|The different faces of Latin America – an improving average regional risk rating belies the exceptional cases of Argentina and Venezuela|
Latin America’s average risk score improved in 2018 as its constituent economies grew.
Yet the gap in average risk score to the Central and Eastern Europe region, with its fiery growth and moderate political risks, remains wide.
Despite the relative strengths of Chile, Mexico, Peru, Uruguay and Colombia – the five safest investments in the region according to Euromoney’s country risk survey – LatAm has been lagging Asia consistently for the past four years.
It is a situation largely caused by the problems in Argentina, Venezuela and to a lesser extent Brazil (now improving), as well as arising from sub-par economic performance and budgeting constraints afflicting the region’s commodity producers.
LatAm has struggled to put over a convincing argument for economic strength in comparison with CEE, a fact that is not lost on Euromoney’s survey contributors.
They include Juan Ruiz, chief economist for South America at BBVA Research, who notes how prospects have been set back by a combination of global and local factors.
Evidently the slowing of global growth arising from an unfavourable international trade environment is a key risk, along with tightening financial conditions.
However, LatAm currencies have steadied this week with the US seemingly more eager to resolve trade disputes by delaying higher tariffs on Chinese imports and Trump signalling the two sides are inching closer to an agreement.
A third reason is commodity price volatility, and especially the renewed dip in oil prices, falling back to $65/barrel after rising above $85/barrel in early October.
“This is joined by internal factors that have contributed to the delayed recovery in Latin America: lower growth than expected in recent months in Argentina, Chile and Paraguay; the greater impact of the economic policy adjustment in Argentina; and the impact of lower investment and greater uncertainty over tax reform in Colombia,” says Ruiz.
Invariably, BBVA has downgraded its growth projections, matching other economic forecasters. GDP growth is still expected to accelerate, but more gradually, from 1.8% in 2018, to 2.1% in 2019, and 2.4% in 2020.
This downward adjustment affects all LatAm countries, and the conservative prognosis from Ruiz is shared by other risk experts, including Marijke Zewuster, head of emerging markets and commodities at ABN Amro.
Yet she also notes some positives, including currency depreciations improving competitiveness without creating inflation that will prevent monetary policy tightening.
“Political uncertainty will also play a less prominent role in the coming period as most countries are not due to hold major elections in 2019 and 2020. One important exception is Argentina, where presidential elections are scheduled in October.”
Argentina, considered a high risk in Euromoney’s survey, lies 95th in the global rankings, two places below Greece.
Brazil, now improving, is still behind Thailand, Bulgaria and even Botswana in the tier-3 (medium-risk) category, while trailing Uruguay, a far safer option, by five points.
“Many uncertainties and structural flaws continue to bedevil the region, so that we only expect moderate growth in the coming years”, Zewuster states.
As for key risks, she notes the effect of trade wars and political uncertainties, with governments in Brazil, Colombia and Mexico facing substantial opposition to policies they were elected on.
But clearly the region is marred by the difficulties in Argentina, and with Venezuela still embroiled in such a huge political, economic and humanitarian crisis.
The IMF’s latest projections for Venezuela depict a sixth year of steep recession and hyperinflation with the country lying 169th out of 180 countries in the global risk rankings, firmly entrenched in tier 5, Euromoney’s highest risk category containing the world’s worst default risks.
Clearly Venezuela, and to a lesser extent Argentina, are exceptional cases and if both countries were to be excluded LatAm would have a far higher Euromoney score.
Indeed, without those two countries the region is in fact a lower risk than Asia so despite all the risks and the downgraded growth prospects it is a region providing some lower risk opportunities that are worth noting if trade disputes can be resolved.