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Sociopolitical risks undermine investor confidence in Latin America, warns Moody’s

Sociopolitical risks undermine investor confidence in Latin America, warns Moody’s

Inflation, the high cost of living and the lack of access to social services, as well as the growing political tensions in Latin America undermine governance and aggravate credit risk, the Moody’s rating agency warned in a report on Monday.

From Argentina, passing through Chile, Brazil, Colombia, Peru or Mexico, the sociopolitical risks have become more and more “prominent” and feed back the “social discontent” and the “political tensions” affecting investments and investor confidence, says the rating agency that studies the largest countries in the region.

The COVID pandemic, added to high inflation and lower growth in Latin America, made the “governments have fewer resources to deal with social problems that have become more serious”, says Ariane Ortíz-Bollin, vice president of the agency and co-author of the report.

The novelty of this report is that we are looking to link political risks with the scores we use to read social risks in the balance.” published by Moody’s so that “investors know what is behind those scores“, Explain.

The report states “four transmission channels”: governance risks, economic policy changes, economic performance and financial volatility, which have “evolved to become more important factors of credit risks”, says Ortíz-Bollín.

Although limited access to basic services and unequal coverage of education, healthcare and job opportunities are common problems in many emerging markets, Latin America stands out for the “income inequality“, which can “complicate the design and implementation of public policies”.

Corruption and weak institutions can also be associated with greater social risks, the authors warn.

Moody’s, which cannot make recommendations but can highlight risks for investors, points out from Brazil that policy changes “could lead to government intervention in state-owned enterprises and government banks”.

In Chile, social risks are “moderately negative”. “As the government seeks to address social demands for better quality and coverage of services, the sectors most exposed to policy changes include banks, mining companies, and energy projects.”.

In Colombia, the “ambitious” reform agenda of the government of the leftist Gustavo Retro, “intensifies the risk of policy changes, which affects investor confidence.”

In the case of Mexico, changes in energy policy “have slowed down private investment in the sector, particularly in renewable energy” and public companies such as CEMEX and CE have increased their reliance on recurring government support.

Concerns about violence and security also limit economic growth and investment in Mexico.

In Peru, a resurgence of social protests would create governance risks, posing a threat to sovereign, banking, tourism and retail issuers, the report warns.

Source: Gestion