El Niño y La Niña in Latin America: when it rains, it pours

Hard on the heels of El Niño, with associated torrential downpours in Brazil in the very last week, Latin America faces a swift transition to La Niña. Losses from ENSO-induced weather events will test the long-standing protection gaps in the region. More severe weather events may also prolong the fight against inflation.

• ENSO can trigger extreme weather events with global reach, but Latin America is particularly vulnerable.
• The severe weather events will likely undermine resilience in the region, adding to already-large protection gaps in agriculture and property.
• Insurance alone cannot do the job. To increase resilience, adaptation and mitigation are also needed.
• The effects of ENSO climate events are non-linear and heterogeneous, but typically entail damage to infrastructure, weaker growth and inflationary pressures.
• We estimate that a 1°C increment in the Pacific Ocean's sea surface temperature adds between 0.24 and 0.47 ppt to headline inflation in Latin America in annualized terms.

A rare event is expected to occur this year: a swift transition from a strong El Niño to La Niña weather conditions. Weather projections suggest a return to El Niño-Southern Oscillation (ENSO) neutral conditions – starting in May – and also a more than 80% chance of swift transition to La Niña in late summer and the fall (see Figure 1).¹ Since 1950, in only two years (1973 and 1998) have there been just one 3-month period of ENSO-neutral conditions between the two.² Latin America is particularly exposed to the extreme weather conditions that ENSO can trigger. The severe weather events brought by El Niño in 2023-24 and potentially also by La Niña in the summer will likely accentuate already-high agriculture and property protection gaps across the region. Further, a swift transition to La Niña could prolong a three-year period of high inflation as food and energy prices become subject to a supply shock.

Figure 1: NOAA Climate Prediction Center ENSO probabilities, three-month periods, starting from March-April-May 2024

The ENSO is a climate phenomenon of irregular variations in sea surface temperatures (SSTs) in the Pacific Ocean, known as El Niño when warmer, and La Niña when cooler. The 2023-24 El Niño has brought heat waves to Brazil, wildfires to Chile, Argentina, and Colombia, and floods in several others. ^{3 4}  Heavy rainfall and warmer weather has created optimal mosquito breeding conditions in Brazil and Peru, with record high dengue cases and declaration of a national sanitary emergency.⁵ Though near its end, in the last week torrential rains induced by the current El Niño have struck southern Brazil, causing deaths, floods, mudslides and dams to collapse.⁶ At the other extreme, in 2023-24 Panama has seen unprecedented droughts, with water levels in the Canal down such that ship transits have been restricted to 24 per day vs the usual 36, disrupting a key global trade route.^{7 8}

At a macro level, variations in commodity exports due to ENSO weigh on growth and inflation. The disruption to agriculture weighs particularly heavily on rural communities. The last La Niña in 2021/22 caused record droughts in the region, resulting in crop yield shortfalls and, in turn, higher global food prices.⁹ In Brazil, agriculture insurance claims increased 47% in 2022. For Latin America, our estimates show crop resilience (34%) has improved since 2016 due to higher insurance penetration and government policies to promote uptake. However, the index is still well below the global average (41%), with an estimated USD 6 billion crop protection gap in premium equivalent terms.¹⁰ For Brazil and Mexico, our weather-related insurance resilience indices are 10% and 18%, respectively, well below advanced economy levels (eg, US (53%); Switzerland (80%)), but also lagging emerging market peers like South Africa (20%) and Turkey (30%). 

Research finds the economic effects of ENSO to be non-linear and heterogeneous, with some countries facing more adversity than others.^{11 12} However, losses generally entail damage to infrastructure, disruption to agriculture and inflation via higher food and energy prices. The timing of this year's anticipated back-to-back ENSOs could prolong the remnants of a three-year-long fight against inflation. We expect the disinflation trend in the region to prevail, but with added bumpiness. Our estimates show that, a +/- 1°C anomaly in SSTs can add anywhere between 0.24 and 0.47 ppts of annualized headline inflation to the region (see Figure 2). For insurers, the direct impact of food and energy inflation should be small. However the second-order effects on core CPI via wage growth would add to claim costs for some non-life lines of business.

Figure 2: Monthly rate of inflation in Latin America, and ENSO periods

Increased uptake of insurance products like parametric solutions can facilitate swift recovery of economic losses. However, to build resilience, adaptation and loss mitigation measures are also needed. One such example is the construction of a multi-purpose reservoir that the Panama Canal Authority is considering to cope with dry seasons and help normalize operations at times of drought.¹³ But also, infrastructure in the region is long due for a boost, with a gap between actual spending and need estimated to be 1.3% of GDP in 2023,  second only to Africa amongst the emerging regions.¹⁴