Fitch: 2016 Growth Outlook Remains Subdued for Latin American Sovereigns
OREANDA-NEWS. After a decade-long commodity super cycle, the 2016 growth outlook for Latin America remains subdued as external and domestic risks persist, says Fitch Ratings in a new special report. Against this backdrop, Fitch expects little upward sovereign rating movement in the region in 2016. To the contrary, negative rating pressures could increase if countries are unable to adjust to the evolving external environment. Subdued growth, increased fiscal deficits, unfavorable debt dynamics, country-specific challenges, and lack of progress on reforms could put pressure on ratings.
Fitch forecasts a 0.2% contraction in regional GDP for 2016, compared with an estimated 1% decline in 2015 and an average 3.5% growth during 2010-2014. Excluding the recessions in Brazil and Venezuela, growth is expected to recover mildly to 2.3% in 2016, from 2.2% in 2015, reflecting a subdued recovery for commodity exporters and some benefit for Central America and Mexico from firmer U.S. growth.
The weak performance in the region responds to a subdued commodity price outlook, moderating growth in China, and tighter international financial conditions. In some cases, political factors could prevent a pick-up in domestic confidence, clouding the growth and investment outlook. Intensification of these dynamics represents a downside risk to growth.
Policy flexibility to respond to slow growth has diminished in the region. Gradual monetary tightening will likely continue in 2016 as central banks respond to better anchor inflationary expectations given above-target inflation figures in several countries, precipitated largely by FX depreciation. The prospects for fiscal consolidation appear challenging in the face of sluggish growth, limited commodity price upside and difficulties in reducing spending. As a result, debt dynamics are likely to remain unfavorable for most sovereigns.
After deterioration in current account deficits for several commodity exporters during 2014-15, external imbalances are expected to decline or stabilize in 2016. On the other hand, commodity importers continue to have lower deficits compared to recent years. These trends should facilitate the adjustment of countries to tighter external financing conditions, especially amidst a U.S. monetary tightening cycle. However, sources of risk include lower capital inflows and reduced non-resident participation in domestic markets. Higher levels of private sector external indebtedness, especially for investment-grade countries, also represent a source of vulnerability. Strong international reserves, flexible currencies and some private sector hedging mitigate risks.
While a lighter election calendar will prevail in 2016, weak growth and country-specific issues such as corruption investigations, reduced popularity of sitting presidents, legislative gridlock, and protests could increase challenges to governance and policy adjustments. Furthermore, the outlook for reforms remains mixed, with some bright spots being Mexico, which is progressing with its structural reforms and some Andean countries focused on developing infrastructure.
The majority of Latin America's sovereign ratings currently carry a Stable Outlook. The number of sovereigns with Positive and Negative Outlooks are evenly balanced,- two countries, Jamaica and the Dominican Republic, have a Positive Outlook, and Brazil and Costa Rica have a Negative Outlook.