Latin American sovereign ratings stabilizing below pre-pandemic levels
Latin American sovereign ratings have begun to stabilize after better-than-expected GDP growth and government revenue rebounds in 2021, Fitch Ratings says in a new report. The additional pressure on public finances and increased debt burdens from the pandemic have driven the average regional rating down by one notch to ‘BB-’.
Four Latin American sovereigns are on Negative Outlook, representing 21% of our sovereign ratings in the region, down from 58% in August 2020. Last year’s economic recovery was stronger than we had anticipated at the start of 2021, supported by vaccine rollouts, economic reopening and high commodity prices. Government revenues also outperformed our expectations.
Uruguay (BBB-) and the Dominican Republic (BB-) avoided downgrades when we revised their Outlooks to Stable from Negative late last year to reflect improved debt trajectories, bolstered by contained spending and favorable revenue growth in Uruguay and investment-driven growth momentum in the Dominican Republic.
However, deficits will remain high in 2022 and be above 2019 levels in many Latin American countries. Strained public finances were already a sovereign credit weakness pre-pandemic and the average rating has weakened relative to Emerging Asia and Emerging Europe. Colombia (BB+) and Peru’s (BBB) Outlooks were stabilized following downgrades last year partly driven by erosion of fiscal balance sheets.
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Three of the four remaining Negative Outlooks are in Central America. In Panama (BBB-), this reflects fiscal uncertainty around consolidation prospects amid high deficits and weak credibility. Costa Rica’s (B) IMF program provides an anchor to address fiscal weaknesses and reform challenges, but El Salvador’s (B-) unorthodox policies are jeopardizing program prospects.
We maintained Brazil’s (BB-) Negative Outlook in December 2021, reflecting risks to the economy, public finances and debt trajectory in the context of tightened financing conditions and increased doubts about the credibility of the spending ceiling anchor.
