The Decisive | Season 7 | Ep.8 - Super El Niño: How Weather Shocks Ripple Through the Global Economy

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Kristen Hallam:

You're listening to The Decisive Podcast, insights and analysis to empower confident decision-making. Welcome to The Decisive Podcast. I'm your host, Kristen Hallam, and I have joining me today John Raines, our Head of North America Country Risk at S&P Global Market Intelligence. And we are going to be talking about a pretty hot topic right now, the US midterm elections. John, welcome back to The Decisive Podcast.

 

John Raines:

It's good to be back.

 

Kristen Hallam:

So let's maybe start at a high level and just talk about our approach in general to how we analyze upcoming elections. So, John, how would you describe our approach to that analysis?

 

John Raines:

That is a great question. And honestly, it's a question I wish people ask me more because I think the natural default when we get asked about elections is who's going to win. It makes sense, right? Because obviously the implications are decided by the winners and not the losers. And so therefore, let's cut to the chase. Who's going to win? Tell me what's going to happen. But the problem is that we live in an environment now where not only are we polarized, But also just to get people on the phone to conduct polls, exceedingly difficult. 5%, sometimes less. And so because of that, what you've got to do is not only focus in on who potentially is going to win, but also more importantly, drawing out scenarios and implications so the clients know what's coming down around the corner depending on what scenario is likely to unfold.

 

John Raines:

So it's a little bit of a process. You want to create the scenarios, look at the implications, And then see where it affects clients as well.

 

Kristen Hallam:

I'd like to just remind our listeners, particularly our listeners outside of the US, we have a significant number of subscribers outside the US, of why the midterm elections in the US are important. Like, why do we care so much about the outcome of these elections? It's not a presidential election. So what's the significance here, John?

 

John Raines:

Yeah, the big thing that we're all looking at, the big significance here is that this election is going to determine who controls Congress in the last 2 years of the Trump presidency. So typically what we see about these midterm elections is they are a referendum on the president themselves, right? And generally speaking, those referendums are quite negative. In fact, over the last 80 years, We've only had 2 times where the president's party has actually gained seats in the House of Representatives. That was 1998 after the Clinton impeachment and in 2002 after September 11th. And so what ends up happening is the results of these midterm elections are largely going to determine what happens with the legislative agenda of Donald Trump going forward. Now, Donald Trump hasn't really rolled through legislative statutes. He's done a lot of things through executive orders, but it does give you a sense where things are likely to go and the battles that are likely to erupt on the federal scenes if Democrats are able to attain a majority in the House of Representatives and also the Senate. And then on the state level and on a local level, we have 36 governorships that are up.

 

John Raines:

So they generally fall within these midterm bands. And again, that's going to have a significant influence when we're looking at state policy going forward. localities. And now, because we have this inter-decade redistricting, they're going to decide where the congressional and the state legislative lines are going to be drawn really every 2 years as we're going forward until we come up with a new system in order to delineate those.

 

Kristen Hallam:

Sounding like there's a lot at stake with these elections, especially as you mentioned with the governorships. That was something that was not top of my mind, but so it's good to be reminded about that. So, John, what would you say are the, the key issues in these elections? Is it just purely a referendum on President Trump and his policies, or are there other issues that are in play here?

 

John Raines:

Every single presidency, we pretty much see this. So on one side, it is a referendum, but there's always a reflection of the issues of the day. And the issue of the day, just like we saw in 2022 and really more importantly, 2024 in the presidential race. Cost of living. Looking at fuel prices approaching $5 a gallon, diesel $6 a gallon, that is playing not only on the news, but it's really playing in front of people's eyes as they're driving down the street. And it's something that's really weighing down the presidential numbers. And then also the gain in the Democrats in the generic ballot. So that's when we have polling where there's a Unnamed Democrat, unnamed Republican.

 

John Raines:

Right now, Democrats are leading about 8.5% nationally, and that's up about 3 points from where we were at the beginning of the year. So it's been pretty fundamental. But aside from cost of living, and really something that's associated with that though, are 2 subsidiary issues. Number one, the war in Ukraine, which started off unpopular and has continued to do so as things have drawn on. We are now 8 months in. And then The third is the tariffs. So I think that in the beginning, I think there was a general perception amongst the public that these tariffs could be implemented in a way that would bring US manufacturing back. Perhaps that is going to happen, perhaps it's not.

 

John Raines:

But one thing that's been associated with them, at least in some communities, especially we're thinking upper Midwest and border communities, is that they have had some type of impact on prices. Now, you could debate that. I'm not an economist, But the perception amongst this community is that's the case. Now, we do have some side issues that are also important that I think are going to likely gain importance not only in 2026, but also looking ahead towards 2028. One of those, AI data centers. And what's been interesting is that both Republicans and Democrats have been switching their policy really over the course of a few months. Last year, we had countless Democrats and again, Republicans saying, oh, data centers, best things in the world. AI full speed ahead.

 

John Raines:

And then what we're hearing this year is state after state politician coming out and saying, whoa, whoa, whoa, our state wants a moratorium. No, these data centers need to bear for the, the costs associated with them, whether that's energy cost, water cost. So there's been a huge reversal there. And it'll be interesting to see how these parties prepare themselves as they get past the '26 election and headed towards '28. Right now, One poll said that data centers, only about 1% of the public thinks that is their highest, most important issue. Does that change as we go to 2028?

 

Kristen Hallam:

I think that's really quite a list there, a lot at play. And it's interesting that you mentioned some issues that maybe aren't at the forefront right now in 2026, but could be in just a couple of years. And AI and data centers is an interesting one. I'm sitting in Virginia. Virginia is one of the— has, I think, some of the highest density in terms of data centers in the whole world. So it's an issue here for sure, and definitely one that I can see growing in importance in the next election cycle. And just a quick plug, we will be having an episode of The Decisive on AI and data centers next week. next month in October.

 

Kristen Hallam:

So now that we know what the— some of the key issues are, John, what would you say are the key battleground states?

 

John Raines:

Obviously, we have those governorship races, which are going to be important, again, looking at state policy and redistricting. But it's really those Senate races that we are focused on, right? And so where we're looking is a manner of speaking of where the Democrats are competitive, where the Republicans Have an advantage. And the way I like to break it down is that we've seen a shift. So early on, I think the expectation, even if you were to ask me a year ago, I would tell you that the odds that the Democrats take the Senate is probably 30%, maybe 40%. And the reason for that is it's really a pretty structurally, at least, a very pro-Republican map. Of all of the seats that are up, there's 23 Republicans that are currently up, there's only one state where Democrats actually won that state in 2024 in the presidential cycle, and that's Maine with Susan Collins, who's a very formidable candidate. All of the others went with Republicans, and most of these are double-digit leads by the Republicans. And so therefore, it seemed like it was going to be very difficult for the Democrats to be able to pick up these seats if they needed.

