reliant India and the Philippines are considered particularly at risk of drought and poor crop yields.