NEW YORK--()--Latin America's GDP is expected to pick up to 3.7% in 2013, from an estimated 2.8% in 2012, underpinned by favorable domestic demand dynamics, sound policies and continued macroeconomic stability, according to Fitch's 2013 Latin America Sovereign Outlook report. Nonetheless, the sovereign credit cycle could stall next year, with only two countries - Uruguay and Ecuador - currently having Positive Outlooks.
'Although selective positive rating actions are possible, weak external conditions, steady commodity prices and a lack of a significant reform drive will likely dampen the upward momentum in Latin America's sovereign ratings that was seen in recent years,' said Shelly Shetty, Head of Fitch's Latin America Sovereign Group. 'Moreover, positive rating actions will increasingly depend on improving institutional and structural factors as more sovereigns enter the investment grade category.'
Currently, the Outlooks for Venezuela, El Salvador and Argentina's local currency IDRs are Negative. Countries with highly speculative ratings will likely be more vulnerable to a challenging external environment, as they have less capacity to maneuver and generally exhibit weaker policy frameworks.
The regional growth forecast is heavily influenced by the expected rebound of Brazil, although there are downside risks associated with its recovery. Bolivia, Chile, Colombia, Panama, Peru, Suriname and Uruguay are expected to perform better than the regional growth average of 3.7% in 2013, with Panama being the fastest growing economy in the region. Economic growth in Brazil and Mexico is forecasted to be close to the regional average. On the other hand, Argentina, El Salvador, Jamaica and Venezuela are likely to underperform.
'Latin America should continue to exhibit external resilience, as most countries benefit from low current account imbalances, steady foreign direct investment flows and a substantial increase in international reserves,' added Shetty. The region's stock of international reserves has increased from USD494 billion in 2008 to an estimated USD812 billion in 2012. Continued improvements in currency composition and maturity profiles render government debt less vulnerable to exchange rate shocks.
Fiscal reforms have proceeded in some countries to strengthen fiscal accounts and address fiscal imbalances. However, Fitch foresees limited fiscal consolidation in 2013, with the result that the region's government debt burden will decline only slightly in 2013. While significant reforms to accelerate productivity growth, improve competitiveness and achieve greater economic diversification are currently not anticipated, Mexico's recent labor reform and Brazil's announcement of an infrastructure plan are considered as positive steps.
At present, the main downside risks to Latin American sovereign ratings are external and include a potential U.S. fiscal cliff, an intensification of the eurozone crisis and a faster-than-expected deceleration in China. Domestically, political risks remain relevant in certain countries while fast-paced credit growth needs to be monitored in some.
The election cycle in 2013 is relatively light with Presidential and legislative elections in Chile and Ecuador. Argentina will also hold legislative elections next year.
Fitch's special report '2013 Outlook: Latin America Sovereigns - Stalling Sovereign Creditworthiness' is available at 'www.fitchratings.com'.
Additional information is available at www.fitchratings.com.
Applicable Criteria and Related Research: 2013 Latin America Sovereign Outlook