NEW YORK--(BUSINESS WIRE)--After two years of economic contraction, Latin American GDP growth is expected to recover moderately to 1.6% in 2017, driven by stronger external demand, a moderate rise in commodity prices and improved performance in Argentina and Brazil, according to Fitch Ratings in a new special report. However, negative rating pressures have emerged, with five countries carrying a Negative Outlook (Brazil, Colombia, Costa Rica, Ecuador and Suriname) and none with a Positive Outlook, reflecting subdued growth and commodity prices as well as deteriorating fiscal and external debt metrics.
Fitch forecasts the region to grow at an average 2% in 2017-18, compared with an average 4.1% during 2010-13. Negative spillovers from weak terms of trade have been felt in investment, consumption and domestic confidence indicators. Greater trade protectionism and tighter immigration controls following the U.S. elections are downward risks for the region, particularly for Mexico and Central America, which remain the most exposed to the U.S. through trade, financial and workers' remittance channels. A faster economic deceleration in China, a renewed slide in commodity prices, higher volatility of domestic asset prices, and tighter external financing conditions could also pose downside risks to the region's economic prospects.
The capacity of monetary policy to support growth remains limited in the region, as central banks seek to consolidate the current disinflation path and, in some countries, support the economy's external rebalancing. On the fiscal side, Fitch does not expect material consolidation to take hold in 2017, due to sluggish growth, reduced commodity price-related revenues and continued spending pressures, which should lead to an increase in the median government debt burden for the sixth year in a row, to around 47% of GDP in 2017.
External current account deficits are gradually stabilizing after deteriorating in recent years as a result of reduced commodity prices, and international reserves are expected to remain broadly stable in 2017, compared to a sizable decline in 2015, providing a buffer against external shocks. Latin America's increased external debt burden (especially related to non-sovereign sectors) will continue to be a source of vulnerability as the U.S. embarks on monetary tightening.
Next year will be a light election year for Latin America, with presidential and/or congressional elections only taking place in three countries (Chile, Ecuador and Argentina). However, this will be followed by a heavier cycle in 2018, which could influence policies and reform progress next year. Moreover, low popularity rates for presidents, fragmented congresses, corruption-related investigations, high incidence of crime and growing demands of the middle class lead to a complicated political environment in the region, especially amidst sluggish growth.
Most of Latin America's sovereign ratings currently have a Stable Outlook. With credit metrics not expected to improve significantly for most of Fitch's LatAm portfolio, upward rating movements in the region are likely to be limited in 2017. Positive growth dynamics, fiscal consolidation, and declines in government debt burdens will be important factors to watch for improvement among sovereign credit trends in the region. On the other hand, given that several sovereigns already have a Negative Outlook and others are also confronting external headwinds, Fitch will continue to focus on how authorities adjust policies to reduce macroeconomic and fiscal pressures and implement requisite reforms to boost growth prospects and aid fiscal consolidation.
Fitch's report '2017 Outlook: Latin America Sovereigns - A Weak Economic Recovery Amid Subdued Commodity Prices' is available at 'www.fitchratings.com' or by clicking on the link.
Additional information is available at www.fitchratings.com.
2017 Outlook: Latin America Sovereigns
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