Dry spell feared to disrupt growth in Asia

CONCERNS are rising over the El Niño dry spell, which is forecast to recur this year after the last episode in 2009, due to its potential disruptions on growth and inflation prospects in the Philippines and other Asian neighbors.

Citibank economists have warned of the Philippines’ potential vulnerability to prolonged dry spell that might arise from the possible recurrence of this extreme weather phenomenon.

In a research note dated June 3 titled “Will El Niño Derail Monetary Policy?” Citi economists Johanna Chua and Siddharth Mathur said monetary policy in the Philippines, India and Indonesia looked “relatively vulnerable” to El Niño, citing inflation sensitivity to food.

Some are not as worried about the Philippines but are concerned about other Asian countries. As the phenomenon increases the prices of oil and food due to higher temperatures and droughts, economists are looking at the potential impact of severe weather shocks on growth, inflation, energy and food prices.

In a research note “El Niño: stormy weather or hot air?” dated June 5, Bank of America Merrill Lynch economist Hak Bin Chua said past El Niño episodes suggested that El Niño fears may be overstated, with limited impact on most Asian countries, including Malaysia and the Philippines.

“Indonesia and India are the main hot spots, where El Niño has a significant negative growth impact. The impact on inflation is more visible in Indonesia, India and Thailand, in that order. We think that only Indonesia’s and India’s monetary policy may be influenced by a severe El Niño,” Chua said.

In the Citi research, the economists noted that inflation rates in Indonesia and India were close to or higher than central bank inflation “targets” while in the Philippines, the output gap was positive, requiring more vigilance from the central bank.

Output gap refers to the difference between what the economy is producing versus its potential to produce when all engines are running at full capacity. A positive output gap suggests that the economy is overworking its resources which, under economic theory, could lead to inflation as production and labor costs rise.

“With the peak rainfall season in the major Asian agricultural regions beginning now, a prolonged dry spell has important implications on agri output, with a lag,” the Citi research said, noting that the last two severe El Niño episodes in 1997-98 and 1982-83 had yielded significant crop damage and a surge in food prices. It noted, however, that other El Niño episodes were mild while last year’s warnings ended up being a false alarm, helping explain why prices of food staples had not reacted much.

On the monetary policy/inflation front, the research noted that the Philippines, India and Indonesia looked relatively vulnerable. The Citi economists said monetary policy would likely be affected in places where inflation sensitivity to food was relatively high, where inflation was close to or higher than inflation “targets” and when output gap was positive.