Latin America Sovereign Ratings in a Weakening Global Economy Shelly Shetty, Head of Latin America Sovereigns October 11, 211
Agenda Latin America Sovereigns: Ratings Trajectory In A Weakening Global Environment Brazil: Rating Drivers And Challenges Ahead
Latin America Sovereign Ratings Country IDR Rating (As of Sep 211) Outlook Chile A+ Stable Aruba BBB Stable Brazil BBB Stable Mexico BBB Stable Panama BBB Stable Colombia BBB- Stable Peru BBB- Positive Costa Rica BB+ Stable Guatemala BB+ Stable Uruguay BB+ Stable El Salvador BB Stable Bolivia B+ Stable Suriname B+ Stable Venezuela B+ Stable Argentina B Stable Dominican Republic B Positive Ecuador B- Stable Jamaica B- Stable 1/7/211 2
Latin America Sovereign Ratings 211 Latin America Rating Changes Rating Upgrades Brazil BBB- to BBB Chile A to A+ Colombia BB+' to 'BBB-' Costa Rica BB to BB+ Panama BBB- to BBB Uruguay BB' to 'BB+' Change in Average Regional Ratings LatAm EM Europe Asia-Pacific (Jan 27=1) 12 115 11 15 1 95 Outlook Changes 9 Dominican Republic El Salvador Positive Outlook Stable Outlook from a Negative 85 Jan-7 Jun-7 Nov-7 Apr-8 Sep-8 Feb-9 Jul-9 Dec-9 May-1 Oct-1 Mar-11 Aug-11 Peru Positive Outlook Affirmed Source: Fitch Ratings 1/7/211 3
Transmission Channels: Trade, Commodity Prices, and Capital Flows Foreign Participation in Government Local Debt Markets 14 12 1 8 6 4 2 211 %of Total Domestic Bond Debt (USbn) (%) Brazil Chile Col* Mex Peru * Colombia data = Feb 211, all other reflect June 211 Source: Tesouro Nacional, Central Banks 5 45 4 35 3 25 2 15 1 5 Exports by Destination (% of country's total exports, 21) to US to EU to China 9 75 6 45 3 15 BR CL CR SV GT MX PE UY Commodity Dependence 1 75 5 25 (% CXR) MX BR CL UY AR PE EC VZ Source: Central Banks, World Bank (29) 1/7/211 4
Financial Linkages With European Banks Claims of Foreign Banks in Latin America 4 US European Spain (% of GDP) Bank CDS Spreads Citi (bps) Santander (bps) 7 HSBC (bps) BBV (bps) 35 6 3 25 2 15 1 5 4 3 2 5 1 ARG BRA CHL COL MEX PER URY VEN LAT* Dec-5 Jul-6 Jan-7 Jul-7 Jan-8 Aug-8 Feb-9 Aug-9 Feb-1 Sep-1 Mar-11 Sep-11 * Latin America: GDP Weighted Average Source: BIS March 211, Fitch (211e GDP) Source: Bloomberg 1/7/211 5
A China Slowdown Could Further Complicate Matters Commodity Pressure Commodity Prices (lhs) (%, YoY) 4 China: IP (rhs) (%) 18 LatAm Dependence on Commodity Prices Prices of Primary Goods (%, YoY) Latin America Exports 45 3 2 1-1 -2-3 16 14 12 1 8 6 4 2 3 15-15 -3-4 -45 1Q4 1Q5 1Q6 1Q7 1Q8 1Q9 1Q1 1Q11 1Q4 1Q5 1Q6 1Q7 1Q8 1Q9 1Q1 1Q11 Source: IMF Source: IMF 1/7/211 6
Economic Slowdown Rather than a Crash Latin America Regional Growth Trend: BRL-CRB vs. VIX Index 8 (%) LatAm USA 45 BRL CRB VIX Index (rhs) (%, YOY) 9 6 3 75 4 15 6 2 45-15 3-2 -3 15-4 21 22 23 24 25 26 27 28 29 21e 211f 212f -45 Jan '6 Oct '6 Aug '7 Jun '8 Mar '9 Jan '1 Nov '1 Sep '11 Source: Fitch Ratings Note: BRL (% YoY) +=appreciation / -=depreciation) Source: Bloomberg, Fitch Ratings 1/7/211 7
Monetary Policy Flexibility Monetary Policy 16 14 12 1 8 6 4 2 Jan '7 (%) Oct '7 Brazil Chile Colombia Mexico Peru U.S. Jul '8 Apr '9 Jan '1 Oct '1 Jul '11 Consumer Prices Brazil Chile Colombia Mexico Peru 8. (%, YoY) 7. 6. 5. 4. 3. 2. 1.. Jul 1 Nov 1 Mar 11 Jul 11 Source: IFS, Bloomberg, Fitch Ratings 1/7/211 8
Fiscal Policy Flexibility Varies Across the Region General Government Debt 27 28 21 211 (% of GDP) 6 5 4 3 2 1 8 7 6 5 4 3 2 1 27 28 21 211 (% of GDP) Chile Panama Peru BRA COL MEX ELS ARG Source: Fitch Ratings 1/7/211 9
External Shock Absorption Capacity Still Strong International Reserves Latin America Reserves Incl. Gold 15 27 28 21 211 (USbn) 9 (USbn) 12 9 4 35 3 25 2 15 8 7 6 5 6 4 3 3 2 1 BRL ARG CHL COL MEX PER 21 22 23 24 25 26 27 28 29 21 211f 212f Source: Fitch Ratings 1/7/211 1
Latin America Sovereign Ratings versus Market Spreads 16 14 VEN Bond Spread (bp) 12 1 ARG 8 6 ELS 4 DOM JAM BRA PER MEX 2 CHL PAN COL URY AA- 4 A+ 5 6A A- 7 BBB+ 8 BBB 9 BBB- 1 11 BB+ 12 BB 13 BB- 14 B+ 15 B 16 B- CCC 17 Fitch Ratings Source: JP Morgan, Fitch Ratings 1/7/211 11
Agenda Latin America Sovereigns: Ratings Trajectory In A Weakening Global Environment Brazil: Rating Drivers And Challenges Ahead
Brazil Upgraded to BBB Fitch upgraded Brazil on April 4, 211 Materialization of rating triggers Enhanced medium-term growth prospects Strengthened external liquidity position Signs of fiscal restraint Policy continuity and greater focus on investment in the Rousseff administration Fitch assigned positive rating outlook to Brazil s sovereign ratings in June 21 Impressive economic recovery Credible response to the global credit crisis Monetary Policy Fiscal policy Further strengthening of external liquidity buffers International Reserves (incl. gold) (USDbn) 4 35 3 25 2 15 1 5 27 28 29 21 211f Source: Fitch Ratings 1/7/211 13
Brazil s Macroeconomic Performance and Policies: Neutral Status Relative to Peers 9 6 3 12 Real GDP (5yrs average % change) India Peru Brazil BBB Median Consumer Prices (5yr average) 8 4 Russia Mexico Volatility of CPI (1yr-rolling SD) 5 4 3 2 1 15 1 5 Russia Brazil BBB Median REER Volatility (1yr-rolling SD) India Peru Mexico Russia India Brazil BBB Median Mexico Peru Brazil Mexico Russia BBB Median India Peru Notes: 21 Data Source: Fitch Ratings 1/7/211 14
Brazil s Structural Features: Neutral Status Relative to Peers GDP per capita (USD) 12, 9, 6, 3, Brazil Russia Mexico BBB Median Peru India Ease of Doing Business (%-tile, latest) 1 75 5 25 Mexico Peru BBB Median Russia Brazil India Governance Indicators Control of Corruption Brazil Political Stability 1 5 Rule of Law Source: World Bank (29), Fitch Ratings Gov't Effectivness 'BBB' Rating Median Gross Domestic Savings (% GDP) 4 3 2 1 Notes: Data reflect 21 Source: Fitch Ratings India Russia Peru Mexico BBB Median Brazil 1/7/211 15
