Latin American Sovereign Outlook Negative Due to Weak Growth, Rising Debt

A weak global economic environment, depressed commodity prices, rising debt levels, and the prospect of higher global interest rates all contribute to negative credit drivers for sovereign creditors in Latin America, Moody’s Investors Service said in a recent report.

Weakness in Brazil and Argentina, two of the region’s largest economies, will hamper economic growth in the region, likely to average only .9% from 2016 to 2018. A recent average of 3% was achieved during the period between 2010 and 2015. Brazil, Ecuador, Trinidad and Tobago, and Venezuela are expected to experience the weakest growth and struggle with credit challenges over the next two years.

“Given some improvement in commodity prices and the rating actions already taken, we expect negative credit trends to be contained in 2017, relative to last year,” said Moody’s Vice President and Senior Analyst Samar Maziad. “Nonetheless, we expect the creditworthiness of a number of sovereigns to deteriorate further.”

Eight of the 29 Latin American countries that Moody’s rates ended 2016 with a negative outlook, while three had a positive. In 2015, only six had a negative outlook.

Debt levels are expected to rise in Argentina and Brazil, and large fiscal deficits and high debt ratios will likely constrain policy choices for the region’s countries. Higher global interest rates and volatile capital flows will limit the ability of authorities to ease monetary policy in 2017, inhibiting growth and contributing to higher interest costs on domestic debt. In Mexico, recent tax reforms have helped to cushion the sovereign’s credit profile to shocks, though uncertainties remain regarding potential changes in United States trade policies, Moody’s said.

– Adam Fusco, editorial associate

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