NEW YORK--(BUSINESS WIRE)--
Negative sovereign rating actions exceeded positive actions in the first
half of 2014 in Latin America and the Caribbean, according to Fitch
Ratings. While the Rating Outlooks for most countries in the region
remain Stable, Negative bias remains for ratings as currently more
countries have Negative Outlooks than Positive Outlooks.
Fitch downgraded the sovereign ratings of Bermuda, Guatemala and
Venezuela by one notch each during the first half of 2014. However,
Fitch also took two positive rating actions in the region, upgrading
Jamaica to 'B-' from 'CCC' and assigning a Positive Outlook to Paraguay.
The Stable Rating Outlooks for the majority of sovereigns in the region
suggest that positive and negative rating pressures are balanced.
Currently, only Paraguay has a Positive Outlook while Argentina (Local
IDR only), Aruba, El Salvador and Venezuela have Negative Outlooks.
'Softer commodity prices, China's slowdown, slower domestic demand and
country-specific factors are clouding the near-term prospects of the
Latin American region,' said Shelly Shetty, Head of Fitch's Latin
America Sovereigns Group. 'Structural constraints including low
investment rates and infrastructure gaps, are also biting in some
countries and highlight the need for a broader reform effort to improve
the medium term growth trajectory,' she added.
Slower growth will likely constrain improvements in fiscal and external
solvency ratios and dampen the sovereign credit momentum in the region,
particularly as the rating cycle for the region has been quite positive
in recent years.
At the same time, Fitch does not anticipate broad-based negative rating
actions either as several Latin American countries have adequate
external liquidity and credible policies in place to confront potential
higher international volatility. Market access remains relatively robust
for most countries. Fiscal room to stimulate domestic economies is more
constrained although countries like Chile and Peru with countercyclical
buffers and low government debt burdens have room to implement such
Fitch is projecting Latin America's real GDP growth will reach 1.9% in
2014 compared to 2.6% last year with modest recovery expected in 2015.
The regional growth forecast masks important differences between
countries. Brazil and Mexico are likely to under-perform this year with
growth in the former reaching only 1.5% and remaining below 3% in the
latter. Even the previously fast growing Chilean economy is losing steam
as it confronts lower copper prices and China's deceleration. Growth
will also slow although remain relatively robust in Bolivia, Panama,
Paraguay and Peru, while Colombia and the Dominican Republic are the
only economies expected to accelerate this year. On the other hand,
Argentina and Venezuela will likely experience recession.
Among the inflation targeting countries inflation remains elevated in
Brazil and Uruguay. Chile, Mexico and Peru have cut interest rates amid
slowing growth. Brazil has halted its monetary tightening cycle arguing
the impact of the rate increases is cumulative and operates with a lag.
Colombia is the only country in a tightening mode given its robust
domestic demand dynamics. Argentina and Venezuela will continue to have
the highest inflation rates in the region.
A gradual fiscal deterioration is forecasted in 2014 for several
countries due to slower growth, lower commodity prices and continued
spending pressures amid a heavy electoral calendar. The two largest
economies of Brazil and Mexico will see higher deficits this year.
Aruba, Costa Rica, El Salvador and Suriname will incur among the highest
deficits in the region (surpassing 4.5% of GDP in each case). Only
Bolivia and Peru are forecasted to run a small surplus or near balanced
budget positions. Commodity dependent and recession-stricken economies
of Argentina and Venezuela will have to manage their fiscal accounts
within the constraints imposed by their limited financing options.
Nevertheless, the modifications to Venezuela's FX regime and the weaker
average official exchange rate will likely benefit government oil
The regional current account deficit is forecasted to reach 2.6% of GDP
in 2014. Current account deficits remain elevated in several countries
including Brazil, Costa Rica, El Salvador, Jamaica, Panama and Uruguay.
However, in most cases, external vulnerability is mitigated by healthy
external reserves cushion, the continued resilience of FDI flows and
access to markets and multilaterals. On the other hand, international
reserves of Argentina and Venezuela have faced pressure over the past
year. While they have stabilized in recent months, Fitch will continue
to monitor their trajectory as significant drainage could further
undermine their external debt repayment capacity.
The electoral calendar was heavy in the first half of 2014 with
Presidential elections held in Colombia, Costa Rica, El Salvador and
Panama. The election outcomes do not materially impact sovereign credit
trends in these countries. However, countries like El Salvador and Costa
Rica face the challenge of implementing fiscal reforms to secure better
fiscal and government debt trajectories.
Bolivia, Brazil and Uruguay will hold elections in the second half of
2014. The Bolivian President Evo Morales is expected to win the
re-election bid which would imply broad policy continuity. Uruguay's
market friendly policies are likely to remain in place after the
elections in which former President Tabare Vasquez is the current
The polls in Brazil suggest that the likelihood of a second round have
increased. Regardless of the electoral outcome, the next administration
will confront the challenge of making policy adjustments to reduce the
existing macroeconomic imbalances and take measures to boost confidence
and competiveness of the economy.
Political polarization will remain high in Venezuela and could make it
difficult for the government to make faster progress on the much needed
policy adjustments to ease foreign exchange constraints and address
issues of scarcity, crime and very high inflation. Periodic periods of
social instability cannot be ruled in Venezuela.
Material structural reforms to boost the lagging productivity growth in
the region have not made significant headway. Mexico is the only
exception where the government has been making progress on long-standing
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Shelly Shetty, +1 212-908-0324
33 Whitehall St.
New York, NY 10004
Arispe, +1 212-908-9165
Santiago Mosquera, +1
Cesar Arias, +1 212-908-0358
Elizabeth Fogerty, +1
Source: Fitch Ratings