Moody's: Currency volatility increasing credit risk for Latin American sovereigns, companies and banks

The depreciation of Latin American currencies since mid-2014 is unlikely to reverse soon and some could weaken even further, says Moody's Investors Service. The rating agency therefore expects devaluation and currency volatility to persist as a credit concern for the Latin America's sovereigns, companies and banks for at least a year.

Since September 2014, the Brazilian real is down 33%, the Mexican peso is off 16%, and the Peruvian sol has declined 11%.

"A prolonged period of currency volatility and devaluation is credit negative, to varying degrees, for Latin American sovereigns and firms facing US dollar denominated debt refinancing needs or diminished funding options for growth," says Gersan Zurita, a Senior Vice President at Moody's in the report "Greater Currency Depreciation and Higher Volatility Are Raising Credit Risk for LATAM Sovereigns, Companies And Banks."

The report examines foreign exchange risk for debt issuers in Brazil and Mexico, the region's two largest economies, as well as in Peru, where financial dollarization remains high.

For the governments of Brazil (Baa2 negative), Mexico (A3 stable) and Peru (A3 stable), borrowing costs may rise, but access to domestic capital markets will alleviate the stress, says Moody's.

The sovereigns' exposure to exchange rate fluctuations has decreased over the past decade because governments have taken advantage of deepening local capital markets, reducing their dependence on foreign currency debt.

Among the three countries, Brazil has the lowest ratio of foreign-currency debt to GDP at 3.7%, while Peru has the highest, at a still manageable 9.8% of GDP.

In the corporate sector, weak currencies help exporters, but hurt firms that have large foreign-currency debts and those that depend on imported inputs. Chemicals, metals, protein and paper exporters in Mexico and Brazil, such as Mexichem, S.A.B. de C.V. (Baa3 stable) and Braskem S.A. (Baa3 negative), are best positioned to benefit from a competitive currency devaluation, says Moody's.

A weaker real also helps Brazil's protein producers, such as JBS S.A. (Ba2 stable) and BRF S.A. (Baa3 stable). Oil firms such as Brazil's Petroleo Brasileiro S.A. (Ba2 stable) and Mexico's Petroleos Mexicanos (A3 stable) will have to spend more to import the oil they use to produce fuel, and retailers and airlines with cross-border businesses and foreign debt are also at risk.

Banks have little foreign currency funding, but may face a decline in asset quality, says the rating agency.

Moody's expects Latin America's currencies to remain depressed against the US dollar for longer than the relatively brief but dramatic period of decline in 2013, when markets reacted to signals that the Federal Reserve would begin winding down its quantitative easing program. Reasons that will prolong their weakness include slower growth in China, which will diminish demand for commodities and reduce foreign trade.