Latin American sovereigns can no longer count on the strong tailwinds that had supported improvements in credit quality across the region over the past decade, warned Moody’s this week.
Favourable macroeconomic conditions along with prudent policy frameworks had supported upward ratings momentum, said the rating. But that momentum is waning.
Every year from 2004 up to and including 2012, Moody’s granted more upgrades than downgrades to Latin American sovereigns. But in 2013 there were four downgrades to two upgrades, and so far this year there have been two of each.
And there are dangers that the progress of the last 10 years could be eroded should institutional improvements not be continued. This is despite the fact that the past decade’s progress has left most sovereigns in a manageable situation in the face of adverse shocks, on account of strengthened external financial buffers.
Stagnant reform policy in Brazil and Argentina and negative reform momentum in Venezuela mean that negative rating movements — which had previously been a phenomenon limited to Central America and the Caribbean — are spreading.
“More recent rating actions show that South America is no longer immune to negative credit pressures,” said Moody’s.
Brazil was removed from positive outlook in October 2013, Venezuela is on negative outlook, and Moody’s dropped Argentina to Caa1 on March 17.
It is therefore unsurprising that Moody’s highlights the country with the most clear reform agenda — Mexico — as an example of a “game changer”.
Mexico is one of the two LatAm nations Moody’s has upgraded so far this year, in February becoming the first LatAm sovereign since Chile in 2006 to receive an A rating. Moody’s used Mexico’s example to highlight the importance of a strong reform agenda.
“The Peña Nieto administration’s focus on a growth-enhancing reform agenda proved to be a game changer,” said Moody’s, “marking a departure from previous years when lack of effort on the reform front prevented positive momentum from developing for the sovereign’s credit profile.”
These reforms would appear to have been timely. Today’s less benign global environment will “increasingly accentuate not only the benefits of conventional policies but also the costs of unconventional policies”, said Moody’s.
But only Chile, Mexico, Peru and Paraguay can boast continued reform momentum, in the rating agency’s opinion. Even Colombia and Uruguay, whose Baa3 ratings are on positive outlook, have stagnated in terms of reform policy.
“Despite having enacted a fiscal responsibility law in 2011, Colombia has made slow progress in reducing its fiscal deficit as mandated by the law,” said Moody’s.
And though Uruguay has enacted social reforms and has opened up its economy to private investment, the country continues to face challenges to control relatively high inflation rates.In Brazil’s case, “structural impediments to economic activity, including a burdensome tax system and a complex regulatory environment have led to low productivity growth contributing to placing a limit on upward potential”.
However, Brazil is not among the EM sovereigns most vulnerable to financial market vulnerability. Its strong resilience comes from a strong international reserve buffer, despite government debt projected to rise to around 60% of GDP, said Moody’s.
Unsurprisingly, Venezuela is the LatAm nation Moody’s highlights as most vulnerable to external shocks.
And though Argentina has a “modest” debt burden and low dependence on external capital flows, it is “difficult to determine with certainty” the country’s real economic conditions, said the rating agency.
“This diminishes confidence in the country’s ability to manage adverse shocks such as the current pressure on EM currencies.”
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