Moody's sees LatAm creditworthiness under pressure in 2021

Moody's sees LatAm creditworthiness under pressure in 2021

Economy & Policy Andean Caribbean Central America Latin America Coronavirus

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The economic outlook for the Latin America and Caribbean (LAC) region is expected to rebound, albeit in sluggish fashion in 2021, leaving sovereign credit conditions under pressure from balancing expanded economic activity against increased social welfare spending needs which were already a major concern before the pandemic, a new report on Thursday said.

"As LatAm sovereigns emerge from the pandemic with higher debt and interest burdens, we expect fiscal strength to weaken. And with economic output unlikely to return to the pre-crisis levels this year, governments will face difficulties stabilizing and eventually reversing the negative credit trends of 2020," Moody's said in a forecast of 2021 credit trends.

The fiscal stimulus applied by governments in the region is expected to be withdrawn gradually, with half of what they have applied being removed in 2021, the firm said.

Moody's said there is a danger that while international borrowing costs are expected to remain low, for countries that turn to financing deficits through local markets they run the risk of taking resources away from the private sector by crowding-out domestic financing pools, "inhibiting the supply of credit to the economy and potentially slowing the pace of recovery."

In the wake of the coronavirus pandemic slamming the region, already weak fiscal positions of some nations and others which were heavily reliant on energy and tourism saw their credit positions savagely curtailed. The number of sovereign defaults, four, was the highest on record for a signal calendar year, Moody's said. There were 21 negative credit actions overall with just two positive actions assigned. The four countries that defaulted on sovereign debt were Argentina, Ecuador, Belize and Suriname. 

Moody's estimates that Latin America's gross domestic product will increase, on average,  by 4.5% in 2021. Most nations will see positive growth from a favorable base effects and the rebound that started in the second half of 2020 will extend into 2021. Earlier this week, the World Bank said economic growth the LAC region this year is forecast to rise 3.7% on expectations that the COVID-19 pandemic mitigation measures will ease while prices for commodities, a main source of revenue for many nations, will see increases.

"Although the cyclical rebound in 2021 will be supported by the easing of lockdown measures, deficiencies that exacerbated the shock - including higher structural unemployment as a result of the economic contraction - will inhibit growth in 2022 and beyond," Moody's said.

Economic recoveries in important economies such as the United States and China will help drive some or the recovery. Moody's expects that demand from domestic economic activity "will derive support from the continuation of credit guarantees and other liquidity measures, tax deferrals and increased public investment in the context of countercyclical measures," already put into use by some nations to varying degrees. Countries with limited ability to tap fiscal resources such as Argentina, Bolivia, Costa Rica, Ecuador and Venezuela "will be unable to engage public investment as part of their policy toolkit to support their recoveries," Moody's said.

Moody's expects overall economic output growth to be slow and uneven, with nations such as Chile, Colombia, and Peru reaching 2019 output levels by 2022 while Argentina, Brazil and Mexico not recovering those levels until 2023. Nation's heavily reliant on tourism are not expected to see passenger air travel hit pre-pandemic levels until 2023 and cruise ship tourism to take even longer. 

Labor markets, which saw erosion and in particular the informal employment sector hit even worse, will not see companies investing because of uncertainty and deterioration of their balance sheets, meaning putting people back on payroll will be slow. As a result there are expectation of significant changes in consumption, investment and production.

The lack of work exacerbates higher poverty rates and income inequality, setting back hard earned social and economic progress. It risks re-igniting social tensions that would weigh on economic activity.

"Because social demands are likely to be more permanent in nature, they increase the likelihood that politicians will be tempted to favor populist policies that would compromise medium-term fiscal prospects," Moody's said.