Moody's Expects Latin American Issuers to Thrive in Post-QE World
While Latin American debt issuers will face higher funding costs and reduced availability of credit as the US Federal Reserve eventually tapers quantitative easing (QE), bond issuers in the region have became better prepared to face these challenges, says Moody’s Investors Service.
Brazil, Chile, Colombia, Mexico and Peru and their banking systems have become more creditworthy, which also supports the credit quality of corporates and other bond issuers in these market , according to the credit ratings agency in a report titled ‘Latin America: Strengthened Sovereigns, Banking Systems Will Help Region Navigate a Post-QE World’.
“The region is more resilient to rising interest rates and investment outflows than it was during the financial crises of the 1990s and early 2000s,” says Mauro Leos, a Moody’s Vice President, senior credit officer and an author of the report. “Although the changing environment will not affect all borrowers in Latin America uniformly, the credit quality of the strongest Latin American sovereigns, sub-sovereigns, banks, corporates and infrastructure issuers should prove durable.”
Among Latin America’s five sovereigns – Brazil, Chile, Colombia, Mexico and Peru – strong balance-of-payments buffers and reduced reliance on cross-border funding will limit the impact of higher interest rates. Moody’s expects post-QE funding costs for the five to rise 100-150 basis points over the next 12-18 months.
Moody’s views Mexico as the most exposed to the reduced capital flows likely in the post QE-era, owing to the large inflows of capital into Mexico during the QE era. Like the rest of LatAm Five, however, Mexico’s vulnerability to tighter funding is in fact low because there is room for policy-makers in the government and central banks to make adjustments and intervene.
Although banks in the LatAm Five have increased their exposure to capital markets through using market funds to support loan growth, Moody’s views their credit risk as contained. The banks do not rely on external markets for funding, which instead is largely based on domestic deposits and ample access to local liquidity.
The credit strength of the LatAm Five sovereigns as well as banks in turn will support corporate credit quality, says Moody’s, where rated companies are adequately positioned to manage in the post-QE era. One reason is that the vast majority took advantage of accommodating capital markets and low interest rates to refinance debt, reducing the risk that refinancing usually poses.
Most of the risk foreign-currency debt creates in turn has been offset at least partially through hedges such as foreign currency revenues. Moody’s identifies airlines, steel and telecoms as the sectors most vulnerable to declines in the value of local currencies.
Latin American issuance of structured finance transactions in turn may increase as banks and corporates look for alternative sources of funding.