 

John Raines:

They need 4 because right now it's a 53-47 Republican majority, which means they need to get those 3 seats and then it's a 50-50 tie. Vice president breaks the tie. So you need that 4th seat. And the question is, where are you going to get? So the ones where we're looking at now are North Carolina, where it looks as though the Democrat there is up by about 8 points. I think most likely that's not going to be too difficult for the Democrats. But then after that, it starts to get a bit tougher sledding. The first of those, again, as I mentioned, Maine. Very pro-Democratic environment.

 

John Raines:

Again, 8.5 points in the generic ballot. One would think that with Maine, which also voted for Kamala Harris, they have a pretty good chance of upsetting Susan Collins there, despite the fact that she has won repeatedly in a difficult swing state. The other states that we're looking at include Democrat holds where they're going to have to defend themselves. That includes New Hampshire, where Congressman Chris Pappas is going for an open seat. versus John Sununu, who's also a former senator. Brother was a governor there. Again, very strong competition there. Good chance for the Republicans to have a pickup.

 

John Raines:

Also Michigan, important race there. Abdul El-Sayed facing off against former Congressman Mike Rogers. El-Sayed, very progressive on his ideological positions. Really important race there. If he were to lose or to underperform and barely win, that could be utilized against progressive Democrats as we head into the 2028 election. Saying it's difficult for progressives to win in these swing state environments, or perhaps even more difficult to run nationally. Finally, Democrats are going to need to hold Minnesota, which hasn't really voted on the presidential side towards a Republican since 1972. That's your tier 1, right? So they got to win most or all of those.

 

John Raines:

And there's tier 2. Now with these tier 2 states, they have got to pull off 2 more victories. And again, these are states where Donald Trump won by at least 11 points, 13 points, or even more. Those include Texas with Ted Lieu running against Attorney General Ken Paxton. Right now, most polls have Ted Lieu in the lead. But traditionally, Texas has voted Republican statewide repeatedly with virtually all of their statewide races going Republican in recent cycles. Second would be Alaska. Mary Peltola, former congressman there running against incumbent Senator Dan Sullivan.

 

John Raines:

Very close race. And again, Alaska. has been voting Republican for quite some time. An open seat in Iowa that could be affected by various trade policy, of course, higher diesel prices in more rural areas. And finally, Ohio, where former Senator Sherrod Brown is currently running against the appointed senator there. Again, tariffs could be a factor in pushing him over the top, and he obviously has won statewide. After that, it gets really slim pickings. We're talking states like Kansas, Nebraska, Montana, states that Donald Trump won by 15 percentage points, 20 percentage points or more.

 

John Raines:

So we're talking it would not have to be necessarily a blue wave. We're talking a blue tsunami. We're talking Category 5 hurricane gale-force winds to push the Democrats over the top there. But polls suggest that these could be actually closer than expected, especially again looking at tariff policy and also again higher diesel prices. It should be noted that the Democrats in many states are not even running as Democrats due to the brand name not being popular at all in these more red-leaning states. You're having to have independents there who will ultimately end up caucusing with the Democrats if they were to win. I would say unlikely at this point that those folks win, but obviously we have seen situations like this before, like 2006, where states that we thought would be noncompetitive actually switched towards the Democrats. In that particular cycle.

 

Kristen Hallam:

Wow. So, John, with all of that in mind, with the various Senate races, which are going to be pretty exciting to watch, what are the main scenarios that you see for the outcome of the midterms?

 

John Raines:

We don't actually do election forecasts here, but we can at least map them out when we're looking at polls and we look at historic tendencies. And so I think the House, it's going to be difficult for the Republicans to retain control. Remember, Democrats only need to pick up 3 seats in the House in order to get a majority. But there are some structural things that favor the Republicans. Number one is they've done well with redistricting. Partly it's been with Republican legislatures at the urging of the White House. And then secondly, that has been done by a Supreme Court ruling looking at the 1965 Voting Rights Act, which is largely, not entirely, but largely eliminated many of the majority-minority districts. Which have favored Democrats in the past.

 

John Raines:

Overall, it looks as though Republicans have picked up anywhere between 6 to 9 seats, 10 seats, just by way of redistricting. Now, whether they actually win those or not is debatable in this particular political environment, but that was the intention. Now, Democrats have tried to do that as well, but they have not been as effective for various reasons— state rules, timing, etc. But what it means is that We do have an advantage for the Republicans as far as the way the seats are drawn and due to the fact that Americans have tended to cluster themselves. So a lot of Democrats are clustered in cities where you have lots of Republicans in suburbs and exurbs. And it means that it's kind of hard to draw these maps in ways that can really represent an entire state's population. So there, that way favors Republicans a little bit as well. Overall, what that means end of the day is Democrats need to win The popular vote in the House by about 4 to 5 percentage points in order to get a majority.

 

John Raines:

They're going to need that to happen right now. Like I said before, they have a lead in the generic ballot by about 8.5 percentage points. So you would think they're likely to surpass that. However, if the polls are wrong, then we can see the Republicans potentially get an advantage here. But there are some issues that say the Republicans could have a fighting chance, including that they have outraised the Democrats, especially at the national party level and at the super PAC level by hundreds of millions of dollars. And we're starting to see those ads come to the airwaves now. So with the supposition, scenario one, probably Democrats get the House. That's going to be in scenario one and scenario two.

 

John Raines:

As far as the Senate goes right now, the polls suggest the Democrats have a fighting chance of winning the Senate. So That's probably scenario one is that the Democrats sweep. It's going to be very close. And again, if the polls are wrong, then they could be very wrong and Republicans do well in the Senate. But right now I'd say number one, Democrats sweep. Number 2, Democrats get the House, but Republicans retain the Senate. And then if all of the things befall the Democrats, as I mentioned before, we could see, and I don't think it's a non-negligible chance here, I would say probably in the order of about 20 or 30% chance. Republicans end up retaining their majorities in both legislative chambers.

 

Kristen Hallam:

Okay. Now, getting back to what we were talking about earlier, given that the polls are not— what's the word I'm looking for— robust, maybe, in, in terms of who is participating, it sounds like we could be in for some surprises on Election Day. It's possible.

 

John Raines:

And not only that, but we're seeing a lot this time are partisan polls, especially in these kind of like when I was talking before about these tier 3 states, we're not seeing a lot of polls conducted by Our regular nationally known pollsters. What we're seeing are polls that have been conducted by the campaign themselves or supported by the campaign or funded by the campaign. And then suddenly these are polls that suddenly suggest that the Democrat is highly competitive here. Is that true? We don't know. Right. It's— one could argue that there's a partisan lean there. And if these polls suddenly had said that Republicans were winning that state by 10 to 15 points, I highly doubt that a Democratic candidate or a Democratic-sponsored poll is suddenly going to be published relaying that type of information. So it does make things a little bit difficult to see.

