Political and social risks that could impact LatAm economies

By Juan Pablo Alvarez

Latin American societies face a strong upheaval in political and social terms, which adds financial uncertainty for investors.

In this context, the US risk rating agency Moody’s prepared a report detailing the situations that generate the greatest credit risk in the six main economies of the region.

“The growing social and political risks present in Latin America have become increasingly relevant credit risk factors for issuers in the region through governance risks, policy changes, and government intervention, transmission channels that impact economic performance and financial volatility,” said Ariane Ortiz-Bollin, senior vice president of the firm, co-author of the report.

WHAT FACTORS ADD THE MOST RISK TO EACH COUNTRY’S CREDIT?

Argentina has one of the worst possible ratings on Moody’s scale (Ca2, stable outlook).

Regarding this country, the document states:

“Economic instability affects the country’s sovereign, bank, and corporate credit quality. Argentina is highly exposed to governance risks”.

Regarding the region’s main economy, Brazil, Moody’s underlined:

“Policy changes could result in government intervention in state-owned enterprises and banks.

For example, changes in Petrobras‘ management and board indicate possible intervention in business strategy, asset sale program, and pricing policies.”

Brazil has a Moody’s Ba2 credit rating with a stable outlook, a note representing “uncertain future but current capacity.”

“Despite Chile’s strong governance, social risks are moderately negative,” Moody maintains.

It adds, “The political ramifications of social unrest have changed the national debate and Chile’s political agenda.”

“As the government seeks to address social demands for better quality and coverage of services, sectors most exposed to policy changes include banks, mining companies, and energy projects.”

Chile has a Moody’s credit rating of A2 with a stable outlook, which places its bonds as investment grade and implies good credit quality.

As for Colombia, Moody considers that the government’s “ambitious” reform agenda “heightens the risk of policy changes,” which affects investor confidence.

While the reform proposals cover public enterprises, banks, companies, toll roads, electricity companies, and utilities, “strong institutional environments will act as checks and balances, limiting the risk of sweeping changes,” the US firm notes.

Colombia has a Baa2 credit quality with a stable outlook, which places its sovereign bonds in investment grade and assigns them satisfactory credit quality, although with possible long-term stresses.

Regarding Mexico, the region’s second-largest economy, Moody’s reflects:

“Changes in Mexico’s energy policy have slowed private investment in the sector, particularly in renewable energy.”

“For state-owned companies Pemex and CFE, dependence on recurrent government support has increased. Concerns about violence and security also limit economic and investment growth in Mexico.”

The credit quality of Mexican bonds is Baa2 with a stable outlook, as is that of Colombian bonds.

Finally, Moody’s details that the resurgence of social protests in Peru would create “governance risks”, which would represent “a threat to sovereign, banking, tourism and retail issuers”.

On the other hand, the report details:

“The escalation of protests and operational disruptions pose risks to critical infrastructure assets and new developments in the country.”

Peru has a credit rating of Baa1 (one notch above Mexico and Colombia), although with a negative outlook. That is to say, with chances of worsening.

On the other hand, Moody states that the growth problems Latin American countries face have “disillusioned” the populations.

“Some countries, such as Argentina and Chile, crossed the US$2,000 GDP per capita mark 52 years before Malaysia.”

“Today, both countries maintain similar levels of GDP per capita, and Malaysia’s GDP per capita continues to rise.”

“Similarly, Brazil and Taiwan crossed the US$2,000 GDP threshold simultaneously, but now Taiwan’s GDP per capita is US$31,000 higher than Brazil’s.”

ARGENTINA: THE ONLY ONE WITH COUNTRY RISK PROBLEMS

Argentina’s sovereign bonds are among the worst in the world if we consider their prices, which is why the country risk of this State is close to 2,600 points, according to the index prepared by the US bank JP Morgan.

In the rest, this is not the case: Colombia has a country risk of 425 points; Mexico, 411; Brazil, 262; Peru, 238 and Chile, 144.

With information from Bloomberg