El Nino threatens livelihoods in Southeast Asia amid economic pressures

Southeast Asia is bracing for an extreme El Nino, a weather pattern that threatens to worsen existing economic challenges already heightened by the Iran war. Households and governments across the region are struggling with increased costs for energy, transport, and food.

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Southeast Asia's agricultural sector is exceptionally vulnerable to a new El Nino shock, given that its two primary commodities, rice and palm oil, are highly concentrated and uniquely sensitive to climate anomalies

The agricultural sector in Southeast Asia is particularly susceptible to El Nino's impact. Key commodities like rice and palm oil are sensitive to climate shifts. "Southeast Asia's agricultural sector is exceptionally vulnerable to a new El Nino shock," said Jason Lee, chair of the Global Heat Health Information Network's Southeast Asia Hub. He warned that localized farm-level shocks could rapidly escalate into a broader food-price and inflation crisis.

Rice, the region's staple food, faces significant risks. Reduced rainfall and increased heat stress could lead to a 2%–8% reduction in output, with drought-prone areas experiencing larger losses. Paul Teng, a visiting senior fellow at the ISEAS–Yusof Ishak Institute, noted that rain-fed areas might see more droughts, while irrigated areas could face water shortages. Thailand, the Philippines, Indonesia, and Cambodia are identified as the most vulnerable countries.

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This extreme exposure means that what begins as a localised, farm-level shock can rapidly spill over into a broader, systemic food-price and inflation crisis across the region.

Palm oil production in Indonesia and Malaysia, which together supply about 85% of the world's output, is also a major concern. While impacts might be felt later, reduced fruit formation and oil extraction rates are expected due to temperature rises. Compounding these agricultural concerns are rising fertilizer and gas costs driven by the Iran war. Analysts warn that El Nino could further inflate these prices. Markets often react to the fear of shortages, pushing prices up even before harvest losses are fully realized, Lee added.

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In the rain-fed rice areas, there will likely be higher incidence of localised droughts and in the irrigated rice areas there will likely be water stress due to lower reservoir and irrigation levels

These factors are putting central banks on high alert, forcing them to maintain high interest rates to combat persistent food-driven inflation. This occurs at a time when regional businesses face higher borrowing costs and governments are already strained by subsidies and soaring energy bills. Some Southeast Asian nations have turned to coal to address energy shortages and have implemented subsidies for food and essential services. The Asian Development Bank has already lowered its growth forecast for developing Asia and the Pacific for 2026, citing the Iran war as a significant factor.

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Palm oil is sensitive to the expected temperature rises, but unlike rice, the impacts may be felt six to 12 months later from reduced fresh fruit bunch formation and oil extraction rates