MAPUTO, Oct 30 – The anticipated effects of El Niño could intensify fiscal and economic pressures across emerging markets, particularly in countries with high public debt, limited foreign-exchange reserves and weak access to international financing, according to global credit rating agency Moody’s.
The agency warned that government spending on emergency relief, subsidies and reconstruction could strain public finances as climate-related disruptions affect agriculture, electricity generation and infrastructure.
Mozambique and Zambia face heightened exposure because their high debt burdens and limited market access constrain their ability to respond to economic shocks. By contrast, stronger institutions and more reliable access to funding provide sovereigns in parts of Asia and Latin America with greater fiscal flexibility.
The assessment highlights the potential for climate-related events to affect sovereign creditworthiness through multiple channels, including increased government expenditure, weaker economic output, higher inflation and pressure on external balances.
Agricultural disruption could intensify food inflation
High energy and fertiliser costs are already putting pressure on agricultural producers and food prices. El Niño-related crop losses could further reduce agricultural output, employment and food security in vulnerable economies.
Mozambique faces risks from potential domestic production losses, while Latin American countries could experience disruptions to agricultural exports.
The impact could extend beyond producing countries. Export restrictions introduced in response to domestic shortages could amplify food supply risks for net importers such as the Philippines.
India and Indonesia have greater buffers against potential agricultural disruptions, with rising food reserves and irrigation capacity helping to cushion production risks.
For countries with limited domestic food production and weak fiscal capacity, higher import costs could increase pressure on household incomes and government budgets, particularly where authorities need to expand food subsidies or emergency assistance.
Drought threatens electricity generation and energy security
Moody’s also identified electricity generation as a major channel through which El Niño could affect sovereign credit profiles.
Drought conditions can reduce hydroelectric output in water-dependent parts of Southern Africa and Latin America, potentially forcing governments and utilities to introduce electricity rationing or rely on more expensive power imports.
The agency expects Brent crude prices to remain between $90 and $110 per barrel for the rest of 2026, adding to credit risks in countries with limited domestic energy supplies, insufficient generation diversity and low fuel stocks.
Higher energy costs could increase electricity production expenses, worsen external financing requirements and place additional pressure on government support for state-owned utilities.
Flood damage presents another potential source of fiscal pressure, particularly where governments must finance emergency response and infrastructure reconstruction.
Mozambique and Zambia face constraints on climate resilience
Southern African governments are expanding adaptation initiatives, including climate-smart agriculture, irrigation infrastructure and early-warning systems designed to reduce the economic consequences of extreme weather.
However, limited rural electricity access and inadequate irrigation infrastructure continue to constrain resilience, particularly in Mozambique and Zambia.
These structural weaknesses increase the vulnerability of agricultural production and rural livelihoods to prolonged drought conditions.
Moody’s also warned that undernourishment could amplify social risks if El Niño disrupts food production and adds to inflationary pressures. Rising food costs and declining agricultural employment could deepen economic hardship in vulnerable communities.
Climate exposure increasingly relevant to sovereign credit risk
The potential economic consequences of El Niño extend beyond immediate agricultural and infrastructure losses. Governments may face simultaneous pressure from weaker tax revenues, higher food and energy import bills, emergency spending and increased demands for social support.
For highly indebted countries with limited access to external financing, these pressures could further restrict fiscal flexibility and complicate debt management.
The contrast between Mozambique and Zambia and more financially resilient sovereigns in Asia and Latin America underscores the importance of fiscal buffers, institutional capacity and infrastructure investment in managing climate-related economic shocks.
As governments expand adaptation programmes, access to reliable financing, improved irrigation, diversified energy generation and stronger food reserves will remain important factors in limiting the potential impact of climate disruptions on sovereign credit profiles.