 

Kristen Hallam:

And once we have the outcome, once we know who's running Congress and who's running the states, who the governors will be, what policies do you think will be most impacted under these different scenarios, especially since at the federal level, you mentioned that President Trump has focused more on executive orders versus legislation to achieve his goals.

 

John Raines:

It's a good point, right? So I think as much as I at the beginning of this podcast had emphasized these midterm elections are critically important, they're going to change the U.S. history as we go forward, we need to recognize this is a president who does not necessarily drive his view of himself vis-à-vis who controls Congress or what legislation could get passed. So I think that needs to be understood, that when we're talking about issues of overall regulation, or we're talking about where is trade policy likely to head, or are we going to start seeing a real shift here when it comes to foreign policy, the answer is no. This is an executive-led government, and it's going to continue to be so for the next 2 years. That being said, these outcomes do make a difference. And to look at one, I think, which is probably most interesting, is what that say that the Republicans do retain their majorities. This has got to propel this presidency to believe as though that they're a lot stronger than the media narrative currently is suggesting. They're much stronger than what polls are currently indicating.

 

John Raines:

And I think in some ways it would allow them to take this as a victory lap. And I think you'd see that in several policies. I would think that you would see another bite at the apple when it comes to tax cuts, tax credits, especially when it comes to US manufacturing. I think that would come down the pike. Other things I think you would see is the continued cutting of social programs in various facets where they could, especially in ways where they feel like it might hurt— not hurt them as much as we get closer to 2028. I think efforts to alleviate permitting reform when it comes to mining, And oil and energy. I think those are on the table. Of course, many of these you might have to reach out to Democrats because remember, you still— none of these parties are going to achieve a filibuster-proof 60 votes inside the Senate.

 

John Raines:

So if they don't affect the budget and you don't go through budget reconciliation, which only needs a basic majority, you're going to have to do these with bipartisan support. So everything that I'm talking here that's not related to the budget, that's part and parcel of what you're going to have to do. But regardless, I think efforts at deregulation, Efforts at permitting, efforts at immigration enforcement. I think those are all on the table, right? Along with additional funding for the Defense Department, as well as supplemental funding for the Iraq War are likely to come down the pike. It's going to be a far much more smooth sailing process for the administration if he can attain these majorities. In some ways, that's part of the reason we're starting to see that he is starting, the president here, getting far more galvanized and far more involved inside the election process that we hadn't seen in these months prior. What happens if the Democrats win? Right? Which is probably the number one thing that clients are asking me on a regular basis. And the big thing I think we need to recognize is that there's a couple of things.

 

John Raines:

Number one is legislative gridlock. All the things I mentioned before, talk about bipartisanship, they're going to have to be done on steroids because nothing is getting passed. Unless a Democratic House or Democratic Senate is willing to put their stamp of approval. And that means concessions from a president who's not necessarily been known for offering concessions in the past. Secondarily, it means that we're likely to see all types of policies getting passed by these Democrats inside the House or in the Senate, and they're likely to do so with the understanding being these things are going to get vetoed by the president. And they are not going to have the votes to override his veto. And what that means is that they're going to be less important as far as actual legislation, and they're going to be far more important as far as setting the policy as we go forward. And for these presidential candidates, remember, the presidential race is going to start the day after the midterm elections.

 

John Raines:

What policies are these presidential candidates going to be espousing? A lot of them are going to be defined from what's coming out of Congress. Another implication, possibility of a shutdown. We've had 2 long shutdowns that have occurred during the Trump administrations over the last few years. The odds of that happening again, pretty high, especially when we're talking about, again, funding for Medicaid, Iraq War funding, immigration enforcement, you name it. There are going to be large ideological divides between Congress and the presidents there, and some of these could be borne out When we look at funding fights that end up causing either a partial or full government shutdown, especially as we come to the year-end funding, September 30th, around that time, odds are high that you could have some type of fiscal impasse. The last thing is that, and I think this is probably what we're going to see quite a bit of, is lots and lots of investigations. So investigations of what the Trump administration has done trade-wise, what has it done with government contracts, what has it done with energy policy, what has it done with whatever, you're going to see congressional committees really across the board taking this as an opportunity to subpoena the White House, subpoena government agencies, subpoena corporate executives to say, what's going on here? How did this happen? Why were we not informed? And I think for the White House, I think they're likely to come back and say, listen, this is none of your business, or they're going to fight these subpoenas. But I think for corporate America, it's going to be more difficult for them to do that.

 

John Raines:

And they're going to have to weigh Do they want to understand where the White House is coming from and saying, hey, listen, this is not an area where we feel like we can appease Congress? Or is the situation where they're looking ahead saying, I think we need to meet these demands, and they're going to find themselves in an area where they're either having to offer testimony, provide documentation, which can make these folks feel quite uncomfortable? Now, just because they're going to be very combative between one another, it doesn't mean necessarily that we have no opportunity for legislation. We do have certain areas where I think you could see things on healthcare and pricing for drugs. I also think AI data centers, we already had legislation that was close to fruition. I could see that coming again along the path, along with other things involving infrastructure too. So there are pathways here, but I think it's going to be far more competitive than it is going to be conciliatory as we work our way forward here.

 

Kristen Hallam:

All right. It sounds like either way, you're going to have your work cut out for you, John. You're going to be pretty busy. So given everything that we've talked about, John, do we think there's a chance that there will be a contested election?

 

John Raines:

Right now, that is not our baseline view. Our baseline view is these things are likely to go on schedule and we're not going to see too much disruption. Obviously, when it comes to California, The way they count ballots, it could be in contention there for a couple days, a couple weeks. But regardless of that, what we're likely to see is that things are going to be going in order. So we'll have the counting of the ballots, folks will be seated, and we really shouldn't have much of a problem. That being said, obviously we've had certain disagreements associated with this election, so including whether mail ballots are getting counted, how they get counted, the process there. Those have gone to the Supreme Court, and Supreme Court has pretty much come down and said, listen, it's a little too late for us to be able to change the rules currently. Might have an impact as we go to 2028, but at this point we're seeing this being your typical election.

 

John Raines:

Obviously, if things did not go down that way and we start to have a situation whereby it is a contested election where people are taking this to court, we could see potential protests that are associated with that. Some of those could get a bit violent, especially if we're talking about whether A majority's in question here. But again, baseline view is that things— this looks like your typical midterm election, and we're not going to deviate from that quite yet.

 

Kristen Hallam:

I'm sure we could keep talking about this for much, much longer, but the time has come to wrap up. What— and we've covered a lot— what would you say are maybe the, the top takeaways for our listeners today on the US midterms?

