S&P: El Niño Unlikely to Cause Sovereign Downgrades Without Costly Government Response

The El Niño weather pattern is unlikely to cause sovereign credit rating downgrades on its own, provided the event is not exceptionally severe and governments avoid costly policy responses, S&P Global said in a recent analysis. The agency's assessment hinges more on how policymakers manage the economic fallout than on the direct impact of potential droughts or floods.

Policy Response is the Key Determinant

According to Joydeep Mukherji, S&P’s lead ratings analyst for Latin America, the temporary economic disruption from severe weather is a stress that sovereign ratings should typically withstand. The more significant risk to a country's creditworthiness comes from the government's reaction to the crisis.

Mukherji noted a crucial distinction between targeted fiscal support for affected populations and broader, more expensive measures. Interventions like controls on electricity or fuel prices could create significant fiscal pressure. "Then suddenly you have a fiscal problem on the side, not just the disruption caused by natural events," he said, as quoted by Reuters.

The critical question for ratings is whether governments absorb the economic costs onto their own balance sheets through higher public spending and increased debt. "Policy response is key here," Mukherji stated. "Do governments spare or share the costs, or do they take a lot of it onto themselves...?"

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Economic Resilience and Mitigating Factors

Countries with certain economic buffers are better positioned to handle the shocks from El Niño. S&P highlighted that nations with flexible exchange rates, such as Colombia and Peru, have more tools to absorb weather-related economic impacts, even if those impacts are "substantial."

In contrast, economies without their own currencies, like dollarized Ecuador, have fewer policy levers to maintain competitiveness after a shock. For now, however, S&P is not anticipating that El Niño will trigger a wave of negative rating actions, though the agency cautioned that uncertainty over the phenomenon's ultimate scale remains high.