Is El Nino's economic risk too hot to handle?

Emerging economies at risk

The weather phenomenon, which typically occurs every two to seven years, could take a heavy toll on emerging economies, pushing up food prices and slowing growth.

Emerging markets are particularly vulnerable as households spend a larger proportion of their income on food, experts said. Also, agriculture plays a big role in their economies, raising the risk that central banks will have to keep policy tighter for longer.

"We came into this year with many central banks thinking they had space to cut. And now we see central banks stopping cutting, and some of them are hiking (rates)," Gillian Edgeworth, a fixed income portfolio manager at Wellington Management, told Reuters.

"I don't think we're moving to a world where there's rapid rate cuts in emerging markets in the second half of the year."

India is among the most vulnerable economies as it depends heavily on the annual monsoon, which typically delivers nearly 70 percent of the country's rainfall.

The country's meteorological department has warned rainfall could be the lowest in more than a decade, threatening crop yields and raising the prospect of higher food prices.

With inflation above the central bank's 4 percent target, analysts warned a super El Nino could force it to tighten monetary policy. However, a revival in monsoon rains late last month accelerated planting of summer crops across much of India, sharply reducing an earlier sowing deficit caused by lower rainfall.

Across much of Asia, higher energy and fertilizer costs are already weighing on external balances and economic growth, complicating central banks' efforts to stabilize currencies and contain inflation.

Central banks in the Philippines, Indonesia, South Korea, Pakistan and Sri Lanka have already hiked interest rates at least once this year.

"El Nino is just going to make inflation more sticky," said Gary Tan, equity portfolio manager at Allspring Global Investments.

"People are forecasting rate hikes for the second half of the year, especially for the … Asian countries, which are kind of the most impacted by El Nino such as India, Indonesia, Vietnam, Thailand," he said.

In South America, Colombia is among the Latin American economies most exposed to El Nino-related weather shocks, as below-average rainfall can hit food supplies and electricity prices.

The country's reliance on hydropower makes reservoir levels a key inflation indicator. Low water levels can force greater use of costlier thermal generation, pushing up electricity prices and inflation.

Analysts warn a severe El Nino could keep Colombian monetary policy restrictive for longer.

Peru's central bank has warned that inflation could exceed its target this year and growth could suffer, citing high oil prices and El Nino's impact on fishing and agriculture.

Argentina, by contrast, may benefit from higher rainfall, which could support grain output, export revenues and foreign-exchange inflows. Central banks in Brazil, Mexico and Chile are expected to take a wait-and-see approach as they assess any impact on inflation and growth.