Fitch: Big LatAm economies under scrutiny

PRESS RELEASE from Fitch Ratings

2 April 2019

Sovereigns in Latin America continue to face negative rating pressures despite a cyclical economic recovery, says Fitch Ratings. Growth in the region will likely remain modest and highly uneven in 2019, with larger economies remaining on a fairly sluggish growth path or, in the case of Argentina, posting another annual contraction.

Fitch released a special report today addressing key questions posed by investors concerning Latin American sovereigns. We see three main risks for the region in 2019: external risks, domestic policy/political risks and fiscal consolidation challenges. The principal external macroeconomic risks for the region are commodity price volatility, a faster-than-anticipated China slowdown, international trade tensions and faster-than-expected tightening of international financing conditions. Political risks range from challenges related to the passage of reforms in Brazil

and a potentially less favorable policy environment for investment and growth under the new administration in Mexico. An uncertain and unpredictable election cycle in Argentina could also bring volatility and introduce downside risks for the reform agenda.

Multiple high deficit countries, including Brazil, Argentina, Ecuador and Costa Rica, are in the process of multi-year fiscal consolidation. However, implementation risks will remain pronounced amid the sluggish growth. Failure to continue consolidation will affect countries' ability to stabilize their debt burden and reduce funding needs. With the exception of Brazil, the aforementioned countries' ratings are all on Negative Outlook. We expect Colombia and Mexico to adhere to their respective fiscal rules, which should be consistent with a stable to declining debt burden. However, any deviation from this path leading to a rise in the public debt burden could be a negative rating

trigger.

LATIN AMERICAN SOVEREIGN RATINGS TABLE

Beyond the broad regional risk profile, our interactions with investors have focused on particular issues facing the largest economies in the region: Mexico, Brazil and Argentina. We assigned a Negative Rating Outlook to Mexico's sovereign ratings last October, and since then, the growth outlook has deteriorated while the new administration has given some mixed signals as to its key economic policies. Positively, the approved 2019 budget incorporated the continuation of a primary surplus. However, the government's stance on energy sector reform, including an

indefinite hold on new oil auctions, could adversely affect investment.

Fitch sees contingent liabilities as a risk to Mexico's public finances. Government support measures for state oil company Pemex announced to date have a minor impact on public finances and suggest the sovereign is concerned about protecting its own credit profile. But they are insufficient to allow the company to invest enough to stabilize oil production. Further support is likely, including the use of stabilization funds.

In Brazil, the new administration has an ambitious reform agenda, but the implementation and timing remains unclear, raising uncertainties to the passage of necessary legislation in Congress. Fitch views the proposed pension reform as a core element of the agenda to adjust public spending; however, its scope and depth are likely to be diluted. The reform is politically unpopular, and the government has yet to form a cohesive coalition in Congress to pass it. Failure to pass the reform cannot be ruled out and could pose challenges to the public finances as well as undermine the economic recovery. This would have negative implications for the medium-term public debt trajectory.

Argentina's economic adjustment process has been mixed, with the balance of risks still leaning to the downside. The government met its 2018 primary deficit target agreed with the IMF, but further consolidation could be challenged by the continued economic contraction. We expect Argentina to miss its primary balance target this year. Progress on external adjustment also lagged in 2018, while disinflation was slower than expected.

Additional analysis and information, including details on Fitch's responses to key investor

questions on multiple Latin American countries, can be found in the special report "What Investors

Want to Know: Latin America Sovereigns" through the link above.