NEW YORK--(BUSINESS WIRE)--Fitch Ratings has published its Latin America Sovereign Outlook for 2012, noting that sovereign creditworthiness trends in Latin America are expected to remain broadly stable in 2012 (only the Dominican Republic is currently on Positive Outlook) following the positive credit cycle of the last 12-18 months.
The eight sovereign upgrades (Brazil, Chile, Colombia, Costa Rica, Panama, Peru, Suriname and Uruguay) that took place in 2011 alone reflect the region's improved credit profile aided by sound economic policies, moderate external and fiscal imbalances, modest government debt burdens, and significantly improved external liquidity, which has made the region more resilient to adverse external shocks.
'Fitch expects Latin America's real GDP growth to decelerate to 3.4% in 2012 from 3.9% this year, although downside risks remain. While exports will suffer from weak external demand, domestic demand will also decelerate due to spillovers from the external sector and weaker consumer and business confidence,' said Shelly Shetty, Head of Fitch's Latin America Sovereign Group.
While the larger economies of Brazil and Mexico are expected to grow at moderate rates in 2012 at 3.2% and 3%, respectively, Colombia, Panama, Peru and Uruguay are still forecasted to grow by over 4% next year, as these countries' investment cycles continue to benefit from greater macroeconomic stability and strong foreign direct investment flows. Argentina's growth is anticipated to slow sharply to 4% in 2012, whereas Venezuela's economy is finally recovering and expected to gain steam next year. El Salvador and Jamaica are expected to be the least dynamic performers in the region, with both of these countries having limited policy flexibility to stimulate domestic demand.
Owing to the economic deceleration and easing of global commodity price pressures, over-heating and inflation concerns are likely to abate in 2012. 'Although an escalation of the eurozone crisis could lead to an increase in risk aversion and capital outflows and thus to a depreciation of regional currencies, inflation-targeting central banks have gained credibility, which should limit the pass-through of exchange rate depreciation to inflation,' says Shetty. 'The international reserves of the region remain at historically high levels, forecasted to reach USD750bn by year-end, giving several countries the flexibility to respond should capital outflows accelerate due to deteriorating external conditions.'
While Fitch expects the region's current account deficit to deteriorate moderately in 2012, generally robust external balance sheets throughout the region should continue to provide a buffer against an unfavorable global environment in 2012. Latin America's direct trade exposure to the eurozone is limited, with Brazil and Argentina exhibiting the largest trade links. However, the banking sector channel could be a source of vulnerability as large Spanish banks have subsidiaries in several Latin American countries, though self-funding and minimal dependence on parent banks in Europe make these banks less vulnerable to parent banks' funding and balance sheet woes.
Economic slowdown, no significant improvement in the terms of trade and continued spending pressures will detract from significant fiscal consolidation in 2012. Fitch expects moderate fiscal deficits and continued economic growth to result in broadly stable to declining debt dynamics for most countries. So far, only Peru and Brazil have explicitly announced counter-cyclical fiscal measures for next year but that could change should domestic economies materially slow. In Fitch's opinion, Chile and Peru have the maximum space to implement fiscal stimulus, whereas fiscal flexibility is more limited in the case of Argentina, Brazil, Colombia, Mexico, and Uruguay.
The main downward risks to the region's economic outlook and sovereign credit profile stem from a 'double-dip' in the U.S. which could adversely affect growth prospects of Mexico and Central America & the Caribbean, an escalation of the eurozone crisis leading to a significant increase in risk aversion and possibly capital outflows from the region which would exert pressure on regional currencies and hit confidence, a 'hard-landing' in China which would likely have knock-on effects on commodity prices, and political shocks that undermine policy-making due to still high poverty rates and income inequality as well as institutional weaknesses.
The special report '2012 Outlook: Latin America Sovereign Review - Creditworthiness Trends Stable' is available at 'www.fitchratings.com'.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research: 2012 Outlook: Latin America Sovereign Review
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=658340
ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE.