LatAm countries hitting a ratings ceiling

Latin American countries face an uphill challenge to reachthe top ranks of credit ratings unless they tackle institutional problems,leading ratings agencies have warned.

The overall outlook for the region remains strong but thereare growing worries over some investment-grade countries and troubles with someof the weaker sovereigns.

Moody’s and Standard & Poor’s (S&P) are unlikely toadd any new members to the club of investment-grade countries. MeanwhileFitch’s new LatAm Risk Radar, released this week, warned that a “prolongedeurozone recovery and the effect of China’s growth and its commodity demand arethe highest risks in terms of urgency and potential impact on Latin America”.

There are also individual trouble spots. S&P this monthdowngraded Grenada and Puerto Rico, the first because of its announcement thatit would not meet a bond payment on March 15 and the second because of itsforecast budget shortfall for 2013.  Italso has negative outlooks for Argentina, El Salvador and Honduras.

The existing investment-grade club of countries faces atough challenge to continue climbing up the ratings ladder. Moody’s said thatwhile rating upgrades in previous years were largely driven by increasedresilience to external shocks, improved government debt profiles, andabove-trend economic performances, additional upgrades for countries already inthe Baa-category will depend on a different set of factors.

“The key will be the strengthening of institutions ingeneral, with particular attention given to credible institutional arrangementsthat reinforce fiscal management,” it said in a report this week.

Joydeep Mukherji, S&P’s managing director of sovereignratings, echoed the concern.  Talkingabout Peru, which had a positive outlook from the agency, he said “the higherthe rating goes, the criteria change and it gets harder to move up. 

“At the higher levels we are looking more at the softer things, such as institutionality, and how well the government works deliveringservices.”

In Colombia, which is a BBB+ like Peru, the focus is onissues such as infrastructure. Victor Herrera, director general of S&P,said “the cost of moving a container from Bogota to Santa Marta is more than tomove it from Santa Marta to China.  Whenyou talk about these things ... these stumbling blocks make it more difficult toscale up.”

Erich Arispe, director of sovereign ratings at Fitch, saidthat infrastructure was one of the issues of “competitiveness that Colombianeeds to address going forward. Its costs are much higher compared to othercountries in the region”. The same thing can be seen in this week’sannouncement by S&P that it had revised up its outlook on Mexico’s sovereign debt, anticipating economic reforms under the administration ofPresident Enrique Pena Nieto.

Mexico’s rating is currently BBB, but could be upgraded inthe next year or two.  “We are basicallysignaling what we think needs to happen for the rating to go up,” S&P’s Mukherji said.

A key issue for Mexico is addressing its dependence on oilrevenues and upping its tax haul, which is estimated at around 10% of GDP whenoil is factored out.

“Roughly one-third of government revenue comes one way oranother from Pemex.  For the past fewyears oil prices have been roughly $100 and it is a bonanza and Mexico’sfinances have been good, the deficit has been lower, debt-GDP ratio low, butthey have not saved anything from oil being at $100 a barrel,” saidMukherji.  “Addressing this is the key.”

- Like every year, Emerging Markets daily newspaper covers the Inter-American Development Bank’s annual meeting, held in Panama in mid-March. Pick up your copy at the meeting, read the news on our website and follow us on twitter @emrgingmarkets