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.

Mexico, on the other hand, jumped five places in the Doing Business report to 48th, and is now lying 40th in the ECR global rankings, just two places below Brazil, on a score of 58.9. The sovereign benefits from its links to a growing US economy for trade and capital flows and is less exposed to, say, the eurozone – Spanish banks included – and any weakening of markets further afield.

Mexico’s political risks are perceived to be higher than Brazil’s, notably regarding corruption, where the score is lower. Mexico also concedes a 1.8-point deficit to Brazil for government stability. However, Mexico’s structural and economic assessments are more favourable. The sovereign is growing at around 3% to 4% per annum as a result of sound economic management. Its fiscal and current account deficits have narrowed, and all five of the country’s economic risk assessment factors improved in 2012, alongside scores for non-payment/repatriation and institutional risk after the elections in 2012.

This is reflected in the market for credit default swaps (CDS), measuring the insurance cost to guard against sovereign default. Mexico’s CDS spreads are tighter than Brazil’s, according to Markit, the financial information services company (see chart), reflecting its lower risk – though neither country is in serious danger of default.

Bolivia – no longer the outcast

Much has been mentioned of the improved risk profiles of Peru, Uruguay and Colombia in recent months if not years, not least by ECR and its survey experts. And for good reason – all three saw improved scores in 2012.

However, it was Bolivia that proved to be the star performer. Climbing 20 places in the rankings to finish the year on a score of 39.2 and up to the mid-point of ECR’s fourth tier, the sovereign’s spectacular leap of faith was capped by a successful $500 million bond placement – its first in a century.

Rich in commodities, including natural gas, clearly Bolivia is not without its risks. That much is true from a comparatively low score and ranking of 86th globally, amid misgivings about a range of factors, including bank stability and its unfavourable nationalist/socialist politics.

Indeed, all of Bolivia’s six political assessment indicators score below 5.0 out of 10 – the regulatory and policy environment just 2.6, which is underlined by a low ranking in Doing Business, according to the World Bank. Bureaucracy is an old habit among the Bolivian autocracy, but equally LatAm’s fastest riser last year can no longer be declared the basket case of old, particularly after the concerns that were raised when the energy industry was nationalized by president Evo Morales after coming to power in 2006.

As Euromoney’s 2013 guide to Bolivia explains in detail, commodity exports have bolstered both economic growth and foreign exchange reserves, and many more of the country’s macroeconomic statistics are favourable, including a general government gross debt ratio that has fallen below 35% of GDP. This has neither gone unnoticed among ECR experts, nor the IMF, which issued a favourable report on the sovereign last year. Even the ratings agencies all “actioned” an upgrade to just below investment grade in time for the debt placement.

Argentina and Venezuela deteriorate, yet again

Bolivia’s fortunes contrast with the continuing declines in Argentina and Venezuela’s scores in 2012, with the former plunging 17 places in the global rankings and the latter by nine. The loss of faith in two of the region’s formerly promising investment markets has been nothing short of catastrophic.

Now ranking 112th and 114th respectively, both countries scored less than 34 points as 2012 drew to a close, which made them not only riskier than Bolivia but also Greece, while on a par with some of the typically unstable sovereigns scattered across other parts of the world – in Africa, and Central and Eastern Europe, especially.

And neither country registered any visible signs of improvement last year, with the high risks reflected in their credit default spreads, which remained elevated in comparison with the region’s safer economies (see chart).

The re-election and subsequent health problems of Venezuelan president Hugo Chavez kept his country’s political risks in the danger zone. The scores awarded for corruption and the regulatory and policy environment associated with the Caracas regime were particularly poor, although all other political risk indicators hardly fared better.

The government finances indicator, too, was marked down by 1.2 points, to just 3.1 out of 10 after the pre-election spending frenzy that accompanied Chavez’ success, but which also saw the fiscal deficit triple in value in spite of strong oil wealth. In an effort to inflate away the fiscal problems, the government announced a 32% devaluation of the bolivar in February 2013. Talk of impending elections prompted by political opposition to the country’s macroeconomic management and the failing health of its leader is only adding to the uncertainty created by successive rounds of devaluation.

Meanwhile, Argentina – hamstrung by its government’s heterodox economic management, which has led to contractual uncertainties, including enforced nationalization and an aggressive stance toward the UK concerning sovereignty of the Falkland Islands (Malvinas) – appears to have done everything in its powers to scare away investors.

Relations with the IMF have sunk to a new low, with the country officially warned in February 2013 about the inaccuracy of its consumer price index and GDP statistics that make a reliable assessment of its macroeconomic picture extremely difficult. The country has until September to rectify the situation or the IMF will sever all relations.

However, of even greater significance, perhaps, are Argentina’s difficulties in settling all of its outstanding debts stretching back to a €95 billion sovereign default in 2001, which has left the country unable to access the international markets and with some creditors seeking legal redress.

The problems in Argentina and Venezuela are – along with Belize and Nicaragua – largely responsible for the LatAm region becoming slightly more risky than Asia last year. The gap between an improving Middle East and Latin America also widened. However, as the analysis, above, indicates, the picture is far from uniform, and for many countries the risks have eased considerably.

This article was originally published in Euromoney Country Risk.