Fitch: Latin America Exposed to Downturn in Cycle and Tough External Environment

In its Latin American Sovereign Overview, Fitch Ratings forecasts real GDP in Latin America to grow by only 0.5% this year, compared to the 1.6% forecast in December 2014. Venezuela and Argentina's economies are expected to record negative growth rates in 2015, while Brazil could contract by 1% this year. Sluggish growth, reduced commodity prices and continued spending pressures could lead to wider fiscal deficits in 2015.

While commodity importers in Central America and the Caribbean could benefit from softer commodity prices through lower inflation, reduced external financing needs, and some fiscal savings, the region's commodity exporters are confronted with weakening confidence, asset prices, fiscal deficits and external dynamics.

Deteriorating terms of trade have weighed on the performance of current account deficits in commodity exporting countries and could result in lower foreign direct investment flows going forward. However, stronger external buffers and exchange rate depreciations in several countries could ease the transition to the new global environment.

On the other hand, increased private sector external debt exposes the region to adverse currency movements and higher costs of funding. In addition, the timing and pace of U.S. monetary tightening could increase market volatility and reduce capital flows to the region.

So far this year, rating trends have been evenly balanced, with two positive rating actions (Paraguay was upgraded and Jamaica was assigned a Positive Outlook) and two negative rating actions (Brazil and Costa Rica's Outlooks were revised to Negative). Going forward, the trajectory of sovereign ratings will depend on the starting point of credit fundamentals and policy responses to confront the new environment.