Fitch Ratings pointed out, this last Monday, March 7, that the impact of the high prices of raw materials such as the highest of metals will benefit Chile (A-/Stable) and Peru (BBB/Stable) (although a major shock to global growth could cause prices to fall), but as importers of Petroleumthe benefit will be offset by higher prices of it.
Higher costs would be positive for the region’s net oil exporters, Colombia’s high deficits (BB+/Stable) would be reduced, Ecuador’s fiscal financing needs (B-/Stable) would recede and its external liquidity would possibly strengthen. For Mexico (BBB-/Stable) that exports crude oil, tax benefits decrease due to lower gasoline tax collection as oil prices increase.
Meanwhile, higher agricultural prices would benefit some countries, including Argentina (CCC), Brazil (BB-/Negative) and Uruguay (BBB-/Stable)
Along these lines, Fitch maintained that the external and fiscal accounts and the inflation internal will affect the credit quality of Latin American sovereign credits due to the war between Ukraine and Russia, given the limited exposure to the two countries.
“The share of imports is equally low and the country is not an important source of investment. Instead, the main channel of transmission to the Latin American economies will be the higher prices of raw materials, especially oil. The materiality will depend on the scale and duration of the shock, and whether it significantly affects global growth,” the rating agency specified in a press release.
However, production constraints will prevent a further revenue windfall and a near-term improvement in GDP growth. GDP true in these countries.
“Russia’s invasion is likely to hamper agricultural production and exports; for example, Russia and the Ukraine are important producers of fertilizers”, highlights Fitch.
On the contrary, the firm warns, those who would bear the brunt are several countries in Central America and the Caribbean that depend largely or totally on imported energy. “Higher prices will put pressure on energy importers’ current account balances and exchange rates.”
“Last year’s fiscal upgrade helped stabilize some Latin American sovereign ratings, but the absence of a Positive Outlook highlights the long-term growth and fiscal challenges facing sovereigns in the region. Where fiscal or external financing constraints are already severe, this is reflected in already low ratings,” he added.
Fight against inflation in check
The increase in energy prices and the foods it could delay the disinflation process and extend or intensify the monetary tightening cycle for the region. Along these lines, Fitch highlighted the work carried out by the different central banks in the region.
“Monetary policy responses so far have been appropriate to preserve the credibility of hard-earned inflation targets, but additional inflationary pressures and policy tightening could hamper consumption and investment,” he said.
Since mid-2021, eight Latin American sovereigns have announced measures to help ease the burden on households, such as freezes on regulated prices, with fiscal costs.
“Fiscal recoveries among Latin American sovereigns in 2021 were much stronger than we expected, as tax collections grew mostly faster than nominal GDP. But reining in spending will be a challenge given persistent social and political pressures that have been exacerbated by rising prices,” Fitch said.
Source: Larepublica
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