July 12, 2017 / 2:35 PM / 6 months ago

Fitch: Growth, Debt, Politics Drive LatAm Sovereign Rating Trend

(The following statement was released by the rating agency) Link to Fitch Ratings' Report: 2017 Mid-Year Sovereign Review and Outlook: Rating Outlook Less Negative, but Debt Levels Still Moving Higher here NEW YORK/LONDON, July 12 (Fitch) Latin American sovereigns saw more negative than positive rating actions in the first half of 2017, highlighting persistent challenges posed by sluggish growth, adverse debt dynamics and, in some cases, politics, Fitch Ratings says. Five sovereigns are on Negative Outlook, showing that the balance of risks is towards more negative actions, although macroeconomic imbalances are starting to correct, providing some support to current ratings. In 1H17, Fitch downgraded Costa Rica by one notch and Suriname by two notches, while El Salvador entered into a default on local debt which was subsequently cured. Suriname's rating Outlook remains Negative, as do those of Brazil, Chile, Ecuador and Mexico. The global ratio of Negative to Positive sovereign Outlooks has more than halved this year, as described in Fitch's 2017 Mid-Year Sovereign Review and Outlook, but no Latin American sovereigns are on Positive Outlook. Our only positive action on a Latin American sovereign in 1H17 was the revision of Colombia's Outlook to Stable from Negative, following tax reform and sharp falls in the current account deficit and inflation. Sovereign credit pressures in the region generally stem from the challenging macroeconomic backdrop, the difficulty of fiscal consolidation, and sometimes volatile or polarised politics. All of these factors will see important developments in the second half of 2017 and 2018 as countries present their 2018 budgets and several elections take place. NAFTA renegotiation is also expected to start. Fitch projects regional GDP growth to recover moderately to 1.1% in 2017 and 2.5% in 2018 following two years of contraction. Risks to these forecasts include greater US protectionism and immigration controls, slower-than-expected Chinese growth, weaker commodity prices and tighter external financing conditions. Inflation is falling in most countries, giving greater flexibility to central banks to reduce or stabilise interest rates at lower levels. Most current account deficits have also fallen on the back of slower growth and exchange rate correction, and with the exception of Bolivia and Venezuela, we forecast broadly stable international reserves. Some countries are taking steps to improve public debt dynamics. Chile and Mexico are seeing benefits from earlier tax reforms, and Colombia and Uruguay have enacted tax increases in the past year. But further measures may be needed to ensure deficit reduction in the face of weak growth and reduced revenues. Fiscal buffers are small or non-existent outside Chile and Peru (although the latter is expected to use some of its buffers to meet flood reconstruction costs), and consolidation remains especially challenging in Argentina, Brazil, Costa Rica, Ecuador, El Salvador and Suriname. Nine important elections are scheduled in Latin America over the next 18 months. The run-up to and outcome of next year's elections in Brazil and Mexico could have implications for policy orientation. Argentina's congressional mid-term elections in October will indicate the level of popular backing for President Macri's policies. Political deadlock was a major factor in our negative rating actions on Costa Rica and El Salvador, which have elections scheduled in 1Q18. Our 2017 Mid-Year Sovereign Review and Outlook is available at www.fitchratings.com or by clicking on the link above. We have also published research on the impact of Latin America's election cycle, and on the implications of US policy for Central America and the Dominican Republic earlier in the year. Contact: Shelly Shetty Senior Director, Sovereigns +1 212 908 0324 Fitch Ratings, Inc. 33 Whitehall Street New York, NY 10004 Richard Francis Director, Sovereigns +1 212 908 0858 Mark Brown Senior Analyst, Fitch Wire +44 20 3530 1588 Media Relations: Elizabeth Fogerty, New York, Tel: +1 (212) 908 0526, Email: elizabeth.fogerty@fitchratings.com. The above article originally appeared as a post on the Fitch Wire credit market commentary page. The original article can be accessed at www.fitchratings.com. All opinions expressed are those of Fitch Ratings. Related Research Central America and Dominican Republic: Prospects and Challenges From the Trump Administratihere Latin America’s Election Cycle and Rating Implications here ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. 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