Economic recovery in Brazil and Mexico will support the performance of their respective structured finance sectors in 2020, while the recession in Argentina will take a toll on the sector's prospects next year, Moody's said in a report.
Although Mexico's economic growth will be slow, it will still cushion high credit quality for new originations and maintain the performance for existing transactions, according to Moody's. A decline in private investment will be offset by a rise in mortgage demand, keeping the level of issuance flat for 2020.
Moody's expects a lower default risk in the country because most consumer collateral is paid through automatic payroll deductions. "Among revolving pools, credit quality of existing deals is expected to remain strong because of robust eligibility criteria," it noted.
In Brazil, credit quality of new collateral and existing deals' performance will gain from a recovering economy and historically low interest rates. Economic growth will increase consumers' and corporations' income, hence boosting their ability to service debt. Meanwhile, debt service obligations will decrease because of low rates.
Issuances will also increase due to the modest economic expansion, Moody's said. "Broad economic growth will spur loan demand, creating revenue streams for lenders and enabling originators to maintain prudent underwriting standards for consumer and corporate borrowers," the rating agency noted.
On the other hand, Argentina's dampened economic environment amid high inflation and unemployment will weigh on new consumer and debt collateral. Within the country's structured finance sector, consumer financing is the primary asset class and is predominantly made up of unsecured loans.
Exposure of securitized assets to highly vulnerable income groups will result in poor performance for new securitizations, while higher underwriting standards will adversely impact liquidity of some borrowers, Moody's said.
Credit quality and performance in Argentina will be buoyed by transaction structures, especially under tighter underwriting criteria, but the economic contraction is expected to keep origination and issuance at low levels, the rating agency said. "Changes in underwriting policies will be insufficient to fully offset further performance deterioration for new pools as the recession continues," it added.