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By Rajiv Biswas, Asia Pacific Chief Economist, IHS Global Insight

Drought conditions hitting Southeast Asia due to the strongest ever El Niño effect since 1997-98 are becoming increasingly severe in Malaysia, Vietnam, Thailand, Indonesia and Philippines. In Malaysia, water levels in dams and rivers have been falling due to the protracted drought and impact of hot weather conditions. This is reaching a critical point in some northern Malaysian states, with the water crisis potentially impacting on 4 million people in Malaysia. The falling water levels in some dams may force the government to give priority to households by diverting water supplies away from irrigation uses in some Malaysian states.

In Vietnam, water levels in the Mekong Delta are at their lowest levels in 90 years which has resulted in lack of fresh water for an estimated 1 million people in Vietnam. Water flows in the Mekong River were about 50% below average levels last month, and have also resulted in saltwater intrusion in the Mekong estuary, damaging significant areas of paddy fields for rice, with an estimated 180,000 hectares of agricultural land impacted already. The impact of the El Niño effect was one of the factors that resulted in a contraction in agricultural output in Vietnam’s Q1, GDP outturn, with agricultural output declining by -1.23% year-on-year in Q1, 2016.

Drought conditions in the Central Highlands region of Vietnam have significantly reduced crop yields for coffee, rice and pepper crops, with around one-third of the region’s major reservoirs having run dry. Crop losses in the region are estimated to reach 80,000 hectares by the end of April. The overall impact of the El Niño effect could reduce Vietnam’s total GDP growth rate by over 0.5%, albeit Vietnam will still be one of Asia’s fastest growing economies in 2016 despite the El Niño impact.

In the Philippines, dry weather conditions due to the El Niño effect have resulted in severe drought in parts of the southern Philippines, resulting in food shortages and severe hardship for the rural population in some areas. Agricultural production fell by 1% year-on-year in Q4, 2015, with crop output down 2.7% and the paddy rice crop down 3.8% year-on-year, mainly due to the El Niño effect and the impact of typhoon-related crop damage.

In Thailand, the El Niño effect has also caused severe drought in some farming regions, and will reduce output of key Thai agricultural crops, including rice and sugar. The overall impact of the El Niño effect could detract over 0.5% from Thai GDP growth in 2016.

Overall, the total economic cost on ASEAN from the 2015-2016 El Niño effect could exceed USD10 billion, depending on how many months longer the El Niño effect persists.

Rice

In Thailand, drought conditions are expected to result in lower rice yields and could be a significant drag on Thailand’s GDP growth rate in 2016. However, Thailand still has very large rice stocks from its government buying program in 2012-13, with stocks still estimated to be at 12 million tons, albeit significantly reduced from the 18.7 million ton stocks level a year ago. This will provide a significant food security buffer for Southeast Asia even if rice crops are significantly impacted by the persistent El Niño effect in the coming months. The impact of the drought on rice production has resulted in Thai rice prices reaching an 8-month high in March. With Philippines and Indonesia expected to be net rice importers in 2016, this could result in further upwards pressure on world rice prices, although a key factor will be the Indian monsoon season and its impact on the Indian rice crop.

Palm Oil

Indonesia and Malaysia together account for an estimated 85% of world palm oil production, and the impact of the El Niño conditions have reduced tree productivity. Malaysian palm oil production volume in March 2016 was 18% lower year-on-year. Persistent drought conditions in Sabah state, which produces 12% of world palm oil output, have reduced the outlook for Malaysian palm oil production and have pushed up palm oil prices during the last two months. In Indonesia, crude palm oil production was 1% lower year-on-year in Q1, 2016, with output affected both by the impact of the El Niño effect as well as the effect of the protracted haze conditions in late 2015 on plantation productivity.

Sugar

The El Niño effect and drought conditions in Thailand have had a severe negative impact on the sugar cane crop quality and yield, with sugar output down 10% year-on-year during the first 90 days of the 2015-16 season. The impact of the drought on cane production has resulted in international sugar prices reaching a 17-month high in March 2016. The United Nations Food and Agricultural Organisation Sugar Price Index surged by 17.1% in March compared to the previous month, as Indian sugar production from October to April fell by 8.3% year-on-year due to the impact of drought on the sugar cane crop.

Outlook

The impact of the El Niño weather effect on ASEAN has created severe drought conditions in many parts of ASEAN and has had a significant negative impact on agricultural output in a number of ASEAN nations, with agricultural output in Vietnam and the Philippines having contracted in recent months due to the effects of the El Niño-related drought. The current water crisis in some regions of Southeast Asia reinforces the need for accelerated investment in water storage infrastructure as well as efficient irrigation systems, to reduce the vulnerability of ASEAN countries to drought. With a large share of ASEAN’s population still working in the agricultural sector, improving infrastructure for agriculture and water management should be key strategic priorities for ASEAN governments to improve food security and reduce the vulnerability of the rural poor. Governments can also enhance the use of insurance risk mitigation products and services to help farmers to manage such risks.