articles Corporate /en/research-insights/articles/political-risks-are-receding-in-latin-america-but-uncertainty-looms content
BY CONTINUING TO USE THIS SITE, YOU ARE AGREEING TO OUR USE OF COOKIES. REVIEW OUR
PRIVACY & COOKIE NOTICE
Log in to other products

Login to Market Intelligence Platform

 /


Looking for more?

Request a Demo

You're one step closer to unlocking our suite of comprehensive and robust tools.

Fill out the form so we can connect you to the right person.

  • First Name*
  • Last Name*
  • Business Email *
  • Phone *
  • Company Name *
  • City *

* Required

In this list

Political Risks Are Receding In Latin America, But Uncertainty Looms

Multiple Operators Suffer Damage to Fiber Networks from Hurricane Michael

Factbox: Hurricane Michael Impact Turns from Production Loss to Demand Destruction

Factbox: Oil, Gas Production Declines Intensify as Hurricane Michael Approaches

Factbox: Utilities, Oil Producers Brace for Hurricane Michael Along U.S. Gulf


Political Risks Are Receding In Latin America, But Uncertainty Looms

Credit conditions in Latin America have turned favorable as political risk recedes and commodity prices remain fairly stable. Although the economic recovery in the region has been sluggish, suitable external conditions and investors' appetite for yield continue supporting positive capital flows to Latin America; this trend should continue through the rest of the year. This environment has also relieved pressure over currencies and inflation, paving the way for accommodative monetary policies and decreasing reference rates in most countries, although Mexico is a relevant exemption. Political risk has lessened over the past few months, especially after President Temer in Brazil dodged corruption charges; on the other hand, the ability of the Brazilian government to undertake necessary reforms remains a concern. In Mexico, anxieties around the North American Free Trade Agreement (NAFTA) renegotiation continue to decline, despite U.S. President Trump's negative statements about the agreement. NAFTA negotiations continue, and although the U.S., Canada, and Mexico have incentives to achieve a new agreement by the end of the year or early 2018 as elections approach, their ability to achieve this is still a major question mark.

However, uncertainty looms as a heavy cycle of elections approaches: Argentina's congressional elections are in October, and there are upcoming general elections in Chile (December 2017), Colombia (May 2018), Mexico (July 2018), and Brazil (October 2018). In many cases, such elections cause investors to delay their plans, negatively affecting debt issuance and, to some extent, GDP growth. Moreover, the lack of clarity with respect to U.S. policies remains and escalating geopolitical risks could heighten market volatility going forward.

S&P Global Ratings continues to expect an economic recovery in the region for 2017 and further improvement in GDP growth for 2018, although we expect that economic expansion in most Latin America countries will continue to be slow. Domestic demand has mainly driven economic growth in most countries in the region. With the exception of Argentina, investment remains lackluster. Public investment is either low or falling in most countries, given fiscal challenges and delays from corruption scandals. Private investment is sluggish in most cases, as investors wait for more clarity in the political arena as elections approach.

Overview

  • Credit conditions in Latin America have turned favorable as political risk recedes and commodity prices remain fairly stable.
  • Although the economic recovery in the region has been sluggish, suitable external conditions and investors' appetite for yield continue supporting positive capital flows to Latin America.
  • Uncertainty remains due to the upcoming heavy election cycle in the region, still unclear U.S. policies, and increasing geopolitical risk;
  • Latin American economies continued to recover in the second quarter of 2017, and we expect that trend to continue throughout the rest of the year and into 2018.
  • Latin American corporate (financial and nonfinancial) and sovereign rating actions remain balanced so far in 2017.
  • Financing conditions continue to be more supportive in Latin America, with the Institute of International Finance's Lending Survey results improving across the board from the first quarter.
  • We see continued risk for sovereigns despite recovering economies, including political risk in Brazil and NAFTA trade related risks for Mexico. Continued solid GDP growth in the U.S. and signs of accelerating growth in Europe haven't positively impacted Latin American sovereign rating trends.
  • Latin American local and regional governments' creditworthiness is likely to remain stable, except for some Brazilian states, given that they're still facing fiscal challenges while the economy recovers.
  • As economies in Brazil and Argentina begin to recover, corporate credit risk is gradually diminishing.
  • Lower GDP growth and sovereign credit quality remain the key risk drivers for the infrastructure sector.
  • Sluggish economic growth or a feeble economic recovery will limit banks' profitability across most of Latin America in 2017.
  • In the face of recent natural disasters, Mexico's insurers will likely show resilience.
  • Although economic recovery is slow, it may alleviate credit pressure in securitizations, while portfolio composition may reset.

