Recently observed weaknesses in the currencies of emerging markets, including in Latin America, are credit negative especially for countries with large external funding needs, Moody's said June 4.
In Latin America, current conditions do not put significant downward pressure on most sovereigns, Moody's said in a report. However, "country-specific macro imbalances" in Argentina have resulted in significant pressures, the rating agency said.
Argentina's large deficits and persistently high inflation, coupled with the government's decision to ease inflation targets and a capital gains tax on foreign holdings of peso-denominated debt instruments, have led to the slump in the peso.
Elsewhere in the region, countries such as Costa Rica, Chile and Paraguay are also vulnerable due to their large external borrowing requirements relative to reserves.
There are mitigating factors, however, in Chile and Paraguay that stem credit risks, Moody's said, such as Chile's steady foreign-currency revenue stream and Paraguay's current account surpluses.
Meanwhile, Brazil's credit weaknesses root from domestic factors including challenging fiscal dynamics, the rating agency added.
Currency depreciations across the region were largely due to lower capital inflows, driven by a stronger performance from the U.S. dollar. Portfolio inflows into the region averaged $6.3 billion per month from January to April, lower than the $10 billion monthly average for the 2010 to 2014 period, Moody's said, citing data from the Institute of International Finance.