 

John Raines:

I think the big message here is a few items. Number one is the Democrats look pretty well-poised to have some pretty significant gains as we go forward, just looking at where the polls are and president's popularity. But we don't want to overestimate the impact here. It certainly is going to change the dynamics of the political environment in Washington, but it doesn't necessarily change the power structure. Within the White House or how the White House is likely to view Democrats or how they're likely to govern policy. Well, I think the big takeaway beyond that is that this is going to be a reflection probably not only within the US public, but also within the world, that if the Democrats can win here, that there is a viable opposition. And I think in some ways it's going to make people take a second step saying, where do I put my chips here? With the administration, or do I want to put more of my chips with Congress, or do I want to parry it down the middle? And I think you're going to start to see a lot more corporate bodies and a lot more entities out there saying, I want to go a little bit more towards the center here because I really don't know what's going to happen next. So from that, we'll just find out together as we start to see these 2024 primaries start to kick off at the end of next year or the beginning of 2028.

 

Kristen Hallam:

All right. Thank you so much, John, for taking the time to chat with me about the US midterms. I know you're super busy and will be for, as we've discussed, the foreseeable future. And we will leave it there. Thank you for listening to The Decisive Podcast from S&P Global. Please subscribe and join us for next week's episode. Until then, stay curious and stay informed.

Kristen Hallam [00:00:03]:

You're listening to The Decisive Podcast, insights and analysis to empower confident decision-making. Hello and welcome to The Decisive Podcast. I'm your usual host, Kristen Hallam. In this episode, taken from our September 9 client webinar, we’re looking at a risk that is often described as a weather event, but for businesses, it's much more than that. A potential Super El Niño could become a supply-side shock that moves through food systems, energy grids, mining operations, inflation expectations, and political stability. The central question for business leaders is how this shock compounds with other pressures already in the system, from higher fertilizer and fuel costs to supply chain disruption, food insecurity, tighter policy settings, and geopolitical stress. We'll explore what this could mean for Sub-Saharan Africa, Asia-Pacific, and the global economy where exposure is most acute, and what those companies should be watching as the events develop. The discussion features S&P Global Market Intelligence experts Ahmad Mobeen, who's a Principal Economist for Asia-Pacific, Martin Roberts, who is an Associate Director of Country Risk for Sub-Saharan Africa, and Justin Valentino, who's the Head of our Risk Quantification and Scenarios. Without further ado, I'll hand you off to our host for this discussion, Susan Minio.

 

Susan Minio [00:01:45]:

Let's start with the big picture. El Niño is not a new phenomenon, but the business context around this particular episode is different. Why? Because companies are already contending with elevated energy and fertilizer costs, trade and shipping uncertainty, geopolitical instability, and pressure on household purchasing power. So the issue is not one shock in isolation, it's the way multiple shocks can reinforce each other. And with that in mind, let's begin with the global framing. Justin, our research describes a potential usper El Niño as a material downside risk to the global economy, mainly through a supply-side shock. For business leaders, what makes this episode different from a typical weather disruption?

 

Justin Valentino [00:02:35]:

Thanks, Sue. So for context, the World Meteorological Organization, the WMO, just confirmed last week an unprecedented nearly 100% likelihood that El Niño conditions will persist through Q1 of next year. As the WMO noted, exceptionally warm ocean conditions on the Pacific based on the Southern Oscillation Index, the SOI, which looks at the air pressure differentials in the South Pacific, as well as other key factors such as sea surface temperature and weaker-than-average trade winds. But an El Niño event will exert quite different climatic responses depending on the region, from droughts in the Western Pacific, Australia, Amazon Basin, and Southern Africa, to a higher frequency and scale of storms and floods on the west coast of South America, as well as hurricanes, typhoons, monsoons in the Central Pacific. This exerts a very different climatic response in some regions, but not all necessarily at the same time, with some tending more towards the winter months of this, the latter half of 2026, and others having more of a delayed impact through Q1 and even into summer of next year. So unlike a typical weather disruption, which may be at most regional in scale, this will truly impact nearly every economy globally and adds yet another compounding adverse layer of risk to the global economy and businesses. As we have all been navigating these compounding risk impacts over the past half decade or so, one would think that maybe we would be accustomed to this by now. But as you said, Sue, this will primarily act as an additional supply-side shock, which will impact the global economy through 3 simultaneous transmission channels.

First, we'll see a net reduction in agricultural outputs due to these drier and drought conditions. Second, through Asia Pacific, Latin America, and Sub-Saharan Africa, we'll see intensified energy sector stress from both hydropower deficits as well as increased cooling demands, particularly if this has a longer lasting effect into places such as Southern and Western Europe. As well as much of Asia Pacific. And finally, third, while this is a little bit more regionally dependent due to flooding or droughts, we will see some maritime port disruption or even closures alongside what drought conditions that make the grounds for the risk of landslides and wildfires, seeing a lot more ground transport disruption, which will further increase shipping delays on top of the already increased maritime disruption that we have seen for the past six months or so.

 

Susan Minio [00:05:59]:

Okay, so Justin, if the impact peaks around late 2026, which much to, I think, all of our surprise, we are so close to, and into early 2027, and we're seeing the largest macro effects showing up in 2027, how should we be thinking about timing, especially for folks who are looking at procurement, pricing, inventories, and capital planning?

 

Justin Valentino [00:06:01]:

Sure. So as you noted, we generally will see an El Niño peak in the latter half of 2026 or the first part of 2027. Again, the WMO is expecting that will last until, with 100% certainty, until at least February. So it's very possible these El Niño conditions will extend for longer than that, but it's still the baseline view is that it will slowly phase out by the third quarter of next year. But we will still see a lot of these lingering effects through the second half of 2027 and into early 2028. Just like with many of the other recent crises that we have experienced, whether the COVID-19 pandemic or the Russia-Ukraine war, it will take quite a few quarters, usually 2 to 3 quarters, for commodity prices, retail food prices, shrinking inventories, and policy responses to really filter through the world economy, especially as over the past 6 months to 5 years, realistically, have been severely affected or strained. A lot of inventories have already— are at record lows, food prices and inflation, a kind of consistent or persistent effect that we've been seeing. So I would say for procurement and capital planning, this should be treated as a kind of a standard economic global stagflationary event. This will be a negative supply shock from food, energy, and transport disruptions on top of the compounding effects, compounding risks that are already in effect from the ongoing crises, where we will see higher input costs and a reduction in output capacity from agriculture, mines, and hydropower and energy.

Our macroeconomic simulation and scenario engine, the Global Link Model, shows that overall we will see world real GDP growth slow by about 0.5%, half a percentage point in 2027 compared to our baseline macroeconomic forecast, as well as world consumer price index growth well above the baseline driven by higher agricultural prices and core food price inflation. Again, this is a kind of a sustained and compounding impact throughout 2027, which you can see will take quite some time to recover on top of additional or potential future crises, which may strike simultaneously. From a pricing and inventories perspective, this won't just impact a lot of staple crops such as rice, corn, wheat, and soybeans, but also will be impacting industrial metals and mining operations, especially in those regions of Latin America and Sub-Saharan Africa where that is a primary export and quite important in today's both green and data center focused economy. But we'll also see across Asia Pacific, any manufacturing supply chains which are intensely reliant on water and water supply will also be severely impacted.

