This quarter it is Latin America and the Caribbean that have taken the biggest hit to their average ECR scores, seemingly in response to the anticipated impact of Fed monetary policy tapering deferred perhaps, but still on the cards for January amid weakened commodity prices due to China coming down from its breakneck expansion and the threatened slowdown in US growth spreading south. This has taken place in a quarter in which the LatAm risk dispersion, dividing high-flying Chile from low-ranking Nicaragua, has reached a record 48.6 points.
ECR expert Victoire de groote, head of global head of country risk at HSBC adds in the Brazil factor: In Brazil the issue is that the country is increasingly vulnerable to capital outflows and the confidence in the government policies is shaken. As domestic demand has been growing rapidly, external position (current account) has been worsening and financing requirements are covered by short term capital inflows.
With the expectations of the QE tapering in the US, markets have withdrawn from Brazil (and Turkey, India, Indonesia etc), provoking a depreciation of the currency and obliging the central bank to raise interest rates while growth is still very fragile. At the same time the government is increasing the fiscal support to the economy, but in wrong sectors or in a way that is negatively perceived.
However, among the sharp falls in scores affecting many countries in the region not only for the trend fallers Argentina and Venezuela, but also some three-quarters of LatAm and Caribbean sovereigns four hot-spots have escapade the axe.
Chile, the regions safest, is perhaps understandable, with a resurgent China pepping up copper demand and its safe institutions and labour market profile. However, Mexico, Peru and Uruguay, too, have also become less risky, continuing long-term upward score trends that have seen reform-minded Mexico inch closer to tier-two status in ECRs five risk categories.
Peru has climbed six places on the back of its solid credentials including investments in copper mining capacity to become safer than Brazil in September, and seemingly also tier-two bound. As a recent LatinFinance article noted (Andean economics: Beyond the boom), a raft of reforms ushered in by the government has greatly improved the business environment.
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