Fitch Ratings: Political risk an acute issue for LatAm sovereign ratings

PRESS RELEASE from Fitch

19 November 2019

Link to Fitch Ratings' Report(s): Political Risk An Acute Ratings Issue for Latin America Sovereigns

Fitch Ratings-New York-19 November 2019: Recent political volatility in a number of Latin American countries, including Argentina, Bolivia, Chile, Ecuador and Peru, reflects a broader theme of rising political risk that could amplify negative sovereign credit trends in the regions, says Fitch Ratings. Political risks are already incorporated as a weakness in most sovereign ratings in the region, restraining uplift in some, and posing potential downward pressure in others if they exacerbate existing economic and fiscal challenges. There are currently no positive Ratings Outlooks among Latin American sovereigns and a large number of Negative Outlooks.

The spate of heightened political volatility in Latin America has included sustained, large-scale demonstrations in Bolivia, Chile and Ecuador that have disrupted economic activity and prompted policy shifts, a constitutional crisis in Peru, and a significant electoral shock that precipitated a financial crisis and sovereign default in Argentina. While each of these events has been rooted in country-specific factors, they reflect a wider trend of political uncertainty and social discontent in the region linked to stagnant incomes, high income inequality and a perceived lack of policy action to address these issues.

This in part reflects weak institutional development, a key factor in our sovereign methodology that is captured in the generally low rankings of Latin American countries in several dimensions of the World Bank's Worldwide Governance Indicators including "Political Stability", "Rule of Law" and "Control of Corruption". Scores for "Voice and Accountability" compare more favorably, underscoring the greater space that populations have to express grievances over institutional shortcomings.

Heightened political risk comes at a time of broad-based downward rating pressure in the region, with protracted subdued growth contributing to persistent fiscal pressures and rising debt levels in most Latin American countries. The underlying macroeconomic and fiscal environment has elevated vulnerabilities to exogenous and domestic shocks.

The heightened political volatility will have a direct short-term effect on growth in affected countries. However, should sustained political instability hinder investment and confidence over the medium term, this would be a more significant risk to credit profiles. Changes in political dynamics could also complicate policies necessary to stabilize rising debt or even prompt a shift that would add to debt. Therefore, the extent to which recent political events translates into negative rating pressures will depend on country-specific factors, including starting points in terms of a country's growth profile and sovereign balance sheet, and the authorities' policy responses.

For further analysis on the impact of political risk on credit profiles in Latin America including specific analysis on Argentina, Bolivia, Chile, Ecuador and Peru, please see the Fitch Wire + report "Political Risk An Acute Ratings Issue for Latin America Sovereigns". The report is available to subscribers through the link above.