With an economic assessment score of 60.7, Brazil is now ranked fifth in Latin America for economic risk. Its risks stem from slower growth amid rising inflation, which led Standard & Poor’s to place the sovereign’s credit rating on negative watch earlier this month.
Colombia’s economic score declined by 0.5 points to 64.9 after GDP growth slowed to 2.8% year-on-year in Q1 from 3.1% y/y in Q4 amid concerns about excessive credit growth in some sectors of the economy.
However, Mexico and Uruguay appears to have bucked the negative regional trend, with economists seeing reduced country risk in both countries in June.
The regions’ increased risk perception coincides with sharp falls in Latin American currencies and rising real rates during the past month.
Concerns about an EM sell-off led to CDS spreads widening across several Latin American countries this month. Brazil’s CDS spread spiked to 213 basis points last week, the highest level in a year (see chart below).
“And while the region’s bond and equity markets have both slumped, it is the sharp fall in currencies that has grabbed most of the headlines,” says a report by Captial Economics.
The Brazilian real has been hit the hardest, but both the Mexican and Chilean pesos have suffered hefty falls too. Of the region’s floating currencies, only the Argentine peso (which is heavily managed) has escaped relatively unscathed, reports Capital Economics.
A report by Morgan Stanley points out that Latin America economies are particularly exposed to an EM sell-off.
The report identifies Brazil and Mexico as the most exposed emerging markets to a sudden stop of capital flows to EM’s.
Chile, Colombia and Argentina are among those LatAm economies considered moderately exposed, While Peru is considered the least exposed to slower credit inflows in the regions, according to the report.
“The framework takes into account economies that have experienced a surge in portfolio flows in gross, rather than net, terms, where domestic credit growth has outpaced nominal GDP growth, as well as current-account and fiscal deficits,” reports Euromoney Magazine.
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