CITI’S TAKE
Rising risks of a Super El Niño could present a potentially significant inflationary shock to EM, complicating the macro outlook even as lower energy prices offer relief. Primary risk stems from food inflation, disproportionately impacting those with high food CPI weights and net import reliance. This, coupled with secondary risks to hydro power supply in climate affected areas, could force some EM central banks to maintain a hawkish stance for longer (e.g. BSP, SARB, Banrep). At the same time, we argue India’s agri production has been more resilient to deficient monsoons, has supply buffers, and a shift to positive IOD would help. Overall, our estimated inflationary impact from El Nino is very heterogenous, necessitating country-by-country discussion.
Lower oil is a relief, but not a full macro reset. Citi’s commodities team now expects Brent at US$75/bbl in 3Q26 and US$60–65/bbl by 1Q27, however, we forecast only a relatively small inflation relief in EM Europe and Asia, while raising Latam inflation forecasts. Lagged energy pass-through, elevated food inflation risks, energy price rigidity (e.g. Egypt looking to pare back subsidies), robust growth among AI capex beneficiaries and persistent inflationary pressures from fiscal/wages (e.g. Brazil, Colombia) are keeping most EM central banks cautious. In fact, we turned more hawkish on Brazil, Nigeria and Romania, further delaying our expected easing path. South Asia, led by India and Sri Lanka, is where we see the clearest dovish pivot post oil relief.
El Niño is the next supply shock to watch as it will likely be a strong, if not a very strong event. A canonical Eastern Pacific El Niño would imply drought/heat risks across South Asia, ASEAN, parts of LatAm, Southern Africa, the Sahel (and surrounds), while increasing heavy-rain/flood risks in East Africa and the west coast of South America. Europe & Mideast are less directly climactically affected.
Food inflation is the most important transmission channel, but hydro, heat and logistics add second-round risks. The shock matters most where food weights are high, agriculture employment/output is large, and staple-import dependence is meaningful. The Philippines stands out due to its unusually high rice CPI weight. Other food-heavy CPI baskets with high import dependence expose many parts of Africa and Sri Lanka (India is less vulnerable). Hydro power risk seems to be the highest for Zambia, Costa Rica, Colombia, Sri Lanka, Ghana and Vietnam; Panama Canal water levels and Peru fisheries are also vulnerable.
Our state-dependent estimation of El Nino’s impact on EM inflation footprint, implying selective CB response. The clearest inflationary signal is in LatAm and CEEMEA, with Colombia showing the most positive model response, while Asia has more mixed, and some counterintuitive results, reflecting IRF model limitations and the need to factor in other idiosyncratic factors, which we provide in a country-by-country discussion. For now, we expect EM central banks to look through any potential supply side shock, but tolerance seems lower for some where inflation expectations are already above target, raising risk of de-anchored expectations.
One Shock to the Next—Macro Impact of El Niño on EM
The US-Iran MoU paving the way for reopening of the Strait of Hormuz alongside a surprisingly hawkish Fed are two major macro developments since mid-June. Our commodities team have dramatically cut their oil price base case (60% prob.) to $75/bbl (from $95) in 3Q26 and anticipate oil markets moving into surplus with prices trending towards $60-65/bbl by 1Q’27. This would be beneficial for most of net energy importing EM, support AE consumption, and reduce inflation risk premium. Meanwhile, our US team continue to discount this risk, though a renewed focus on price stability could lead Fed on a protracted hold, and that US (AI-led) exceptionalism could continue to support a stronger USD bias.
