Fitch Rtgs: Economic, Fiscal, Political Risks Pressure LATAM Sovereign Rtgs

By Fitch Ratings

Fitch Ratings-New York-05 March 2020: The coronavirus outbreak has added downside risks to Latin America's 2020 economic outlook when sovereigns in the region were already facing multiple challenges from a sluggish recovery, difficulty in consolidating fiscal accounts to stabilize public debt burdens, and rising social unrest, says Fitch Ratings. The confluence of economic, fiscal and political risks continues to affect Rating Outlooks, with seven sovereigns on Negative Outlook versus only one on Positive, despite 13 downgrades in 2017-2019.

Even prior to the international spread of the coronavirus, Latin America was likely to face broad-based macro-economic, fiscal and political challenges this year. Our base case has been for a mild recovery in 2020 after regional real GDP (excluding Venezuela) expanded below 1% in 2019. However, the sudden spike in global uncertainty related to the coronavirus and resulting volatility in capital markets, currencies and commodity prices has reinforced downside risks to the growth outlook. Many Latin American economies, including Brazil, Peru and Chile, have extensive direct trade exposures to China. Moreover, all commodity producers are indirectly exposed as a result of sharp falls in prices of metals (Peru, Chile), energy (Bolivia, Colombia, Ecuador and Mexico) and agricultural commodities (Argentina, Brazil).

We expect two-thirds of Fitch-rated Latin American sovereigns to experience an increase in their debt burdens this year, which is a principal factor behind many of the Negative Outlooks in the region. The sluggish economic recovery and weaker-than-expected commodity prices will further reduce fiscal maneuverability, making consolidation more difficult. Currency depreciation and increased potential for fiscal slippage from a potential global growth downturn will further challenge debt stabilization.

Political and social unrest will further add to the region's growth and fiscal challenges. Unrest observed in several countries in the region in 2019 could persist in 2020, especially in an extended period of weak growth, limited job creation, high income inequality and perceived lack of progress in addressing public demands. A potential downturn could add to this social dissatisfaction, which in turn could further undermine growth prospects.