Africa faces El Niño with less room to weather shock, IIF says

Africa is heading into a strong El Niño from a weaker economic position than the last one a decade ago, adding to price pressures triggered by the Iran war, the Institute of International Finance said.

Higher oil prices caused transport costs to increase, and a stronger dollar, while tighter financing conditions have added to the strain, IIF analysts Candice Reddy and Leila Hamilton said in a research note.

“The interaction of these shocks has altered the macroeconomic starting point from which countries may confront a strong El Niño episode,” they said, noting that the impacts will vary sharply across the region. “Egypt, Zambia and Ethiopia appear to have the least room to look through another food-price shock.”

Forecasters are predicting the current El Niño cycle will be the strongest on record. It threatens to bring climatic extremes, from severe drought in parts of southern Africa to flooding in the east of the continent, raising the risk of crop damage.

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The last severe occurrence in 2015-16 took place against a backdrop of falling oil prices and generally softer global inflation, the IIF said.

“Today’s environment looks markedly different as climate-related risks emerge alongside elevated energy prices, tighter financial conditions and renewed dollar strength,” it said. “At the same time, food systems are becoming increasingly exposed to geopolitical disruptions, supply chain vulnerabilities and strategic competition for critical commodities.”

Food accounts for more than half of the consumer price index in Ethiopia and Zambia, meaning higher costs quickly feed into headline inflation. In South Africa, on the other hand, it comprises about a fifth of the CPI basket, suggesting the impact will be more limited, the IIF said.

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Zambia faces an additional vulnerability — the nation relies on hydropower for the majority of its electricity generation, and a drought may reduce water levels. Still, Africa’s second-biggest copper producer has installed a significant amount of solar power over the past year, and is expanding coal-fired generation too.

South Africa and Zambia, southern Africa’s biggest corn producers, both reaped a record harvest this year, which will help provide a buffer.

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