Oran A Hall - El Niño and your wallet

El Niño is a natural climate phenomenon in the equatorial Pacific Ocean characterised by unusually warm ocean currents, which disrupt global weather patterns, including rainfall, temperatures and storm patterns. Its effects are far-reaching and personal, as it can hurt your pocket mainly by causing prices to increase and reducing income stability.

We are experiencing in Jamaica the effects of El Niño: very high temperatures and widespread drought conditions, so it is a personal matter for every Jamaican resident.

By disrupting weather patterns, El Niño may cause food and energy prices to increase. For example, it may cause droughts, which affect agricultural output, leading to higher prices. It may also lead to lower profits and employment in the agricultural sector. Households which depend on food production for income experience reduced purchasing power and a likely fall in their standard of living or lower savings if their priority is to maintain their level of household spending.

Higher food costs are not just confined to food at home. They affect prices in restaurants, hotels and cookshops, for example. Beyond that, developing countries like Jamaica tend to be hit hard by higher food prices because of the high proportion of household income which is spent on food. Higher food prices, then, may weigh heavily on the household budget, which may make less available for savings, investment, debt servicing and discretionary spending.

Because El Niño generally affects weather patterns, it causes a redistribution of rainfall: some regions get hotter and drier, while others get more rain. More rain may cause floods, which can be devastating, as they can destroy crops and personal property, leading to significant financial losses, as well as higher food prices. We in Jamaica can be affected if we import from such countries.

Locally, El Niño is fuelling higher spending for drinking water, reflecting the fact that a higher level of water intake is required to quench the thirst of residents. Beyond that, as we are now experiencing, the rain has taken a holiday. As the supply of water from public sources has fallen, some people have had to buy water from private sources at elevated prices – one more dent to their budget.

Another area of increased cost for households is electricity, reflecting the increased reliance on fans and air conditioning to make people cooler.

Incurring higher expenses without a matching or higher level of income may lead not just to lower levels of savings, but to dissaving. It can also lead to higher debt – including the dangerous but too-loved high-cost credit card debt, as well as other forms of debt, such as overdraft or loans from financial institutions.

The risk here is that a climate shock has the potential to spawn a long-term financial setback in a situation in which using other people’s money is used as a means of supporting spending. Money has a price – interest. Interest eats into tomorrow’s income and the capacity to spend in the future.

Because the effects of this weather phenomenon are so wide and far-reaching, even developments in other parts of the world can affect you and other residents of Jamaica. Here is an example. Recent reports are that fewer ships will be allowed to pass through the Panama Canal. The reason? With reduced rainfall in the watershed that feeds the Gauin and Alajuela lakes – the fresh water sources the canal needs to operate its locks – the water levels have fallen, so the canal authority must limit transits through it. Generally, this slows shipping and raises costs, leading eventually to higher retail prices even in Jamaica.

Being so highly import-dependent, any increase in the price of imports is bad news for residents, whose budgets eventually feel the pinch. Of particular note is the fact that price increases from the various sources are often incremental and are not always very obvious, and perhaps only become evident when the damage to the budget has been done.

El Niño can affect earnings if it disrupts farming, fishing, tourism and other sources of income that are sensitive to the weather. The approach to take in such cases is to build a reserve in the relatively better times to provide a cushion for the downturn.

El Niño can quietly shrink your wallet. It adds to the cost of important items in your ‘basket’, food and electricity, for example. Your best response may be to realign your budget to afford the most important items by reducing consumption of some items, particularly the discretionary ones, and delaying non-urgent purchases. How well you protect your wallet in this El Niño cycle can be the key to having a fat wallet in the future.

Oran A Hall, author of Understanding Investments and principal author of The Handbook of Personal Financial Planning, offers personal financial planning advice and counsel. Email: finviser.jm@gmail.com.