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Credit FAQ: How The COVID-19 Pandemic Has Affected Sovereign Creditworthiness In Latin America And The Caribbean

Given the COVID-19 pandemic and resulting global economic recession, S&P Global Ratings has recently reviewed most of its sovereign ratings, which has led to a number of rating actions. A disproportionately large number of the recent downgrades and negative outlook revisions have been on sovereigns in Latin America and the Caribbean. This is largely because many of these sovereigns' economic and fiscal profiles were already quite weak prior to the pandemic.

Below are answers to some questions we've been receiving regarding our Latin American and Caribbean sovereign ratings.

Frequently Asked Questions

What have been the trends in S&P Global Ratings' sovereign ratings since the start of the global economic downturn?

We have reviewed over two-thirds of our sovereign ratings globally since early March, when lockdowns started pushing economies into severe recession. Our current assumption is that the COVID-19 pandemic will peak in mid-2020, with an economic recovery starting late in the year.

We have lowered over one-fifth of all our sovereign ratings, and after the downgrades we assigned negative outlooks to five of them. We've also revised our outlooks on 15% of the reviewed sovereigns to negative from stable. Across all 135 rated sovereigns, the distribution of outlooks is firmly tilted to the downside. However, despite our forecast of economic contractions and widening fiscal deficits in the majority of rated sovereigns, we affirmed more than half the sovereign ratings we reviewed.

Why has S&P Global Ratings affirmed so many of its sovereign ratings despite the heightened uncertainty?

The overall financial health of most governments will be weaker this year. This could lead to the conclusion that the pandemic and global downturn must result in lower sovereign ratings across the board. However, we believe it's important to distinguish between the short- and long-term implications of recent developments.

We've designed our sovereign criteria to allow ratings to withstand short-term fluctuations within different economic cycles. Our evaluations of each sovereign's different characteristics--including its room to maneuver fiscally and its ability to support its economy through policy flexibility--are an important factor in our analysis of such fluctuations. In our quantitative analysis, we have ranges for the different variables that influence the rating, and many of the ranges deliberately overlap. This allows us to differentiate between transitory fluctuations and underlying trends as opposed to being confined to a strict quantitative outcome.

What actions has S&P Global Ratings taken on sovereign ratings in Latin America and the Caribbean?

We've affirmed our ratings on only 12 of the 29 (just over 40%) sovereigns in the region, which is lower than the global average. We've either lowered the other 17 or revised the outlooks downward, mostly to negative from stable but in two cases to stable from positive.

Among the 12 regional sovereigns that have investment-grade ratings (see Table 1), the ratings on only four--Peru, Uruguay, Turks and Caicos, and Montserrat--remain unchanged since the start of the pandemic. We either lowered the other investment-grade ratings or revised the outlooks.

Table 1

Changes In Investment-Grade Latin American And Caribbean Sovereign Ratings Since March 2020
Sovereign Downgraded? Outlook revised to negative? Rating as of May 21, 2020
Bermuda* No No A+/A+
Chile No Yes A+/AA-
Aruba No Yes BBB+
Panama No Yes BBB+/BBB+
Peru No No BBB+/A-
Turks and Caicos Islands No No BBB+/BBB+
Curacao Yes Yes BBB/BBB
Mexico Yes Yes BBB/BBB+
Uruguay No No BBB/BBB
Trinidad & Tobago Yes No BBB-/BBB
Montserrat No No BBB-/BBB-
Colombia No Yes BBB-/BBB
*Outlook revised to stable from positive.

Seven of the 17 speculative-grade sovereign ratings (see Table 2) are unchanged: Paraguay, Guatemala, Honduras, Costa Rica, Barbados, El Salvador, and Nicaragua. Again, we either lowered the others or revised the outlooks.

We currently have 'SD' (selective default) ratings on three sovereigns--Argentina, Venezuela, and Ecuador--though only one (Ecuador) relates to the pandemic. The Venezuela rating has been 'SD' since 2017. Similarly, Argentina defaulted in August 2019, prior to the pandemic and global downturn, when the government unilaterally extended the maturities of all its short-term debt. It then defaulted on other debt in December 2019, January 2020, and April 2020. We assigned an 'SD' rating to Ecuador on April 8, 2020, after the government launched a consent solicitation with bondholders to delay interest payments on various global bonds until mid-August while it engaged with investors to reprofile its debt.

Table 2

Changes In Speculative-Grade Latin American And Caribbean Sovereign Ratings Since March 2020
Sovereign Downgraded? Outlook revised to negative? Rating as of May 21, 2020
Bahamas Yes Yes BB/BB
Paraguay No No BB/BB
Brazil* No No BB-/BB-
Dominican Republic No Yes BB-/BB-
Guatemala No No BB-/BB
Honduras No No BB-/BB-
Bolivia Yes No B+/B+
Jamaica No Yes B+/B+
Costa Rica¶ No No B+/B+
Barbados No No B-/B
El Salvador No No B-/B-
Nicaragua No No B-/B-
Suriname Yes Yes CCC+/C
Belize Yes Yes CCC/C
Ecuador Yes -- SD/SD
Argentina Yes -- SD/SD
Venezuela No -- SD/CCC-
*Outlook revised to stable from positive. ¶The outlook remained negative.
Why has the Latin America and Caribbean region had a disproportionately large number of negative rating actions?

