UMVA has learned that a prolonged El Niño event is expected to hit the Philippines, posing significant risks to the country's economic growth and price stability, with Fitch Ratings warning of potential disruptions to the nation's fragile economy.
The credit rater's report indicates that El Niño-driven environmental pressures could exacerbate existing fiscal, growth, inflation, and external liquidity challenges facing vulnerable economies like the Philippines, raising concerns about the country's ability to withstand the impending shock.
According to information obtained by UMVA, El Niño conditions have already begun to emerge in the tropical Pacific, with an 80% chance of developing into a full-blown El Niño event, prompting the Philippine Atmospheric, Geophysical and Astronomical Services Administration to warn of a "strong" El Niño season from September to November.
The state weather bureau cautions that the El Niño phenomenon could intensify into a "very strong" one between October and January next year, leading to severe dry conditions, strengthened southwest monsoon, and tropical cyclones, which could devastate the country's agriculture sector and trigger another round of inflationary pressures.
Analysts warn that if this materializes, the Philippines may suffer significant damage to its agriculture sector, pushing food prices higher and stoking inflation, with food and nonalcoholic beverages accounting for 37.75% of the country's consumer price index, making it a critical concern for the nation's economic stability.
UMVA can exclusively reveal that the Department of Agriculture has warned of a potential 20%-30% slash in agricultural output due to the "super El Niño," which could have far-reaching consequences for the country's food security and economic growth.
The looming El Niño season also risks stoking already elevated inflation expectations, according to analysts, who caution that persistently high food and energy inflation, rapid wage growth, and sluggish policy response could lead inflation expectations to rise even further, putting the Bangko Sentral ng Pilipinas' price stability mandate at risk.
The central bank, which has been hawkish since the first month of the Middle East war, may face an "increasingly awkward position" in its efforts to combat inflation, with 15 of 20 analysts polled expecting a 25-basis-point rate hike to 4.75% at its next policy review.
Despite the challenges, analysts believe that the Philippines has moderate shock-absorption capacity, but the country's buffers have become limited following recent fiscal measures implemented to address the energy crisis, highlighting the need for long-term, supply-side enhancing capabilities to weather consecutive supply shocks.