 

Susan Minio [00:09:19]:

What I'm hearing here is the central narrative here is the compounding risk. El Niño could hit at the same time that companies now are managing higher fertilizer, fuel, freight, plastics, and packaging costs linked to the geopolitical shocks that we're all well aware of. But where do you see the strongest interaction between climate, commodity, and supply chain pressures?

 

Justin Valentino [00:09:41]:

Sure. So according to the macroeconomic scenario that we ran, the strongest interaction of all of these climate, commodity, and supply chain pressures will almost certainly be felt across Latin America, and most countries there will face a multi-sector supply shock as well as even sectoral competition for dwindling water resources. Super El Niño would represent a material downside risk to Latin America's economic outlook for the rest of 2026 and all of 2027, with lingering effects beyond that. For all 3 of the transmission channels of our scenario, agriculture, energy, and logistics and supply chain. Of the most affected, this is mainly going to be Colombia and Peru, with Chile and Brazil to a slightly lesser extent, where according to our scenario, they will be exposed to the most adverse effects of severe droughts, intense rainfall, coastal flooding, which all threaten not just agricultural exports, but also a lot of the energy grids, which are dependent on hydropower. We're planning on seeing or expected to see simultaneous pressure from this lower hydropower generation, especially in places like Brazil, which are highly reliant on that, and more in a switch to more expensive thermal power, the weaker agricultural and fishery outputs across the continent, and potentially in some cases even damage to a lot of critical supply chain infrastructure. Whether those are roads or ports or just general logistics hubs that will severely complicate a logistics framework. And then more specifically in Peru, we will likely see some disruption to open-pit copper mines as the heavy rainfall will make the damaged transport infrastructure in what are typically more difficult to reach places just significantly more complicated.

All of the above will raise production costs, increase electricity tariffs, and create a greater fiscal subsidy burden, which will only serve to amplify that broader economic shock across the region, but also in places such as Asia Pacific, which will be the second most felt. I would say from a policy response and planning point of view, the timing of these shocks will be quite varied. Colombia, Peru, and Chile will see a relatively fast transmission more in the nearer term, the latter half of this year and early next. But other countries in the region such as Brazil and Mexico will see some more delayed effects, particularly in early to mid-2027 around different harvest cycles, as well as the cumulative stress on energy supplies and hydropower, which as I mentioned, Brazil is highly dependent on. So any of these policy responses will be incredibly country-specific to balance that stagflation impulse, to contain inflation, provide fiscal support, and repairing infrastructure as quick as possible to get supply chains up and running again, with the underlying pressure being to broadly stabilize the energy market that has already been so stressed.

 

Susan Minio [00:13:12]:

Okay. All right. So let's turn to one of those spaces. Let's turn to food. The research we've done points to crop production losses in key Asian-Pacific markets and higher global agricultural prices, with rice, cocoa, and wheat especially exposed. Why is food such an important transmission channel for El Niño to the broader economy, Ahmad?

 

Ahmad Mobeen [00:13:36]:

Thank you, Sue. So food is indeed one of the fastest ways the ongoing El Niño shock will move into impacting the real economy, especially in the Asia-Pacific region. So the first reason is that agriculture sector is the most directly exposed to weather. So for example, if the rain is lower or the temperatures are higher or irrigation water is less available, crop yields and area under cultivation can fall quite quickly during any phases of harvesting or collection. And that would, of course, affect directly the supply. And the second related reason is that food is a large part of the household spending in many APAC economies. So When staple prices rise, and especially I'm talking about wheat and rice because that is the major staple prices, then the impact will be felt immediately by the consumers because it will reduce their real incomes, particularly for lower and middle income households, because they'll have less discretionary money or income left for other spending. And the third and related channel would be overall inflation because food price increases can lift headline inflation both directly, but also they can create second-round effects.

For example, if households expect food prices to keep rising, then wage demand can rise as well, which we in technical terms call the wage-price spiral. And then looking at that, if businesses will face higher input costs, they may pass those on to consumers again. So this will make it more difficult. And finally, also food is sensitive from country risk perspectives. Because as the crisis will escalate, the governments will come under increasing pressure to intervene through either subsidies or export controls or releasing of their strategic reserves or even price caps or import tenders. So this food shock will not just remain an agriculture issue, but become more like a multi-pronged inflation challenge, also fiscal challenge, trade challenge, and in some countries also a social stability challenge.

 

Susan Minio [00:15:35]:

So for Asia-Pacific, rice is both a staple and a politically sensitive market. How quickly could a production shock that we've just been talking about move from that local harvest conditions into regional trade flows, export restrictions, reserve policies, and then ultimately consumer inflation?

 

Ahmad Mobeen [00:15:54]:

So to answer this, I would be responding in terms of stages of spillovers. So the first stage would be local when poor rainfall or heat stress or irrigation shortages will affect the planting yield or harvesting plannings. And then the traders and farmers, they usually react before the final crop numbers are known because expectations around those numbers also matter. So if the market believes that the harvest will be weaker, then prices will begin moving early on the upside. And then the second stage would be government response. So especially for Asia Pacific, rice is very politically sensitive for governments to leave entirely to the market. And as we see, and as we have seen before as well, as domestic price pressures rise, governments may release their strategic reserves or increase their procurement or raise imports or even restrict or delay exports of those commodities. And these decisions can happen within weeks, especially if consumer prices are rising very quickly.

And then this would lead us to the 3rd stage of the spillover, which is regional. So for example, if a major producer or exporter such as say India or Pakistan from South Asia or Thailand or Vietnam from Southeast Asia, they tighten their supply to protect their own domestic market, then importers in the region will face higher prices and supply disruptions very quickly. So overall, the timing can be short and weather stress may begin locally for each individual economy, but once it affects expectations around the market supply, then it could quickly become a regional price shock quite rapidly.

 

Susan Minio [00:17:32]:

As Asia-Pacific is already exposed to imported cost pressures, if El Niño reduces agricultural output and water availability at the same time, what are the implications for rural incomes, household purchasing power, and domestic demand?

 

Ahmad Mobeen [00:17:50]:

Yes. So the major risk would be El Niño becoming both supply side and demand side shock concurrently. So squeeze on both the producers and consumers at the same time. So let's begin with the farmers. For example, if El Niño will reduce yields or delay planting, that will mean lower output for them and also weaker farm income. But this would also be happening, as just mentioned, while input costs globally are already elevated, right? So we see it in fertilizer, in diesel, irrigation sector, transport sector, and imported materials and commodities in general, they're all more expensive than they were before the latest wave of external cost pressures. So farmers will face a double hit, lower production locally and also the higher imported costs. And then on the demand side for households, the problem will be food inflation in particular, because if staple prices rise, then consumers will spend more on basic goods and less on everything else, and that will weaken their purchasing power. Especially of farmers who will be impacted in the rural areas.

