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Fitch sees 'room for further ratings deterioration' in LatAm

Latin American sovereigns, which faced negative ratings pressure for months, could see further ratings deterioration, Fitch Ratings said Oct. 18.

The rating agency noted that countries in the region with negative outlooks outnumber those with positive outlooks.

Fitch's negative ratings actions over the past two quarters include the downgrades of Nicaragua and Ecuador, the revision of Argentina's outlook to stable from positive and the revision of Aruba and Uruguay's outlooks to negative from stable. "While most sovereign ratings in the region remain on stable outlook, there is room for further ratings deterioration with more countries on negative outlook than on positive outlook," the rating agency noted.

Tightening external financing conditions, challenging growth dynamics and country-specific risks serve as constraints to the region's sovereign ratings, Fitch said. Countries like Argentina, Brazil, Costa Rica and Ecuador have complicated fiscal and government debt prospects, in addition to facing constraints on external or domestic market access, the rating agency noted.

Although Argentina's financing agreement with the International Monetary Fund anchors its credit profile amid a currency crisis and a depressed growth outlook, execution risks still linger due to the incoming elections and President Mauricio Macri's declining approval rating, Fitch said.

A shift in leadership in two of the region's biggest economies — Brazil and Mexico — will also have a material impact on the countries' fiscal metrics. Despite a favorable market reaction after the first-round election in Brazil, in which market-friendly candidate Jair Bolsonaro took the lead, Fitch noted that "uncertainty remains with regard to the pace and scope of fiscal reforms (including the social security reform) that can be implemented by the next administration in light of Brazil's large fiscal deficit and rising debt burden, and the heavy burden of mandatory spending."

Meanwhile, in Mexico, the 2019 budget set to be submitted in December will provide a clearer view on the fiscal plans of President-elect Andrés Manuel López Obrador, which advocates for increased social and capital spending, Fitch said.