On a global basis, the majority of our recent negative rating actions have been on speculative-grade sovereigns, and most of these have been in emerging markets. Much of Latin America and the Caribbean falls into those two categories.

However, there are distinct differences among emerging market sovereigns, as some are more vulnerable to negative shocks than others. Some sovereigns have implemented fiscal and monetary stimulus to support their economies, but the reach and effectiveness of those steps has been more limited than those of developed economies. In some cases--particularly in Latin America, the Caribbean, and Africa--the economic and fiscal outlook prior to the pandemic was already quite weak. Moreover, in many cases the erosion of credit quality stemming from the effects of the pandemic will be structural and long-lasting, which the lower ratings reflect.

What are the main factors that have contributed to the negative rating actions in Latin America and the Caribbean?

Beyond limited fiscal and monetary flexibility, and sometimes a weak external profile, many countries in the region depend on tourism, remittances, and commodity exports, all of which will suffer this year. Moreover, the region as a whole has weaker GDP growth prospects than other parts of the world do (see chart).

A country's rate of per capita GDP growth is an important variable in our rating analysis, as rapid growth typically spills over into better fiscal revenues and stronger public finances. In addition, countries with higher long-term GDP growth prospects are in a better position to stabilize and reverse a short-term deterioration in their public finances.

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Given the narrow economic base of Caribbean sovereigns, why did S&P Global Ratings affirm the ratings/outlooks on some of them despite recent developments?

We downgraded or assigned negative outlooks to some Caribbean sovereigns because of a deterioration or potential deterioration in their economic growth prospects, fiscal flexibility, or external position as a result of the pandemic. In contrast, we affirmed other ratings when we believed that within our current assumptions, their rating strengths are sufficient to counterbalance the negative impacts of the pandemic, including lower tourism. The sovereigns we affirmed--Bermuda, Turks and Caicos, Aruba, and Montserrat--typically benefit from strong institutional frameworks, often based on ties with--and support from--higher-rated sovereigns. In some cases, such as in Aruba and Curacao, this support is materializing. Other regional sovereigns, such as Barbados and Jamaica, have strong ties to or support from multilateral-lending institutions that should sustain their external liquidity and set the stage for economic recovery.

Why did S&P Global Ratings affirm all sovereign ratings and outlooks in Central America?

Our ratings on Central American sovereigns (El Salvador, Guatemala, Nicaragua, Honduras, Costa Rica) are lower than for Latin America as a whole, ranging from 'BB-' to 'B-'. Therefore, our assessments of their creditworthiness already reflected many of the economic vulnerabilities that recent negative events have highlighted. In addition, most of these sovereigns have good access to official funding from abroad, helping to limit the potential erosion of their external liquidity during the downturn. Low oil prices might also help balance the loss of current account receipts this year from falling exports and remittances. Such factors--along with likely limited countercyclical fiscal policy to cushion the impact of the downturn--should help these ratings remain at current levels.

Why did S&P Global Ratings assign negative outlooks to two of the highest-rated sovereigns in the region--Chile and Panama--while maintaining stable outlooks on Uruguay and Peru?

The trajectory of GDP growth in these countries was a key factor in these decisions.

In Chile, the economic downturn, rising global uncertainty, and the impact of domestic public protests last year could limit GDP growth prospects over the coming couple of years. These factors could also contribute to an erosion of public finances, leading to a downgrade. Similarly, in Panama, the negative outlook reflects the risk that the impact of the pandemic and global economic downturn could undermine trend GDP growth prospects, which are key to stabilizing the sovereign's long-term financial profile.

In Peru, our stable outlook reflects our view that GDP will contract by 3% in 2020, followed by a steady and solid recovery of 4% on average over the following three years. Because of recovering growth, we assume fiscal deficits will remain contained after the one-off expansion in 2020. We also expect Peru's external profile will remain resilient despite global volatility.

In Uruguay, we expect economic recovery and a corrective fiscal policy will contribute to reversing the near-term deterioration in the sovereign's fiscal and debt profile, limiting the long-term negative impact on its financial profile. We expect GDP to fall 3% in 2020 but grow 5% in 2021, averaging 2.8% growth during 2022-2023. Major planned investments--including a US$800 million public-private partnership railroad and an investment by Finland-based forest and paper company UPM-Kymmene Corp. for US$3 billion--should sustain medium-term GDP growth.

How does S&P Global Ratings assess the risks of further social protests in the region, such as those that began last October in Chile?

