Fitch: 2015 Latam government financing needs down from 2014 electoral peak

After reaching 9.1% of GDP during the heavy electoral year of 2014, Latin American government financing needs are expected to decrease by 4.3%, to USD481 billion or 8.6% of regional GDP in 2015, according to a special report published today by Fitch Ratings. Two-thirds of the decline is expected to come from a reduction in domestic debt amortizations, partially offset by a widening of fiscal deficits in most sovereigns of the region. However, financing needs should remain above the 7.8% average recorded during the peak of the commodity supercycle in 2012-2013.

Adept liability management has improved the amortization profile of some investment grade sovereigns such as Brazil, Mexico, Peru and Uruguay, by reducing amortization payments and increasing the average life of their sovereign debt portfolios. Speculative grade sovereigns, such as the Dominican Republic and El Salvador, have also been able to re-profile their amortization schedules through the issuance of long-term global bonds.

'While prudent liability management has reduced near-term amortization payments in several countries, downside risks remain for financing needs in 2015, especially as sluggish regional growth, a decline in commodity prices and continued spending pressures could lead to greater than anticipated fiscal deterioration,' said Shelly Shetty, Head of Fitch's Latin America Sovereign Group.

Fitch forecasts that moderate fiscal deficits will contain government financing needs around the regional median of 6.3% of GDP in most investment grade countries in the region. Colombia's tax and expenditure-containment measures, and Mexico's oil hedge and budget cuts should mitigate downside risks for their fiscal deficits in 2015. Panama and Uruguay could benefit from post-electoral spending adjustments and lower imported energy costs.

Commodity exporters with fiscal space, such as Bolivia, Chile, Paraguay and Peru, should continue to exhibit financing needs below the regional median in 2015. Low government debt and fiscal buffers provide room to respond with counter-cyclical fiscal policies if needed.

On the other hand, Fitch anticipates financing needs to approach 12% of GDP in Costa Rica and 10% in Ecuador. Elevated fiscal deficits could be hard to tackle due to oil revenue shocks in Ecuador and congressional gridlock affecting the prospects of new tax legislation in Costa Rica. Economic contractions, weak commodity prices and lack of fiscal policy adjustments in an electoral year are keeping financing needs of Argentina (10.8% of GDP) and Venezuela (7.8% of GDP) high amidst their limited financing options.

Fitch forecasts that external bond supply by Latin American sovereigns could reach US24 billion in 2015, a USD9 billion decline from its 2014 peak. Despite the decrease, the 2015 projection is still 13% higher than the average issuance observed in 2009-2013. Higher international volatility, investor risk aversion and financing costs might lead sovereigns to increase their reliance on domestic bond markets, the expected source for 71% of public financing in the region in2015.
'Higher borrowing costs are a key risk for Latin American sovereigns in 2015 and beyond. Monetary policy normalization in the U.S., geopolitical factors, weak growth prospects in emerging markets and reduced commodity prices are contributing to higher financing costs,' said Cesar Arias, Associate Director in Fitch's Latin America Sovereign Group and co-author of the report.

'However, risk premiums will depend on country-specific factors. Speculative grade sovereigns that exhibit high twin deficits, low foreign reserves and developing local bond markets could be most exposed. Commodity exporters with deteriorating credit fundamentals might also face a negative bias and be vulnerable to tighter liquidity conditions', Arias added.