Changes to Latin sovereign credit ratings last year by the three big agencies -Standard&Poor’s, Moody’s Investors Service and Fitch-have reinforced the division between winners and losers in the region. The biggest winner clearly is Mexico, which Moody’s raised to investment grade (Baa3) back in March 2000. Some investors were surprised by the timing of the move, which came four months ahead of the historic presidential elections that ended 71 years of rule by the Institutional Revolutionary Party, but Moody’s judgment now appears vindicated.
Mexico’s political stability and its integration with the US economy lay behind Moody’s decision and “set Mexico apart from the rest of the region,” according to Luis Ernesto Martínez Alas, a Moody’s vice president. For other countries in the region, however, Martínez says, “External shocks are the main source of vulnerability, although the precise impact will differ in each case.”
S&P still rates Mexico a notch below investment grade at BB+. The rating agency will not commit itself on the timing of an adjustment to its rating and Managing Director Laura Feinland Katz insists that differences in ratings across the agencies of one notch are not unusual. S&P director Bruno Boccara points out there is a risk of overheating in Mexico and cautions that the non-oil current account deficit is as high as it was before the onset of the Tequila crisis in 1994-1995.
Nevertheless, S&P does have a positive outlook on Mexico and the expectation in the market is that it is a matter of when, not if, S&P will upgrade. As Adam Weiner, director of emerging markets currency strategy at ING Barings in New York, says, “S&P has been slow on Mexico.”
Fitch has also been holding off on raising Mexico to investment grade. Richard Fox, Fitch’s senior director in sovereign ratings, is waiting to see “how the new government beds in” in relation to the 2001 budget and its ability to work with Congress. Fox also sees the need for tax and energy sector reforms. He says the agency has become more comfortable with Mexico’s short-term debt position and “while one can’t take things for granted, it is a case of so far, so good”.
Brazil has also basked in the approval of the agencies. S&P upgraded Brazil’s credit rating to BB- from B+ at the beginning of this year, for the first time in almost three years. Moody’s is also positive on Brazil and raised it to B1 from B in October, with a stable outlook.
Lisa Schineller, associate director at S&P, credits the “fiscal consolidation” in Brazil since late 1998 and the success of the central bank’s inflation-targeting policies within the floating exchange rate framework since 1999.
The result of such changes is that a perception gap has opened up between Mexico and Brazil on one hand and Argentina on the other, even though Brazil now shares the same ratings from Moody’s and S&P as its South American neighbor. After putting Argentina on credit watch early in November, S&P downgraded it in mid-November, reducing it to BB- from BB and surprising observers with the swiftness of the move. Later the same month, Moody’s placed Argentina’s B1 rating on credit watch with a negative outlook.
Fitch put Argentina on negative watch last September, as economic and political problems mounted for Latin America’s largest sovereign borrower. However, the agency saw the $39.70 billion IMF-backed program-announced in December-as a lifeline. As Fitch ‘s Richard Fox says, “If they can generate a decent growth rate, the debt numbers are sustainable.” Equally, S&P’s Schineller sees the IMF-led package as a “breathing space” in which Argentina can attempt to put its fiscal house in order.
The government in Buenos Aires needs a more competitive exchange rate to help provide a growth stimulus. The agencies expect this to come about through a reduction in companies’ operating costs rather than through a currency devaluation. Fox adds that, “Fiscal policy is the key throughout Latin America. Argentina has done a lot in that regard, but it needs to do more than the others.”
The Outlook Elsewhere
Outside of the big three Latin sovereigns, the ratings agencies have generally been in negative mood. In both Peru and Colombia, says Martínez Alas of Moody’s, “Political conditions have deteriorated sharply and policy capability and implementation have suffered. In a less benign international environment, there is little room for maneuver in responding to external shocks.” Moody’s rates Peru Ba3, with a negative outlook since mid-December, while Colombia’s Ba2 ratings outlook is still stable.
“There is a distinction between the big three and the Andean states on politics,” says Fitch’s Fox, with Peru, Colombia, Ecuador, and Venezuela facing major political problems. Fitch downgraded Colombia this year to BB+ and S&P maintains a negative outlook on its BB rating, indicating that it could be lowered within the next one to three years. Although President Andrés Pastrana has introduced reforms, S&P’s Boccara still sees “a lot of obstacles” along with the risk of a clash with the activist constitutional court in pushing through reforms.
For Peru, the departure of Alberto Fujimori is seen as positive in the long term, although the political crisis that precipitated his downfall prompted a downgrade from S&P to BB- from BB on Nov. 1, largely because the country’s corruption scandal demonstrated the underdevelopment of the country’s political institutions and highlighted Peru’s “political vacuum and heightened uncertainty.”
“Overall, ” says S&P’s Feinland Katz, “there is now a clear differentiation between those countries which have chosen the path of reform, unshackled their markets, encouraged competition and become more closely tied to world markets, against those that haven’t.”