U.S. ratings agency Moody’s has given negative rating for Latin America’s sovereign credit, citing a weak global economic environment and depressed commodity prices.
Rising debt levels and the prospect of higher global interest rates are also impacting credit prospects, said the agency in a note to investors.
A rating downgrade can make borrowing far more expensive for the regional governments in the international financial market. In theory, a high credit rating means a lower interest rate (and vice versa).
Considering its report, economic growth in the region will likely average only 0.9% in 2016-18, driven largely by the weakness in Brazil and Argentina, two of the region’s largest economies. That’s well below the recent average of 3% achieved during the five-year period of 2010-15.
In its previous report, the agency had expressed hope that the new administration in Argentina might boost business and investor confidence with some market-friendly policies. Now it expects Argentina’s debt levels to rise, because it says the country’s fiscal consolidation is insufficient to reverse negative trends.
The ability to initiate or accelerate growth is limited for many governments in the region, largely to higher global interest rates and volatile capital flows.
Moody’s says it is expecting Brazil, Ecuador, Trinidad & Tobago, and Venezuela to experience the weakest growth this year.
“Given some improvement in commodity prices and the rating actions already taken, we expect negative credit trends to be contained in 2017, relative to last year,” said Samar Maziad, a Vice President and Senior Analyst at Moody’s. “Nonetheless, we expect the creditworthiness of a number of sovereigns to deteriorate further.”