How are shifting global trade and tariff dynamics affecting Latin American sovereigns?
Changing trade and tariff dynamics have probably been the biggest risk for the global economy. Effective tariff rates have risen materially, although the degree of impact across Latin America varies.
Mexico has been the most affected, since it was among the first countries hit with 25% fentanyl tariffs. There’s also uncertainty around the 2026 review of the United States-Mexico-Canada Agreement. Progress has been made in aligning Mexican exports with the agreement, and as a result, effective tariffs have increased more slowly than expected.
Still, we see Mexico as among the slowest growing economies in 2025, reflecting both external uncertainty and domestic dynamics.
Brazil has faced some of the highest tariffs — around 50% before exclusions — but its relatively closed economy means the growth impact is more muted.
The rest of Latin America has fared better, with headline tariffs near 10%. Competitiveness has not been significantly affected, especially compared with parts of Asia, where tariffs are 15% to 20%.
Another potential channel of impact is US immigration policy. Increased deportations could reduce remittances, particularly affecting Central America and Mexico.
What is the economic growth outlook for the region, amid this uncertain external backdrop — and how is this affecting credit trends?
Even without external uncertainty, growth is weaker in Latin America than other emerging regions, due to structural issues such as low saving and investment rates, limited reform momentum and governance constraints.
We forecast median growth of 2.7% in 2025, slightly down from 3.2% last year, but above the prepandemic average. Larger economies like Mexico and Brazil are slowing, while Paraguay should grow close to 5%.
Macroeconomic stability has held up, supported by flexible exchange rates, inflation targeting regimes, contained current account imbalances and sound external liquidity in most. Central banks are easing amid disinflation, and expected US rate cuts add flexibility. We see growth slowing further to about 2.4% next year as China cools and oil prices fall.
Despite headwinds, sovereign ratings in Latin America have held up well. We’ve had more upgrades than downgrades this year — Argentina and El Salvador were upgraded, while Bolivia was downgraded.
Positive outlooks now outnumber negatives, especially among smaller Central American and Caribbean countries, with Paraguay also recently assigned a positive outlook. Most of the larger countries are on stable outlook, although we did put Colombia on negative outlook earlier this year.
What are the main fiscal trends in the region and what challenges do you see ahead?
Fiscal consolidation since the pandemic has been fairly good, with median deficits narrowing toward pre-pandemic levels — a contrast with regions like Asia, where progress has lagged.
But larger economies such as Brazil and Colombia still run high deficits and Mexico’s remains moderate but persistent. Credibility around fiscal rules has weakened somewhat, as seen in Peru and Colombia.
Looking ahead, moderate growth, subdued commodities, high financing costs, and social pressures will complicate further adjustment.
Some governments, including Mexico’s, also face strains from weak state-owned enterprises such as Pemex. Debt ratios are rising in the large economies, while smaller Caribbean and Central American credits running primary surpluses are seeing debt decline.
Beyond headline debt and deficit numbers, what deeper structural risks are most relevant to your sovereign rating outlooks?
Structurally, public finances remain a relative weakness. The region’s narrow revenue base reflects high informality, tax evasion and exemptions, while commodity dependence of revenues introduces volatility. Stabilisation funds are rare and have eroded — for example, in Chile and Peru — and are small in Mexico.
Efforts to improve tax administration have helped in countries like Mexico and Paraguay, but it’s uncertain how durable those gains will be. In the longer term, countries will need structural tax reforms to broaden the base, address spending needs and consolidate further.
Rising fiscal rigidities are another concern. Many governments have used capital expenditure as an adjustment tool, making budgets less flexible. Growing pension costs, social spending and interest payments all add rigidity. In Brazil, prolonged high interest rates have sharply increased debt service costs, and about 90% of the budget is already committed to mandatory spending.
Pension costs remain a headwind, though Brazil and Uruguay have passed reforms in recent years, while Paraguay is planning a reform. Other countries, such as the Dominican Republic, still face rigidities from transfers to the electricity sector and quasi-fiscal deficits that weigh on flexibility and credit profiles.
Looking ahead to the 2026 election cycle, how significant are political transitions for sovereign credit risk in the region?
Governance challenges and institutional weaknesses weigh on the credit profiles of several countries. World Bank governance indicators have generally slipped over the past decade, especially in larger economies, while smaller credits have shown some improvement.
Overall, Latin America still scores below other emerging regions on rule of law, corruption and government effectiveness. Elections will be important to watch to see whether policy direction improves or deteriorates.
Before 2026, two key votes are coming up this year in Argentina and Bolivia, both rated in the ‘CCC’ category. In Argentina, the mid-term election will test the durability of President Milei’s adjustment programme and his ability to govern effectively. The US’s support is important, but it remains to be seen if Argentina uses this period to rebuild reserves to manage sizable foreign currency debt maturities ahead.
Bolivia faces a bleak outlook, with high deficits, inflation, weak external liquidity and bond payments due early next year. The government will need to decide between a pragmatic adjustment — cutting subsidies, rebuilding reserves and securing multilateral support — or some form of debt restructuring. Social unrest is also a risk.
Looking to 2026, the key elections will be in Colombia and Brazil. Both face high fiscal deficits and rising debt burdens, and post-election fiscal adjustment will be crucial to restore investor confidence. Colombia may need another tax reform, while Brazil’s next administration will face the challenge of boosting investment, reinforcing the fiscal anchor and achieving primary surpluses to stabilise debt.