LatAm Sovereign Credit Ratings Snapshot

S&P raised recently Argentina’s long-term local currency rating to B- from CCC+. Still, dollar-denominated debt remains rated as “Selective Default” despite progress being made with U.S. hedge funds to settle a dispute arising from the historic default of 2002. That pending, Argentina is the only Latin American country in default zone, but Venezuela is fast approaching.

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Chile is the only Latin American country rated in the “A-zone” by all three major credit rating agencies. All of them constantly praise the country’s sound macroeconomic fundamentals, historic debt-servicing commitment, and current levels of sovereign debt. The A-status is well-deserved and will likely continue, despite the country’s lackluster economic growth seen in the last few years and the high correlation of Chilean copper exports with China and the global commodity cycle. General government gross debt to GDP stood at 15% in 2014 and was expected to increase to 18% in 2015 (IMF, Oct 2015 forecast). Chile will be fine even if financial turmoil intensifies.

Mexico and Peru are both rated A3 by Moody’s and BBB+ by S&P and Fitch. Peru holds the second lowest government gross debt-to-GDP ratio among major Latin American economies,  expected to have reached 22% in 2015 (IMF, Oct 2015 forecast). The country is highly exposed to copper price volatility. However, output from new mines should compensate for some of the decline in exports. Thus, debt is not expected to deteriorate significantly in the next few years. As for Mexico, Moody’s upgraded government bond ratings to A3 from Baa1 in February 2014. The rating agency said back then that “The decision to upgrade Mexico’s sovereign ratings was driven by the structural reforms approved last year (2013), which Moody’s expects will strengthen the country’s potential growth prospects and fiscal fundamentals.” Moody’s probably did not expect Mexico’s gross debt-to-GDP ratio to deteriorate to 52% from 46% in just two years (IMF). The MXN’s massive depreciation is partially responsible for this, as well as the Peña Nieto’s administration ambitions of expanding public spending after implementing fiscal reform. Taxes have indeed increased, but oil revenue—despite hedge production being partially hedged—has been declining. GDP growth at 2.5% in 2015 brought insufficient fiscal revenue improvement to cover increasing debt. It is unlikely that Moody’s will downgrade Mexico’s sovereign credit rating soon, but the increase in public debt and slow economic growth will surely slow down S&P’s or Fitch’s plans of an upgrade, which impedes the country from clinching a full A-status like Chile’s.

 

Brazil recently lost its investment grade, after being downgraded by all credit rating agencies in the second half of 2015. Following several months of constant warnings, both S&P and Fitch stripped Brazil’s sovereign debt from an investment-grade rating. Recall that bonds are considered investment grade if their credit rating is BBB- or higher by S&P and Fitch or Baa3 or higher by Moody’s; if agencies disagree whether a country should be given investment grade, then the majority prevails. As 2 out of 3 rating agencies downgraded Brazil’s sovereign debt to junk, the country lost the status it had won in 2008. Moreover, Moody’s is likely to join S&P and Fitch soon. Why are the agencies penalizing Brazil? Three reasons prevail: (1) slow economic growth; (2) deterioration fiscal accounts, pressured by a weak BRL; and (3) political impasse preventing “shock” therapy to revive the economy. As general government gross debt as a percent of GDP stands around 70%, the highest in the region, debt will become a hot topic as the year progresses.

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Venezuela could go into default this year if economic conditions do not improve dramatically. The chances of sovereign debt default are closely tied to oil prices. If they remain depressed through mid-2016, Venezuela could stop honoring its debt by yearend, as maturities pile up. Venezuela’s reserves currently stand at a 12-year low of $14 billion, according to official data. The central bank has sold gold reserves and Special Drawing Rights (SDR) with the International Monetary Fund (IMF). Venezuela’s 5-year credit default swap (CDS) —debt insurance— spiked to over 5,000 after President Maduro’s “economic emergency” announcement. This means that markets are pricing the chances of default at over 50%. UBS is one of the most bearish on Venezuela, predicting that the country has an 82% chance of defaulting within a year. All three major credit rating agencies have remained expectant to policy changes following the recent renewal of Congress. However, if political action is not convincing, they would probably begin to warn about a likely default around midyear.


LATAM PM’s Take: Besides a possible Moody’s downgrade in Brazil, we do not expect cuts to current credit ratings in the first half of the year. If Venezuela defaults, it would probably be towards yearend, once reserves dry up and maturities pile up. As for upgrades, Argentina could finally overcome default if it settles with U.S. hedge funds. Negotiations are going well, and a deal could be reached as soon as the first half of the year. Aside from these two countries, Colombia could be the next focus of concern if all oil prices, current account deficit, and the COP (peso) keep deteriorating throughout the year. The rest of the region should be fine for now, but negative outlooks could be triggered towards midyear if global economic activity does not pick up.