S&P eyes politics in Venezuela, El Salvador, Costa Rica

With political developments poised to drive Latin American sovereign ratings in 2019, S&P managing director and sector lead for ratings in the Americas, Joydeep Mukherji, tracked potential impacts with Venezuela, El Salvador and Costa Rica.

"The impact of Venezuela on the region so far hasn't changed any ratings, but it's a serious impact," said Mukherji. "And Colombia is feeling a lot of that, and other countries are also feeling the impact of refugees coming in."

The analyst added he expects to see developments this year that could possibly steer the deeply troubled nation out of default.

CenAm gridlock

Turning to Central America, Mukherji stressed that S&P is carefully weighing political developments in El Salvador and Costa Rica where needed reforms require meaningful cooperation across party lines.

For Mukherji, the big development for El Salvador is the recent election of 37-year-old Nayib Bukele, "The election results to some extent changed the dynamics of the country."

S&P lifted El Salvador's sovereign ratings out of default in October 2017 after the difficult passage of crucial pension reforms. And while the foreign/local currency ratings now stand at B-/B-, serious problems persist.

"The [current] rating reflects many weaknesses, but one of them is simply the deadlock that has existed for years between the two parties, which represent the two armies that fought each in the civil war back in the 1980s," said Mukherji.

"There is hope now that you have a new leader, independent, potentially able to do something different, to break the logjam, but the congress is still divided amongst the dominant two parties, the Arena and the FMLN, although now there is more diversity and other parties are there," he said.

Mukherji asserted that a breakthrough could result in passage and implementation of a better form of debt management.

"It's bad debt management which led them to default on some pension obligations a while ago," said Mukherji. "If they have more discretion in managing their debt, then they can get away from these liquidity problems that they have when they build up short-term debt and they sort of run towards the last minute before getting authorization to refund it."

Costa Rica

With Costa Rica, Mukherji said, "There's both good news and bad news, as you know we lowered the rating last year after the fiscal reform was passed finally. The good news is that there was a reform that passed, but the bad news is that it wasn't enough to keep the rating where it was, and we have a negative outlook on the rating, signaling that fiscal problem has been pushed back a little bit but it hasn't gone away."

S&P's 'negative' outlook for Costa Rica's sovereign ratings stems from the "combination of fiscal slippage plus somewhat lower GDP growth than in the past," he noted.

Mukherji said Costa Rica's fiscal problems and lower growth are related, saying growth "largely reflects a lot of spending for the public sector, for public sector employees."

"There are some distortions created in the rest of the economy by having such a huge fiscal deficit, and their debt management is also an issue because of the same kind of deadlock [as El Salvador's] in congress that prevents them from having the flexibility to issue abroad in dollars when they really need to," said Mukherji.

As for the future, he said, "We're looking at whether the [President Carlos] Alvarado administration can make some progress on these issues, both in terms of GDP growth and debt management the way it has made progress - give it credit - on the long delayed fiscal reform."