LatAm Q4 2012 results: Big favourites hold firm; Argentina and Venezuela still chiming alarm bells

Jeremy Weltman
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Brazil, Chile and Colombia continued their long-term ascents in Euromoney’s global rankings in 2012, despite having their scores shaved, mostly by reduced Chinese demand for raw materials and manufactures, Jeremy Weltman reports.

Argentina and Venezuela suffered from their domestic political problems and economic weaknesses, with neither country able to convince country-risk experts to reverse their appalling investor image. But other countries in the region – Mexico, Peru and Uruguay – enjoyed higher scores, underlining the long-held belief that the region still offers portfolio potential. Bolivia, a star performer in 2012, demonstrates this.

Diverse risk patterns were seen across Latin America during 2012, according to Euromoney’s Country Risk Survey, with the region’s 20 sovereigns all shifting places in the global rankings in response to the altered perceptions of economists and other country-risk experts.

However, the risks from country to country differed substantially by the end of the year, with almost 46 points separating top-rated Chile, a tier-two sovereign on 74.4 points out of 100, from high-risk Nicaragua, ensconced within the lowest of ECR’s five tiers on just 28.4 points.

The region’s safest sovereigns held firm last year, unperturbed by the eurozone debt crisis and fears of a global economic downturn. Despite some slippage in country-risk scores as 2012 drew to a close, with concerns about global economic prospects niggling away in the background, the region’s heavyweights Chile, Brazil and Mexico all improved their relative places, along with Colombia and Peru. The long-term trend improvement in risk that has aroused such investment interest in countries such as Brazil, Chile and Colombia during the past few years has remained unaffected.

Indeed, while the region has just one tier-two sovereign – Chile – several more within tier-three might soon be knocking on the door if their risks continue to ease. Brazil, on a score of 60.2, just five places and fewer than five points off a tier-two ranking, heads a list of seven tier-three sovereigns (see table) rated double-B/triple-B by the main rating agencies Fitch, Moody’s and Standard & Poor’s. All tier-three LatAms, bar Panama and Costa Rica, climbed the rankings last year.

Six more, those with more substantial risks, still reside in tier four. They range from El Salvador on 43.6 points and lying in 80th spot, to Suriname, a recent inclusion after a 15-place climb in 2012. However, it is the region’s six tier-five sovereigns where investors should adopt the utmost caution as potentially high returns come attached with considerable political, economic and structural uncertainties. The two most prominent – Argentina and Venezuela – have been unable to reverse their troublesome descent through the rankings. Both remain basket cases from a bond investor’s perspective, still raising alarm bells among risk experts.

Chile’s economic fundamentals untarnished

Chile, the only A-rated sovereign in the region, and long considered the darling of LatAm investors, remained the only tier-two sovereign in the region at the end of 2012. On 74.4, Chile has defied the rise in global risk and is now considered virtually indistinct in risk terms from the US, which ended 2012 on a score of 74.7. LatAm’s top-rated sovereign is now just two steps and less than four points away from tier-one status after a two-place rise in the rankings last year, and would become the first regional sovereign to do so.

Boosted by strong domestic demand and exports, Chile has enjoyed robust 5%-plus real GDP growth in recent years, and is well positioned to benefit from China’s expansion and its unquenched thirst for raw materials. Chile’s stability and prosperity were just two of the factors highlighted by the IMF’s managing director Christine Lagarde recently at the conclusion of her visit to Chile in December. She also noted that Chile’s “... strong economic policy framework, including a fiscal rule, inflation targeting and exchange rate flexibility has underpinned the economy’s resilience in the face of the global financial crisis and the devastating earthquake in February 2010.”

Chile remains vulnerable to deterioration in the global economic climate and to falling commodity prices as the world’s leading copper producer. Its current account deficit, too, at just over 3% of GDP, is on the margins of comfort. However, the country scores higher than the US for its economic assessment (see chart) and with sound institutional underpinnings, ample transparency and a solid track record of capital repayment/repatriation, its political risks are extremely low in a South American context.

Mexico gaining on Brazil

Brazil, meanwhile, has seen its score slip as the country has come to terms with a more difficult economic environment. All five of the country’s economic assessment scores deteriorated in 2012, and the regulatory and policy environment suffered too. In the World Bank’s Doing Business 2013 guide, Brazil slipped two places – relative to 2012 – to 130th out of 185 countries surveyed, scoring lowly for most aspects of its regulatory framework and highlighting an often-overlooked facet of its risk profile.