Latin America "particularly vulnerable" with swift La Niña transition – Swiss Re

More severe weather events to prolong inflation

Latin America "particularly vulnerable" with swift La Niña transition – Swiss Re


By Kenneth Araullo

The Swiss Re Institute has provided insights into the impact of the swift transition from El Niño to La Niña on Latin America, highlighting the region’s longstanding protection gaps and potential economic effects.

This rare event, expected to occur this year, will test the resilience of Latin America’s infrastructure and agriculture.

The El Niño-Southern Oscillation (ENSO) is projected to move from El Niño to ENSO-neutral conditions starting in May, with an over 80% chance of transitioning to La Niña by late summer and fall.

Swiss Re notes that since 1950, only two years (1973 and 1998) have experienced just one three-month period of ENSO-neutral conditions between El Niño and La Niña. Latin America is particularly vulnerable to the extreme weather conditions triggered by ENSO, which could exacerbate already-high agriculture and property protection gaps.

The 2023-24 El Niño has brought significant weather events, including heat waves in Brazil, wildfires in Chile, Argentina, and Colombia, and floods in various countries. Heavy rainfall and warmer weather have also led to optimal mosquito breeding conditions in Brazil and Peru, resulting in record-high dengue cases and a national sanitary emergency.

Recently, torrential rains induced by El Niño have caused floods, mudslides, and dam collapses in southern Brazil. In contrast, Panama has experienced unprecedented droughts, restricting ship transits through the Panama Canal and disrupting global trade.

ENSO effects on the economy

ENSO-induced weather variations affect commodity exports, growth, and inflation, with rural communities bearing the brunt of agricultural disruptions. The last La Niña in 2021/22 led to record droughts, crop yield shortfalls, and higher global food prices. In Brazil, agriculture insurance claims increased by 47% in 2022. Although crop resilience in Latin America has improved to 34% due to higher insurance penetration and government policies, it remains below the global average of 41%, with a $6 billion crop protection gap.

Weather-related insurance resilience indices for Brazil and Mexico are 10% and 18%, respectively, compared to advanced economies like the US (53%) and Switzerland (80%). Emerging market peers like South Africa (20%) and Turkey (30%) also surpass Latin America.

The reinsurer noted that the economic effects of ENSO are non-linear and vary by country. Losses typically involve infrastructure damage, agricultural disruption, and inflation via higher food and energy prices. The anticipated back-to-back ENSOs this year could prolong the region’s ongoing battle with inflation. A +/- 1°C anomaly in sea surface temperatures can add 0.24 to 0.47 percentage points to annualized headline inflation.

For insurers, while the direct impact of food and energy inflation may be small, second-order effects on core CPI through wage growth could increase claim costs in non-life lines of business.

Increased adoption of insurance products like parametric solutions can aid in the swift recovery of economic losses. However, building resilience also requires adaptation and loss mitigation measures.

For instance, Swiss Re noted that the Panama Canal Authority is considering constructing a multi-purpose reservoir to cope with dry seasons and normalize operations during droughts. Additionally, the region faces a significant infrastructure spending gap, estimated at 1.3% of GDP in 2023, second only to Africa among emerging regions.

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