And that will in general subdue the domestic demand. And from expenditure side of the GDP, it'll have a major impact or a drag on the overall economic growth, especially in economies where consumption tends to be a key growth driver rather than being export-oriented. And this would be in countries where particularly agriculture still employs a large share of population. And even if agriculture is no longer the largest part of GDP, still remains central to rural incomes and rural employment. So this is the major risk that there will be a major takeaway that it becomes both a supply shock and a demand side shock at the same time.

 

Susan Minio [00:19:32]:

So you've been talking wider region. Can you give us a quick look at which economies are most exposed because agriculture accounts for a large share of employment, even when its direct contribution to GDP is smaller?

 

Ahmad Mobeen [00:19:48]:

Yes. The economies that I would highlight are Pakistan, India, Indonesia, Vietnam, Thailand, and the Philippines. Pakistan in particular, it has the highest direct exposure because agriculture is both a very large part of GDP still and also employs a larger share of workers. And then in the same region, India is also highly exposed because it remains an employer of a very large share of the workforce, especially in rural areas. For the ASEAN region, if you talk about Indonesia and Vietnam, they're also vulnerable because agriculture is still important for employment as well as rural demand, and then also higher value-added exports compared to South Asia, for example, in food processing exports. Within ASEAN, then if you talk about Thailand or Philippines, they have a relatively smaller agriculture share, but they remain exposed through the regional rice markets as well as the employment channel and the food price sensitivity channel that I mentioned earlier. So overall, if you just look at the GDP, it can understate the risk. So that is why the employment channel and the export channel would matter very much going forward.

 

Susan Minio [00:21:01]:

Very interesting. The other side of our research is looking at risk. And it points to potential protests and policy intervention in parts of South and Southeast Asia, especially where food affordability, farmer incomes, and reserve policies are politically sensitive. How should businesses monitor the point at which an agricultural shock becomes a policy or social stability risk?

 

Ahmad Mobeen [00:21:27]:

Very interesting question. I would say we will have to look at 4 or 5 indicators to monitor in the coming quarters. So I think first would be the staple food prices. Especially for rice, wheat, and cooking oils. So if retail prices rise quickly, then the risk will become more political, more towards the country risk side, and it will also lead to higher food purchasing price pressures. And second indicator I would say would be the government strategic reserve release policy. So if, for instance, authorities begin releasing food stocks or increasing procurement from the farmers directly, or accelerating imports or restricting their own domestic output for exports, then that should be taken as a sign by the businesses that the issue has moved beyond the temporary or normal market volatility. And related to that would be the third indicator of farmer margins.

So as I mentioned before as well, so if farmers face lower yields and higher input costs, then pressure can build for demand for subsidies. For debt relief, for higher bank financing, for minimum price supports or cash assistance. So that could also become politically sensitive. And fourth would be more of a public messaging. So for instance, if governments in South Asia in particular start emphasizing food security or anti-hoarding measures within the market or price ceilings and caps, then businesses should expect more intervention. More persistent intervention in the markets going forward as well. And lastly would be social signals, any announcement or actual protest by farmer groups or student groups or rural area labor groups, as well as consumer organizations. And that's very important in South Asia and also to, to a major extent in Southeast Asia, because food prices there, they're often a trigger or a leading indicator for wider dissatisfaction.

Because they, as I mentioned, affect household budgets immediately and also materially. For businesses, policy uncertainty, export restrictions, sudden import tenders, any changes in subsidy announcements or tighter enforcement around those areas would be the key indicators to watch.

 

Susan Minio [00:23:44]:

Thank you. That's very helpful to know how to assess what we're hearing out in the market, right? So we've talked about food and water stress in Asia-Pacific. Martin, can I turn to you now to look at how these same climate signals translate differently across Sub-Saharan Africa? The regional picture there is sharply divided. Southern Africa faces drought and hydropower shortages, while parts of East Africa face extreme rainfall and flooding. With the largest economic effects expected in 2027, which countries and sectors are most exposed? And then, where should businesses expect the greatest disruption?

 

Martin Roberts  [00:24:25]:

Thanks, Sue. I think the first thing to understand is that there isn't really a single Sub-Saharan Africa story here. It's very nuanced. We're looking at 2 very different climate shocks unfolding across the region at the same time. In East Africa, the main concern is flooding. Countries such as Kenya, Ethiopia, and Tanzania face risks to transport infrastructure, agricultural production, and export supply chains from excessive rainfall. And in Southern Africa, the challenge is almost the opposite. It's drought, heat stress, and water shortages.

Now, those risks affect not only agriculture, but also power generation and mining activity. And from a business perspective, Southern Africa is where we see the most severe direct economic impacts. And that's because drought can create multiple problems simultaneously. It reduces crop yields, it puts pressure on water supplies, it lowers hydropower generation, and it can ultimately constrain industrial production. So the report estimates that Sub-Saharan Africa's overall growth could be around 0.6 to 0.8 percentage points below the baseline in 2027, which is expected to be the peak impact year. But that impact will obviously diverge to a great deal between different countries.

And another point worth highlighting is that the disruption is not confined to agriculture. So mining companies, manufacturers, and exporters could all be affected through electricity shortages, weaker domestic demand, and logistical bottlenecks. Even South Africa, which is less exposed to food insecurity, faces risks through potential disruption to key export infrastructures such as Durban Port and Richards Bay.

 

Susan Minio [00:26:15]:

Okay. If we're going to go into the country discussion, Zimbabwe and Zambia show the largest downside deviations from that baseline across growth, inflation, exchange rates, fiscal conditions, and food security. What makes these 2 economies pit— what does it mean for companies operating there or relying on their agriculture, power and mining sectors.

 

Martin Roberts  [00:26:38]:

I think what makes Zambia and Zimbabwe stand out is that they're exposed to almost every major transmission channel. Both these economies face significant drought risk. This affects agricultural production and export earnings. At the same time, they both rely heavily on the Kariba Dam system for electricity generation. We've already seen in recent years that lower water levels can lead to electricity rationing, particularly for heavy users in mining and industry. Now, the modeling we've done reflects that vulnerability, which shows that Zambia experiences the largest growth shock. Zimbabwe follows closely behind. Both countries are also expected to experience substantial inflationary pressure as food supplies tighten and production's disrupted.

Now, for businesses, the implication is that this isn't only an agriculture story. Mining operations may face power shortages, manufacturers face higher operating costs, and of course, consumers will see purchasing power eroded by inflation. So it's the combination of agricultural, energy, and macroeconomic pressures that make these 2 markets particularly exposed compared with most of the rest of the region.

 

Susan Minio [00:27:58]:

One of the less obvious but important themes that we've been looking at through our research on El Niño is the linkage between drought, hydropower generation, and industrial output, which you just noted a little bit. In the hydropower-dependent markets such as Zambia, Zimbabwe, Mozambique, and Malawi, how could reduced rainfall affect electricity reliability, mining activity, production costs, and then governments' fiscal choices based on that.

 

Martin Roberts  [00:28:28]:

Yeah, I think hydropower is one of the most underappreciated parts of the story, because when people think about El Niño, they do tend to think first about agriculture and food prices, which are clearly important. But in parts of Southern Africa, water shortages can quickly become an energy problem as well. And that's where the business implications are much broader. So a number of the countries in the region are really heavily dependent on hydropower. Zambia, for example, hydropower accounts for around 84% of installed capacity, and countries such as Malawi, Mozambique, and Zimbabwe also rely substantially on hydroelectric generation. And when the reservoir levels fall, electricity production declines, and governments often have little choice but to introduce power rationing. Now, we've seen examples of this during the recent drought periods, particularly around the Kariba Dam and the Cahora Bassa systems, where lower water levels contributed to extensive electricity shortages. And the concern is that a stronger El Niño can recreate very similar conditions during 2027, potentially getting extreme.

And for businesses, this matters very much because power shortages have a multiplier effect. Mining companies facing potential interruptions to production. Manufacturers have to rely more heavily on expensive backup generators, and operating costs can increase across multiple sectors. So the water stress doesn't stay confined to utility sector. It's moving through supply chains, exports, and industrial production more broadly. So very much when we talk about El Niño in Southern Africa, it's much more than an agricultural story. It's very much also an energy industrial competitiveness story.

 

Susan Minio [00:30:21]:

We're going to take that a little further, right? Because food security and external sector pressures are also likely to be the main transmission channels across Sub-Saharan Africa. How could higher food import bills, weaker current accounts, and currency depreciation reinforce one another, even in countries that escape the most severe drought or flooding?

 

Martin Roberts  [00:30:42]:

The region, or the continent nearly, remains a net food importer, and food accounts for around 12 to 13% of total imports. So if global prices for products such as rice, vegetable oil, sugar, and wheat increase, these countries need to spend more foreign currency to import those goods. Accounts, and in many cases on exchange rates. And as the currencies depreciate, imported food becomes more expensive in local currency terms, which adds further inflationary pressure. So that's larger food import bills, weaker current accounts, currency depreciation, and weaker household purchasing power. And the result is that a weather shock can evolve into a much broader economic issue because higher inflation reduces real incomes, consumer spending weakens, and governments often face pressure to intervene through subsidies or other support measures. And various exogenous shocks over the last few years means that the capacity to do this has been greatly reduced. So even companies operating in countries that largely avoid the severe weather impact should be paying close attention to food prices, currencies, and consumer demand, because those are going to be the channels through which El Niño is ultimately felt there.

 

Susan Minio [00:32:06]:

And then Martin, which African markets have the greatest exposure to the imports, rice, vegetable oil, and sugar? And how should consumer-facing companies prepare for renewed food inflation and weaker household purchasing power in 2027?

 

Martin Roberts  [00:32:23]:

The commodity that's probably needing to be watched most closely in Sub-Saharan Africa is rice. Some countries have notable exposure to this commodity. For rice imports, Côte d'Ivoire, Benin, Senegal, Guinea, and Kenya stand out. For vegetable oil, Kenya, Tanzania, and South Africa appear amongst the more exposed markets. And for sugar, it's different again with Nigeria, Sudan, South Africa, and Kenya featuring most prominently. What's important here is that the risk extends beyond the commodity markets themselves. As the food prices rise and remain elevated throughout 2027, households are more likely to devote more of their income to essentials and less to discretionary spending. So for businesses, that means looking beyond supply chains and input costs.

Consumer-facing sectors should also be thinking about demand. How resilient will households be if food inflation remains elevated for an extended period and is taking up much more of their income? So that's the question many companies will need to answer as the event develops and possibly deepens. So it's a case of monitoring those key markets for Africa— rice, vegetable oil and sugar, not just as agricultural markets, but as indicators of future pressure on inflation, consumer spending, but also political stability.

 

Susan Minio [00:33:51]:

So, higher food prices are not only an economic issue. We're looking at rising political and social stability risks during 2027, particularly, as you mentioned, the cost-of-living pressures that overlap with existing grievances or upcoming elections. Where's that likely to be most visible?

 

Martin Roberts  [00:34:11]:

Yeah, well, one thing we've learned repeatedly across Africa, particularly in relation to those exogenous shocks I mentioned earlier, is that food inflation is rarely just an economic issue. The report notes that food accounts for roughly 40% of household spending across the continent. So that means obviously that increases in food prices are felt very quickly and directly by consumers. And when these cost-of-living pressures rise sharply, they often translate into broader political and social pressures as well. The countries that I'm watching most closely are those where these economic pressures overlap with existing grievances, discontent with the government, but also where they come in with major political events as well. So Kenya stands out as the clearest example because El Niño's peak effects are expected to coincide with the run-up to the August 2027 general election, which is going to be very hard fought as President William Ruto seeks a second term. More broadly as well, businesses should think of political risk as a second-round effect of the economic shock.

We've seen that higher food prices can weaken purchasing power, and this has a direct effect on increasing public dissatisfaction. Governments are prompted to intervene if they can through subsidies, price controls, or other emergency measures. Where they can't, that increases the risk of protest. So while the story starts with weather, agricultural, and food prices, it can ultimately become a story more depending on the country about policy risk, protests, and operational disruption.

 

Susan Minio [00:35:53]:

Okay. And so what indicators should companies monitor to distinguish manageable economic pressure from a broader escalation in protests, policy intervention, or operational disruptions?

 

Martin Roberts  [00:36:06]:

The first indicator is probably food inflation. I think one of the countries we're monitoring most closely for this is Kenya, because as I noted, the climatic risks and political risks are converging unusually closely. So, in Kenya, food and non-alcoholic beverage inflation was already running fairly high earlier this year. And this is before El Niño conditions have even peaked. So, if there are countries in a very similar situation, then that's already a worrying sign. Linked to that, there are food security indicators. So, again, with Kenya, around over 4 million Kenyans were already facing acute food insecurity, again, prior to the expected peak of the event. And if those numbers worsen under the impact El Niño, the political implications become much more significant.

Thirdly, obviously we need to keep a close eye on rainfall, flooding, and transport disruption. Major flood events are going to affect transport networks, farming communities, or food distribution channels, which will in turn reinforce inflation pressures and deepen public frustration. Finally, we'd have to watch for signs of all this translating into political mobilization, including protest activity, whether the government is able to bring in supportive measures to help alleviate the problem, and also whether there's growing political focus on the living cost issues and whether they are factors in Kenya's case in the upcoming election. So the key question is whether that food inflation remains a manageable economic challenge or becomes a source of grievance on which the opposition could capitalize in the run-up to the election. So historically, that's the point at which operational and policy risks for businesses begin to increase much more rapidly.

