Deficit reduction key for Latin American government credit ratings, says Fitch

18 Feb 21

Several countries in Latin America “will find it challenging” to reduce their deficit enough to get their debt back on a sustainable footing, according to ratings agency Fitch.


Buenos Aires

Buenos Aires, Argentina. Photo © iStock

In a report into 19 countries in the region, Fitch said progress on deficits, as well as clarity on medium-term GDP growth prospects, would likely be the main influence on governments’ ratings.

Ten of the countries currently have a ‘negative’ outlook from the agency, following several downgrades in 2020 amid Covid-19, which “exacerbated underlying economic and fiscal weaknesses”, the report said.

None have a ‘positive’ outlook.

The return of GDP growth during the post-pandemic recovery, and the withdrawal of some stimulus measures, will likely lead to deficits beginning to narrow in 2021, Fitch said.

“But downside risks persist from a resurgence of coronavirus infections, slow vaccination rollouts and the difficulty of withdrawing last year’s stimulus,” the report warned.

“Moreover, continuing negative outlooks reflect our view that several Latin American sovereigns will find it challenging to achieve fiscal consolidation consistent with debt stabilisation and eventual reduction.”

Structural weaknesses in the region, such as small tax bases, highly informal economies and large dependencies on commodity exports, make it harder for public finances to benefit from a GDP rebound, Fitch said.

The report also warned of political difficulties that could mean governments are less likely to reduce deficits, pointing to the region’s historical aversion to hawkish fiscal consolidation.

“In most countries in the region, the relatively slow fiscal consolidation following previous crises reflects limited political appetite to expand tax bases or structurally improve expenditure profiles,” Fitch said.

“Upcoming elections could slow adjustments this year or influence the scope and pace of post-pandemic adjustment.”

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