- Chile and Peru have the most fiscal space to implement counter-cyclical fiscal policies
- The electoral calendar heats up in 2014 with several countries including Brazil, Bolivia, Colombia, Costa Rica, El Salvador, Panama and Uruguay holding presidential election.
Sovereign rating actions in Latin America have had a positive bias in 1H13, according to Fitch Ratings. Positive rating actions in 1H13 have included the rating upgrades of Mexico and Uruguay and the revision of Colombia's Rating Outlook to Positive from Stable.
The only negative rating action was on Jamaica where Fitch downgraded the Foreign Currency and Local Currency Issuer Default Ratings (IDRs) to Restricted Default ('RD'). The downgrade took place in February following the implementation of a domestic debt exchange that adversely impacted the original contractual terms of domestic bondholders.
Fitch is projecting Latin America's real GDP growth will reach 2.9% in 2013 compared to its previous forecast of 3.3%
The Rating Outlook for the majority of sovereigns in the region is Stable, which suggests that positive and negative rating pressures are evenly balanced. Currently, Colombia and Ecuador have a Positive Outlook, and El Salvador, Venezuela and Argentina's Local Currency IDRs have a Negative Outlook.
“Slow global recovery, slower domestic demand growth, softer commodity prices and country-specific factors are leading to a slowdown in most of the regional economies in 2013,” said Shelly Shetty, Head of Fitch's Latin America Sovereigns Group. “As a result, improvements in fiscal and external solvency and liquidity indicators may be hindered, thus weighing on the upward potential of sovereign ratings.”
Fitch is projecting Latin America's real GDP growth will reach 2.9% in 2013 compared to its previous forecast of 3.3%. However, excluding Brazil, Latin America's real GDP will slow to 3.2% in 2013 from 4.1% in 2012.
Fitch expects the multiple speed growth in the region to continue. The five highest growth countries are Bolivia, Chile, Peru, Panama and Paraguay, with the latter forecasted to be the fastest growing economy in the region after a mild contraction observed in 2012. The smaller economies of Ecuador, Colombia and Suriname will record growth above 4% in 2013, while Brazil and Mexico are forecasted to drag the regional performance by growing at 2.5% and 3%, respectively. On the other hand, El Salvador, Jamaica and Venezuela will underperform with growth below 2% in these countries.
In the investment grade category, low debt countries with fiscal buffers like Chile and Peru have the most fiscal space to implement counter-cyclical fiscal policies. Brazil, Colombia, Mexico and Uruguay are more constrained. In the speculative grade space, several Central American and the Caribbean countries continue to face weak growth prospects and challenging debt dynamics that will limit their ability to provide stimulus. Costa Rica will incur the highest fiscal deficit in the region while Argentina's growing fiscal pressures could lead to greater monetization of the deficit given its lack of market access.
Elections were held in Paraguay and Venezuela in 1H13. The tight victory margin in the Presidential elections in Venezuela could maintain political uncertainty and reduce the scope and pace of policy adjustments. The election calendar is relatively light in 2H13 with legislative elections in Argentina in October and general elections in Aruba in September and Chile in November. The electoral calendar heats up in 2014 with several countries including Brazil, Bolivia, Colombia, Costa Rica, El Salvador, Panama and Uruguay holding presidential elections. Fitch does not foresee dramatic shifts in economic policies following the elections in most countries.