 

Susan Minio [00:38:03]:

Okay, Justin, I'm going to turn back to you for a minute. Ahmad and Martin have both described regional shocks that ultimately feed into prices, income, and policy responses. Let's pull back to the macro level for a bit. This is a supply-driven shock concentrated in essentials, food, energy, and transport, rather than discretionary demand. What does this mean for central banks and for companies trying to forecast demand?

 

Justin Valentino [00:38:31]:

Sure. So as mentioned, this is a classic stagflationary dilemma that central banks face of rising consumer price index inflation and slowing real GDP growth. But because these prices come from essentials rather than just discretionary demand, central banks tend to face a higher-for-longer constraint, which will likely further delay easing cycles and lead to, in most cases, tighter financial conditions. Our macroeconomic scenario shows that this impact will be felt by many of the aforementioned economies, not only across Sub-Saharan Africa, but Vietnam, India, Colombia, Chile, and Peru. But for any— the scale of this problem and broadly the impact of a super El Niño will largely depend on any given economy's preexisting economic conditions, particularly against a backdrop of global geopolitical uncertainty, elevated energy prices that both central banks and companies are already being persistently confronted with. Broadly, this impact will be particularly acute for those economies that are already grappling with elevated consumer price inflation, primarily those of which that are net energy or food importers, I believe, as Martin noted just a bit ago. So consistent with higher assumptions for oil, food, and other material prices, our baseline inflation projections for 2026 and 2027 were already raised substantially in the months following the Middle East war, starting the end of February, which in turn led to our adjustments to our monetary policy forecasts when we expected to see less accommodative global financial conditions this year and next than we were expecting prior to the breakout of the war. So really consistent with the theme, super El Niño on top of all of that is just yet another compounding adverse effect that's going to complicate any central bank response around the world, as well as broader demand planning as heightened retail food prices and costs of consumer goods are going to continue to drag on consumer confidence for most countries.

On top of all of that, like what we're already seeing going into 2027, quite a few countries that are running large budget deficits with elevated debt burdens in most major economies that are going to make achieving those necessary fiscal conditions much more difficult under deteriorating global macroeconomic framework and supply chain constraints. So this isn't just a northern and southern hemisphere problem of trade interaction. It is a globally interrelated phenomenon.

 

Susan Minio [00:41:37]:

Gives us a lot to think about. I was going to go and ask all of you to give us some quick thoughts on stabilization escalation. However, I realized one of the critical factors, one of these inputs, I want to go back to Ahmad for a minute. I'm sorry, Ahmad, I wanted to go back to that issue of hydropower that Martin was talking about earlier. Will a strong El Niño and the associated potential water shortages also be a secondary amplifier for the power sector in APAC?

 

Ahmad Mobeen [00:42:05]:

Thank you, Sue. Absolutely. As Martin mentioned earlier, this is an undernoticed and underappreciated angle and perspective of the El Niño shock. So for the Asia-Pacific region, I would say droughts are the major risk to look out for. Because if droughts lower reservoir levels to the extent that hydropower generation falls, then utilities will need to rely more on alternate sources such as coal, gas, or oil-fired power. And that raises generation costs, especially as Justin mentioned, when imported fuel markets are already vulnerable at the moment. And this risk is most acute, I would say, in Vietnam and Pakistan because hydropower generation and electricity there accounts for roughly 29% for Vietnam and 27% in Pakistan. So a drought in those economies could directly affect power availability and of course fuel the import needs and as well as high industrial costs.

So for mainland China and India, hydropower remains a relatively less dominant aspect nationally, but still there are specific regions and provinces where water stress can still matter. So it can affect the power supply and irrigation and industrial activity in those regions that will be more of a region-specific shock, not an overall national-level shock. And then for other economies like say Australia, Japan, South Korea, Indonesia, their hydropower is a relatively smaller part of the energy mix, so they will be relatively insulated from this angle. So for businesses, I think the impact to look out for would be in terms of higher electricity prices, higher fuel input costs, imports of raw materials, and of course, greater pressure on energy-intensive sectors in particular, which are very important for these regions. For example, in relatively lower value-added manufacturing, it will be textile, and for higher value-added, it would be for electronics and semiconductors.

 

Susan Minio [00:44:04]:

So much like our chief economist has been talking, higher for longer, right? This compounding. So we're going to get to this. This is the part that I love the best about these conversations. I'm going to go to each one of you. What are the indicators you'll be watching over the next 90 days to determine whether this risk is stabilizing or escalating? I'm going to start with you, Ahmad.

 

Ahmad Mobeen [00:44:27]:

Sure. So first would be, I believe, rainfall and temperature anomalies in major rice, wheat, and corn-producing regions. That would be very important. And second would be related to this, staple food prices, particularly rice, in both the wholesale segment as well as the retail market, because there will be the spillovers from wholesale prices to consumer prices as well. And third would be any government signaling or action towards releasing reserves or tendering imports or restricting exports. That would mean that this is no longer a managed or normal or temporary shock, but it's more of a shock that will be here for longer and would require active government intervention.

 

Susan Minio [00:45:08]:

Okay. Thank you. Justin, can you give us on the larger scale?

 

Justin Valentino [00:45:14]:

Sure. So really paying attention to what the World Meteorological Organization will produce as their experts will see if this is going to be closer to 2015 or 2016 scale, where it is a nearly 2-year-long El Niño event. But at a broader scale, really tracking developments on what will happen with the Strait of Hormuz and the conflict in the Middle East, if that will, how that will unveil over the rest of 2026, especially as we saw oil prices hitting $100 per barrel again this morning. And then on the other side of the picture, looking at data center developments and expansion. Which requires a significant amount of water cooling. And we have already seen some resistance from local communities trying to safeguard their domestic, their local water supplies, especially in drought-prone areas of Central and South America, South Asia, and Southern Europe. And then in more specifically those regions where these data centers may be competing for that quite valuable hydropower demand.

 

Susan Minio:

Martin, we're looking at the indicators you'll be watching for Sub-Saharan Africa, escalation or stabilization?

 

Martin Roberts  [00:46:34]:

It's a fairly small set of indicators. First of all, whether the October to December rains are going to be heavier than normal in East Africa, and if the growing season in Southern Africa deteriorates any further. We'll be looking at drought indicators in the main countries I mentioned, Zambia, Zimbabwe, Malawi, Mozambique, and obviously linked to that, water levels at the Kariba and the Cahora Bassa dams and power generation availability as a result. Falling reservoir levels being an early sign that the economic impacts are broadening beyond agriculture. And, I suppose, finally, whether there is any sign of emerging protests as higher food prices start to take effect, what scale those protests are on, whether the governments concerned are going to be able to take any remedial action. In particular, I suppose, subsidizing food prices and how long they can do that for.

 

Kristen Hallam [00:47:33]:

Thank you for listening to The Decisive Podcast from S&P Global. Please subscribe and join us for next week's episode. Until then, stay curious. And stay informed.