There is a risk that a prolonged recession, the suffering caused by the pandemic, and other events could trigger public protests in several parts of the region. The impact of protests will vary across countries based on the nature and strength of domestic institutions and political leadership.

In assessing the potential impact of public protests, we focus on factors that affect creditworthiness. In such situations, we assess: (i) the nature of the protests, (ii) their economic, financial and political impact, and (iii) the ability of the sovereign to manage such developments. Public protests could affect sovereign creditworthiness in a variety of ways, such as by:

  • Contributing to weaker public finances, a worse external profile, or lower trend GDP growth.
  • Affecting external flexibility and investor confidence, damaging access to financing.
  • Leading governments to delay or dilute important structural reforms that have a direct impact on sovereign creditworthiness.
  • Unleashing unpredictable political consequences, especially if there is violence.
  • Raising the likelihood of the emergence of new political leadership from nontraditional groups or movements.

We combine our analysis of such potential outcomes from the protests with an assessment of the political and economic capacity of the sovereign to respond and contain their impact. This includes both the fiscal capacity to meet demands for more spending and the institutional strength to channel discontent into dialogue that reduces investor uncertainties. We also assess whether protests could weaken predictability of policy and the strength and timeliness of policy response to potentially adverse developments.

How has the pandemic affected the sovereign credit rating on Brazil?

On April 6, 2020, we affirmed our 'BB-' credit rating on Brazil and revised the outlook to stable from positive. The outlook revision was due to the negative effect of the pandemic on Brazil's GDP growth and fiscal performance in 2020, combined with the slower-than-expected progress on its ambitious economic reform agenda. We also expect its public finances to deteriorate throughout 2020 due to higher spending and revenue shortfalls. As a result, net general government debt could increase about 10 percentage points to 66% of GDP. Despite the considerable uncertainties, we assume that the fiscal deficit will decline slowly on prospects for moderate economic recovery in 2021.

Recent political events could affect the timeliness and effectiveness of the government's response to the COVID-19 shock. Most notably, political disagreements among the branches of government and within the cabinet have become more acute in the past few weeks, which could complicate policy execution and fiscal corrections. This situation also increases the uncertainty regarding the passage and implementation of structural reforms after the crisis passes.

We could lower the ratings over the next two years if--once the effects of the pandemic dissipate--Brazil's fiscal profile remains weaker than expected for a prolonged period, harming the prospects for a slow decline in government deficits or quickening the rise in debt.

Why did S&P Global Ratings downgrade Mexico in March, and what could result in another downgrade?

The downgrade reflected the pronounced hit to the Mexican economy following the combined shocks of COVID-19--in both Mexico itself and in the U.S., its main trading partner--and lower global oil prices. These shocks, while temporary, will worsen the already weak trend GDP growth dynamics for 2020-2023, which partly reflect low private-sector confidence and poor investment dynamics.

The negative outlook signals the possibility of another downgrade over the coming 12-24 months due to uneven or ineffective policy execution, potentially weakening public finances, or higher off-budget contingent liabilities. We assume that the government will take steps to contain our projected widening of the fiscal deficit and the increase in the sovereign's debt burden that resulted from the economic downturn. However, prolonged poor fiscal performance and a corresponding rise in debt burden, or the risk of potentially weak policy implementation, could lead us to lower the rating again. In addition, potential increases in contingent liabilities from the energy sector could worsen the sovereign's debt burden and lead to another downgrade.

How does S&P Global Ratings view the use of countercyclical fiscal and monetary policy in Latin America? Is it good or bad for the region's sovereign ratings?

Sovereigns have differing capacities to effectively use countercyclical monetary and fiscal policies without weakening economic stability and public finances. Those that have greater capacity to effectively use their substantial monetary and fiscal flexibility will likely be able to cushion the impact of the pandemic in the short term and postpone or alleviate its potential long-term impact. In the near term, there likely won't be many downgrades among advanced economies with relatively high ratings. However, most sovereigns in Latin America and the Caribbean have only moderate or limited capacity to use countercyclical policies without weakening their creditworthiness.

Chile, which has comparatively low general government debt and ample monetary flexibility, is in a good position to use stimulus to contain the impact of the economic downturn. Similarly, Peru has greater capacity than most in the region to employ countercyclical policies. Others, such as Colombia, have only moderate capacity for such policies due to a weaker financial profile. At the other extreme, Argentina has very little capacity to loosen fiscal or monetary policy due to already high inflation, severe pressures on the exchange rate, and the loss of access to market financing for its fiscal deficit.

Related Research

  • An Overview Of Sovereign Rating Actions Related To COVID-19, May 11, 2020
  • Sovereign Ratings And The Effects Of The COVID-19 Pandemic, April 16, 2020
  • What's Behind S&P Global Ratings' Actions On Certain Caribbean And North Atlantic Sovereigns? April 16, 2020

This report does not constitute a rating action.

Primary Credit Analyst:Joydeep Mukherji, New York (1) 212-438-7351;
joydeep.mukherji@spglobal.com

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