Pandemic Central to Overwhelming Downside Risks to Latin American Economy -Fitch
RIO DE JANEIRO, BRAZIL – Latin American economies will rebound this year from last year’s recession but the risks to that outlook are almost all skewed to the downside, analysts at Fitch Ratings said on Wednesday, January 20th, citing in particular the evolution of the COVID-19 pandemic.
Slower growth would also compromise government efforts to get deficits and debt back on a more sustainable, downward path, just as public pressure to spend in the face of the second wave of the virus grows, they warned.
Shelly Shetty, managing director for Sovereigns at Fitch, said that how the region weathers the second wave, the pace of vaccine distributions, the volume of shots to be rolled out and generally weak public health systems all bear monitoring.
“We don’t see many upside risks … (we see) several downside risks,” Shetty said in an online presentation.
Peru will register the strongest growth in the region this year of more than 5%, while Brazil’s economy will expand at a little over 3%, capped by an expected tightening of fiscal policy, she said.
The recovery should be supported by 8% growth in China, strong global commodity prices, continued accommodative domestic monetary policy, and favorable base effects, she said.
The average budget deficit across the region will fall by 3% of gross domestic product but fiscal deficits will remain high by historical standards at an average of 6% of GDP. Brazil’s deficit will be 7% of GDP, Shetty said.
“Consolidation will be a multi-year process,” she said, noting that over half of all Latin America sovereign ratings outlooks are negative, the highest for any region in the world, and with no positive outlooks.
On Mexico, Fitch analyst Charles Seville highlighted that struggling state-run oil company Petroleos Mexicanos (Pemex) could need further financial support from the government, perhaps as much as 1.5 percentage points of GDP.
This would not be a “game-changer” for Mexico’s sovereign rating, but it would hardly be a positive factor, Seville said.
Fitch’s sovereign rating for Mexico is BBB-, one notch above speculative grade, or junk, with a stable outlook.
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