Risks And Imbalances

Brazil's political risk has somewhat receded because President Temer avoided a corruption trial. Nevertheless, Brazil's political challenges remain, as the country needs reforms to tackle its deteriorating fiscal position and rising government debt. Furthermore, uncertainty reigns over 2018: there's no clarity about what political route the country will take after next year's election.

U.S. policies are now the top risk for Latin America as President Trump continues to carry out his agenda, by, for example, posting negative statements on NAFTA. While these conditions cause temporary anxiety among investors and episodes of volatility, markets in the region have tended to stabilize, supported by the recovering global economy, fairly stable commodity prices, satisfactory and improving domestic conditions, and continuing accommodative monetary policies in developed countries. On the other hand, the possibility that the U.S. could walk out of the agreement remains, although the possibility is low and not in our base case. Mexican officials have publicly stated this could be a potential outcome and a contingent scenario should be considered. In our view, NAFTA negotiations will bring anxiety and volatility to the markets over the next few months.

Furthermore, risks linger because investors' sentiment remains fragile. We believe that capital flows are vulnerable to negative developments in the external or domestic arenas. Events such as an escalation of tensions between North Korea and other countries, accelerating monetary tightening in the U.S., or falling commodity prices could result in a sudden shock to portfolio flows to Latin America.

In absence of adverse events, we expect credit conditions to remain favorable in the region as developed economies recover, accommodative monetary conditions remain, and commodity prices are stable. In our view, this environment should allow issuers to continue financing their needs with advantageous terms.



Multiple Operators Suffer Damage to Fiber Networks from Hurricane Michael

Communications providers are working to restore services in areas impacted by Hurricane Michael, but storm debris, power outages and significant fiber damage are hindering progress in those counties most devastated by the storm.

As of Oct. 14, a number of counties along the Florida Panhandle had more than half of their cell sites down, including Bay County — home of Panama City and Mexico Beach, described as "ground zero" of the storm by U.S. Federal Emergency Management Agency administrator Brock Long — where 66.1% of cell sites were down. Similarly, neighboring Gulf County had 69.6% of cell sites down, according to data from the U.S. Federal Communications Commission.

Based on the amount of damage in the area and ongoing power outages, it could be weeks before services are restored. Long said Oct. 12 that after search and rescue, restoring communications in impacted counties is among FEMA's top priorities.

"You have to be able to communicate to appropriately respond and we are trying to do everything we can to get the private sector vendors, the Verizon [Communications Inc.]'s of the world, to get in to try to get their systems back up and running," he said.

Long added, however, that the process is not easy. "There was a tremendous amount of debris. When you look at the damage in Mexico Beach, that is where the ocean rose potentially 14 feet … and shoved buildings out of the way. When you have that type of damage, it takes time to get in and go through," he said.

Hurricane Michael made landfall Oct. 10 near Mexico Beach as a Category 4 hurricane with 155-mile-per-hour winds.

For its part, Verizon said the "vast majority" of Florida and Georgia service has been restored, with 99% of the company's network in Georgia in service and 97% of its network in Florida. But the company noted there are pockets, particularly near Panama City, where the damage is severe.

"The storm caused unprecedented damage to our fiber, which is essential for our network — including many of our temporary portable assets — to work. Our fiber crews are working around the clock to make repairs, and while they are making good progress, we still have work to do to get the fiber completely repaired," the company said Oct. 14.

Fiber is the connecting component of a network that carries data from point to point. It is necessary for Verizon's permanent and temporary cell sites to be operational. The company noted that while it has multiple fiber paths to carry data, "The severity and intensity of the storm caused damage to all duplicate routes in the Panama City and Panama City Beach area."

In terms of wireline services, the FCC said 291,300 subscribers remain out of service as of Oct. 14, including 205,643 subscribers in Florida. The figures were down from a day earlier, when a total of 337,223 subscribers were without service, including 233,843 in Florida.

