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Moody's holds stable outlook for LatAm but points to rising political risks

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Moody's holds stable outlook for LatAm but points to rising political risks

Moody's on Jan. 9 said it is holding a stable outlook for Latin American sovereign creditworthiness in 2019, with moderately higher economic growth than 2018, despite rising political risks following the elections in Mexico and Brazil.

In making its outlook, the rating agency also highlighted "improved debt structures that mitigate liquidity risks, and moderate balance-of-payments risks."

It forecasts regional growth of 2.0% on average in 2019, compared to 1.5% in 2018. However, commodity prices will recover only mildly and oil prices will remain "volatile," Moody's predicted.

The rating agency expects slower global growth during the year due to the trade tensions between the U.S. and China and waning fiscal stimulus in the former country.

"The contentious international trade environment is likely to weaken global demand. The Mexican, Central American and Caribbean economies will be most impacted by the trade rift because of their high exposure to demand from the [U.S.]," Moody's said.

However, the rating agency also said Latin America's biggest downside risk stemmed from domestic challenges related to changes in political dynamics following major presidential elections in 2018, with increasing political polarization and a dissipating political center.

Moody's said an "adverse" investor sentiment in Mexico reflected concerns about the decision-making process of the new administration of President Andrés Manuel López Obrador and its ability to deliver on promises of fiscal responsibility.

The final outcome of pension reform in Brazil will be a key factor affecting the country's medium-term sovereign credit prospects. While the election of President Jair Bolsonaro had had a positive effect on investor sentiment, Moody's also warned that "high unemployment reflects a large output gap and persistently low levels of private investment" in Brazil.

"Slower global growth in 2019 and elevated government debt burdens will limit upward rating pressures. Ultimately, the policies that the region's governments adopt will be key in determining sovereign credit trajectories," Moody's said.

At the start of 2019, 29 Moody's-rated sovereigns in the region have a stable outlook while two hold a positive outlook and six a negative outlook.