US Political Polarisation, China Slowdown are Main Risks for Latin America

Slow growth stemming from US political polarisation and sluggish growth in China are the main risks facing Latin America’s larger economies, according to Fitch Ratings’ newly-published ‘LatAm Risk Radar’.

“The risks associated with the US political stalemate and the slowdown in China are affecting economies around the world – not just Latin America,” said Peter Shaw, Fitch’s regional credit officer for Latin America.

“Continued wrangling over the debt ceiling and other fiscal issues risks derailing the modest recovery in the US, and the scenario of a material slowdown in China has become somewhat more urgent given Latin America’s reliance on commodity trade.”

Foreign funding risks have been highlighted by the recent increase in risk aversion and volatility in international capital markets in light of the prospect of tapering of asset purchases by developed central banks and the accompanying risk of policy mistakes.

Credit growth remains in double digits in many of Latin America’s economies, though it slowed in 2013, matching slower economic growth. Sustained credit growth has resulted in a steady rise in consumer indebtedness, although debt service pressures are a bit less largely due to lower interest rates and longer tenors.

Inflation risk has abated in most of the region, except Brazil. Monetary easing has already occurred in some countries and counter-cyclical policies can be employed to varying degrees if external conditions deteriorate and the deceleration in regional economies gathers pace.

Government interference continues to muddy the outlook and operating environment in several lowly rated countries, most notably in Argentina and Venezuela and, to a lesser extent, Brazil.
The ‘LatAm Risk Radar 2013’ report is available on www.fitchratings.com.