El Niño 2026: What EM Debt Investors Need to Know

El Niño's 2026 conditions have potential to ripple through food prices, energy generation and inflation across emerging markets—reshaping the EM debt outlook.

• More than a weather phenomenon: The economic implications of the El Niño ocean warming phenomenon can be substantial, affecting agricultural production, food security, and energy generation. These are all factors that can feed into inflation and growth across many emerging economies. This year’s El Niño is expected to develop very strong conditions in October–December, persisting into early 2027.
• Food and energy are key transmission channels: Disruptions to agricultural output often lead to higher food prices, while reduced water availability constrains hydropower generation. These effects are especially important in emerging markets, where food and energy account for a larger share of household expenditure and inflation baskets than in developed markets.
• The greatest potential vulnerabilities are concentrated in tropical and coastal economies: Countries in Latin America and Southeast Asia tend to be among the most exposed. Economies such as Peru, Ecuador, Colombia, Indonesia and the Philippines are particularly sensitive due to their reliance on agriculture, fisheries and climate-dependent energy infrastructure. For instance, 78% of Ecuador’s energy production¹ comes from hydropower, and severe drought can significantly constrain energy supply, driving electricity prices higher and weighing on growth.
• Not all countries are affected equally: Although El Niño is generally viewed as a net negative for emerging markets, some countries may experience more favorable rainfall patterns that support agricultural output or energy production. Argentina for instance, where agriculture accounts for around 50% of total goods exports, benefits from heavier rainfall in its Pampas agricultural heartland. Paraguay could also see some benefits with excess rainfall boosting hydropower output.
• Country-by-country impacts and potential second-round effects merit close attention: We do not expect the current El Niño to disrupt the outlook for the overall EMD asset class, which comes into the phenomenon with strong fundamentals. However, we are mindful of the secondary effects of rising inflation in previous El Niños (see chart). Monitoring food prices, reservoir levels, agricultural conditions and energy supply trends across countries can provide early signals of where macroeconomic pressures may build. This will inform the risks and opportunities for bottom-up positioning across EM assets.