The EM macro reality looks far more complicated than the turn in our oil price outlook. In fact, we are only factoring in very modest inflation relief in Europe and Asia, while we raised Latam inflation further. Some lagged pass thru on energy costs, El Niño risks on food inflation, energy price rigidity in some still looking to pare back subsidies (e.g. Egypt), robust growth among AI capex beneficiaries (Korea, Taiwan, Singapore) and inflation pressures from fiscal dynamics/ wages (Brazil, Colombia) are still keeping EM inflation revisions asymmetrically rigid to the downside, after having revised it up substantially (by 70bps and 40bps in 2026 and 2027F, respectively, from February to May. On the growth front, as Africa and LatAm were not as affected by the Middle East crisis, our forecasts are mostly unchanged. Instead, the most meaningful growth upgrades are in Asia (with AI driving the North Asia story). Surprisingly, we have downgraded growth in EM Europe, alongside quite sizeable growth downgrade in the Euro Area. (Figure 1)
Consequently, our EM central bank calls have demonstrated tremendous policy inertia – i.e. it moved significantly more hawkish in the last few months coinciding with the energy price surged since February, and in some cases like Brazil, Romania and Nigeria, we are still paring pack rate easing expectations – i.e. progressively more hawkish. The places of more meaningful dovish turn are in South Asia, with India and Sri Lanka fully offsetting the earlier hawkish turn (Figure 2). Assuming this fragile US-Iran truce holds, we expect market will now increasingly focus on another potentially significant supply side inflationary shock in EM – a potential Super El Niño, which we discuss in detail in the next section.
Assessing the Macro Impact of El Niño on EM
How bad will this El Niño episode be?
El Niño already underway…. Climate conditions characterized by the abnormal warming of the central and Eastern parts of the Pacific Ocean are already underway. El Niño oscillation cycles typically happen 2-7 years, but there is heightened focus now for two reasons: 1) It plausibly could be a very strong episode (we’ve only had a few of them in modern history: 1982-83, 1997-98, 2015-16, 2023-24); and 2) It may hit a world still reeling from aftershocks of the Middle East crisis.
A canonical El Niño (Eastern Pacific warming) pattern appears more likely based on current eastward subsurface heat patterns JMA, 10 June). 1 This displays certain climate features— intense heat/drought/deficient rainfall conditions in South Asia (e.g. India, Sri Lanka, Pakistan), ASEAN (Vietnam, Indonesia, Thailand, Philippines), Australia, Central America (Costa Rica, Panama), Colombia, Southern Africa (South Africa, Zambia), Sahel region (includes Northern part of Nigeria), and just South of that impacting Ghana. Meanwhile, it tends to cause heavier rains in East Africa (Tanzania, Kenya, Uganda) and West and Southern coast of South America (Ecuador, Peru, Central Chile, Argentina). We see spatial variations within China, Brazil, Mexico and Nigeria— higher drought risk in the North (and Central areas of Brazil and Mexico), while excessive rainfall/flood risk in the South. Europe, is less affected, given its distance from the Pacific and the stronger influence of the North Atlantic Oscillation. We summarize a pictorial representation of El Niño’s temperature and precipitation impacts in Figure 3 .
The Indian Ocean Dipole (IOD) – or differences in the sea surface temperatures (SST) between western and eastern parts of the Indian Ocean – will also need monitoring. We are currently in neutral IOD. If we shift to a positive IOD in the coming months coinciding with El Niño,3 this tends to exacerbate rainfall in East Africa, dryness in Australia/ Southeast Asia, but it can also reduce the adverse effects of El Niño on India (depending on how positive IOD becomes), as it did in the Super El Niño episode of 1997-98 (The Economic Times, 14 June). However, the precipitation effect does not seem to extend far West enough to benefit Pakistan (which went through a serious drought in that El Niño episode), highlighting complexities in regional climate dynamics.4 The key agency monitoring IOD is the Australia Bureau of Meteorology (BoM), is currently forecasting “a positive IOD event in the southern hemisphere winter-spring [Jun-Nov]. However, model forecasts show a large variation in both the timing and strength of this potential event.” (BoM, 16 June)
Assessing Macroeconomic Effects of El Niño
We summarize four major transmission channels in which a strong El Niño event would have significant spillovers to EM macro and markets. Crop yield and food inflation. The most important is how drought risks/flooding could adversely impact crop yields, which will more adversely impact climate-affected countries with high share of agriculture output and employment (Figure 6) –South/Southeast Asia, leading to higher food inflation, which would squeeze real incomes and could lead to a hawkish risk for central banks where food weight in their CPI basket is high (Figure 7). ENSO cycles tend to specifically hit cereals (maize, wheat and rice) given their reliance on moisture and temperature sensitivity in key phenological (life cycle) stages.5 This would make the Philippines standout globally not only by its relatively high food weight, but its unusually high “cereal and cereal product” (CCP) weight of 12.3%, dominated by a single commodity—rice (8.9%). We do not see this elsewhere in EM. Pakistan is closest with CCP weight of ~7.6% (5.5% of which is wheat); India6, Indonesia, Sri Lanka, Egypt, Peru are far lower at 5.9%, 5.6%, 5.3%, 4.9%. 4.4%, respectively.