The top residential video and broadband provider in Bay County is Comcast Corp., according to MediaCensus data from Kagan, a research group within S&P Global Market Intelligence. Comcast, the largest cable operator in the U.S., said in an Oct. 12 statement that it is working to get Xfinity services back online.

"As power returns … and it becomes safe for our technicians and restoration crews, we will work to repair any damages affecting our network," the company said.

As of Oct. 15, more than 162,000 customers in Florida remained without power, including all 27,275 customers served by Gulf Coast Electric Cooperative. The cooperative said in an Oct. 12 Facebook Inc. post that its distribution system "suffered catastrophic damage"

In Gulf County, the top residential video provider is AT&T Inc.'s satellite video service DIRECTV, according to MediaCensus data, while the top residential broadband provider is Mediacom Communications Corp., the fifth-largest cable operator in the U.S.

Mediacom said Oct. 14 that its recovery efforts are underway but its network in Florida has 14 miles of severely damaged fiber near Walton County, as well as 25 miles of damaged fiber east of Panama City that is obstructing video transmission from Gulf County to Walton County.

"Our current priority remains focusing on repairing damage to our high-speed data transport network and main transmission facilities and repairing downed lines where we have access to the area. We have outages from widespread loss of commercial power along with downed lines, and structural damage throughout our systems," the cable operator said.



Factbox: Hurricane Michael Impact Turns from Production Loss to Demand Destruction

Houston, Oct. 11 2018 — Hurricane Michael made landfall at the Florida panhandle as a Category 4 hurricane Wednesday with 155 mph winds, quickly destroying demand for power, natural gas and refined oil products. Shut-in oil production rose modestly from Tuesday to over 700,000 b/d, but the storm has stayed east of much of the region's production, which means supply should be back online quickly.

Meanwhile, the severity of the storm has surprised to the upside, which could a mean longer lasting and more severe impact on demand for power, natural gas, refined products and ultimately crude oil.

"We expect the impact on refined products demand to be below that of previous hurricanes in the Gulf Coast such as Harvey in 2017, as the region impacted by Michael has lower population density than Houston ... Nevertheless, the impacts are favoring the high side of our estimates given the sheer severity of the storm," said Claudio Giamberti, Head of Demand and Refining at S&P Global Platts Analytics.

As of 7 pm EDT, the eye of Michael was moving over southwestern Georgia with maximum sustained winds still at 100 mph, according to the National Hurricane Center. The storm is expected to move northeast across the Carolinas before heading back out to sea Friday morning.



Factbox: Oil, Gas Production Declines Intensify as Hurricane Michael Approaches

Houston, Oct. 09 2018 — With Hurricane Michael expected to make landfall Wednesday mid-day in the Florida panhandle as a Category 3 hurricane, oil and gas producers continued to shut in production Tuesday, leading to a drop in output and rise in prices.

Shut-in Gulf of Mexico oil production more than doubled from Monday to nearly 700,000 b/d Tuesday. That drop in output contributed to WTI rising to nearly $75/b, with Gulf Coast sour crude Mars rising concurrently.

Natural gas prices followed suit, with Henry Hub reaching its highest level since January. That strength could be short lived as power outages lead to falling demand for natural gas for generation.



Factbox: Utilities, Oil Producers Brace for Hurricane Michael Along U.S. Gulf

Houston, Oct. 09 2018 — With Hurricane Michael expected to make landfall on the Florida Panhandle as a Category 3 storm Wednesday, offshore oil and gas producers were busy evacuating crews and shutting in production Monday. By mid-day, nearly 20% of Gulf of Mexico oil production had been taken offline. That number will likely have risen when reported Tuesday as operators continued to shut down platforms Monday afternoon.

Meanwhile, just 24 days after Hurricane Florence made landfall, electric utilities were gearing up for Hurricane Michael restoration efforts by staging crews and supplies in the storm's path. Lost power demand is likely to have a knock-on effect on natural gas demand and prices.

After it brings over 100 mph winds to the western-most portion of Florida, Hurricane Michael is expected to turn northeast, bringing wind and rain to Alabama, Georgia and the Carolinas before heading back out to sea. Thiis article covers the key takeaways across commodities.