A key crop in a drought-exposed region is palm oil, where Indonesia and Malaysia alone account for 82% of global production (see USDA), and supports significant employment (one estimate cites 20mn in Indonesia).7 El Niño tends to drive up global prices (up 15% since Feb), as Citi analysis argues here.
Extreme heat, water scarcity, and animal feed shortages could also have adverse impact on livestock, though if it leads to distressed farmers selling livestock, this may lead to a short-term surge supplies. On the flipside, El Niño tends to boost soybean output in the US, which is one of the most important animal feeds. globally, not to mention reports that US is planting more soybeans (versus corn) to ease the impact of higher fertilizer costs (WSJ , 31 March)
Energy demand versus supply. Energy demand can rise when intense heat boosts demand for cooling, though on the flipside, for economies with colder climates (e.g. North America), and this can lead to lower energy demand due to milder winters. Energy-related risk from El Niño will likely be on hydroelectric power supply, where parts of Africa, Americas and Asia look more exposed (Figure 9). Mapping the deficient rainfall exposure risk to hydro for countries we cover, Zambia, Colombia and Costa Rica look vulnerable, alongside Sri Lanka, Ghana, Vietnam and Malaysia, while the impact on hydropower output in Brazil is less predictable given less stable precipitation patterns during El Niño.
Intense heat/extreme weather events could dampen heat-sensitive construction activity, create transport bottlenecks, and in worst cases, lead to weather-related damages (floods, fires, intense storms). One transport bottleneck unique to Panama is the operation of its canal, where El Niño reduces water levels in Gatun Lake, restricting Canal transit and raising logistic costs across the region. It is hard to predict extreme events, which do not always coincide with ENSO signals. The world is getting progressively warmer (BBC, January 2025) which could compound the effects of El Niño. One extreme disaster associated with major El Niño events are bush/forest fires, notable EM examples are Indonesia (1997-98, 2015,8 2019 forest/peatland fires; haze spillovers on Singapore and Malaysia) and Brazil (1997-98 Roraima fire, 2015-16 and 2023 Amazon/Pantanal fires).
Fisheries/aquaculture – a salient issue for Peru. El Niño significantly disrupts marine ecosystems by warming ocean surface temperatures in eastern Pacific spanning the west coast of Americas (Humbold current from southern coast of Chile to Peru), suppressing the upwelling of nutrient-rich deep water needed to sustain the Peruvian anchovy population –Peru given that it is the world’s largest exporter of fishmeal. Western Pacific Ocean (hitting costs of Asia & Australia) faces the opposite cooling effect and is not as impacted.
Food Import Reliance is a differentiating factor of Vulnerability
Relative vulnerability to food prices will also likely be influenced by domestic self-sufficiency, buffer stocks and reliance on imports of key vulnerable food staples. For agri commodities that Citi Research forecasts, the most meaningful revisions have been for wheat (+33% in 2H26 vs Feb) and corn (+9%) [they do not forecast rice]; soybean prices were unchanged, while coffee and cocoa forecasts are 17%-18% lower vs Feb forecasts (see Citi’s latest commodities forecasts here).
As a quick gauge, we look at EM’s net agriculture trade balance broken down by major food groups (Figure 10). Once we adjust for large cash crops (coffee in Uganda, cocoa in Ghana, Nigeria, tea & coffee in Kenya, tea in Sri Lanka, palm oil in Indonesia & Malaysia), net food import dependence for food-sensitive CPI countries looks high in the Philippines, Egypt, Nigeria, Kenya, Sri Lanka, Ghana, and to a lesser extent, Pakistan, while more developed EM are, not surprisingly, also sizeable food importers, with the exception of Poland and Hungary.