Strength of Policy Flexibility to Deal with External Shocks Transmission Channels Policy Flexibility External demand weakness Imports adjustment Flexible exchange rate Decline in commodity prices leading to lower business and consumer confidence, and hitting private investment Flexible exchange rate Counter-cyclical monetary policy Excessive FX weakness and volatility FX adjustment, FX Intervention: spot markets, repo of reserves, and future markets Capital Outflows FX adjustment, Govt. domestic bonds buy-backs, unwinding of capital controls Banking Sector liquidity issues Reduction in reserve requirements and liquidity support Economic slowdown Counter-cyclical monetary policies, automatic fiscal stabilizers, and focus on private investment in infrastructure 1/7/211 16
Challenge #1: Reducing Inflation and Maintaining Monetary Policy Credibility CPI and Core Inflation (Rolling 12-mo) Inflation Expectations for 211 8. (%) CPI Core CPI (exclusion) 7. (%) 211 Mid-point Target 212 7. 6.5 6. 5. 4. 3. 6. 5.5 5. 4.5 4. 2. Jan-7 Jun-7 Nov-7 Apr-8 Sep-8 Feb-9 Jul-9 Dec-9 May-1 Oct-1 Mar-11 Aug-11 3.5 Jan-9 May-9 Oct-9 Mar-1 Jul-1 Dec-1 May-11 Sep-11 Source: BCB, Fitch Ratings 1/7/211 17
Challenge #2: Improving the Monetary-Fiscal Policy Mix Real Interest Rates Fiscal Balance (Average 25-211) 6 (%) 4 (% of gdp) 5 4 3 3 2 1 2 1-1 -2-3 -4 1% - Treasury loans to BNDES -1-5 Chile China Colombia Indonesia Mexico Peru Russia Turkey Brazil Brazil Chile China Colombia Indonesia Mexico Peru Russia Turkey Source: Bloomberg, Fitch Source: Fitch 1/7/211 18
Challenge #3: Differentiating Brazil s Fiscal Policy and Dynamics Revenues and grants (% gdp) 5 4 3 2 1 Brazil Russia BBB Median* Debt (% revenue) 4 3 2 1 Peru India Mexico India Mexico Brazil Peru BBB Russia Median* Note: GG if not otherwise specified. *BBB Median - Average of 1 years Source: Fitch Ratings Debt (% gdp) 75 5 25 12 1 8 6 4 2 India Brazil Mexico BBB Median* CG debt maturities (% gdp) Brazil Mexico BBB Median* Peru Russia India Peru Russia 1/7/211 19
Interest Burden Still High General Government, 21 Interest Payments (% of revenue) 25 2 15 1 5 PERU MEXICO ARGENTINA (21) BRAZIL SPAIN PORTUGAL UK IRELAND US GREECE ITALY 2 4 6 8 1 12 14 16 Debt (% of GDP) Source: Fitch Ratings 1/7/211 2
Challenge #4: Managing the Credit Cycle Total Loans Household Leverage 5 45 4 35 3 25 2 15 1 5 (% of GDP) 26 27 28 29 21 Gross debt-to-income ratio of households 225 2 IE 175 UK CA 15 PT SE 125 SP US EE FI 1 DE AT LAT 75 HUN BE PL SK IT FR CZ 5 BR LT SI 25 5 15 25 35 45 55 GDP per Capita Source: Bloomberg, Fitch Notes: Gross debt-to-income ratio of households: (AF4, liab)/(b6g+d8net) Source: Fitch 1/7/211 21
Brazil s Future Rating Drivers Positive Rating Drivers Sustained improvements in fiscal and external balance sheets Further improvement in economic growth dynamics Continued consolidation of macroeconomic stability Progress on economic reforms 21 GDP per head at market exchange rates (USD) Real GDP growth (%, 5-year average) Volatility of GDP Brazil 1691.2 4.4 2.6 A Median 17291.9 4. 2.8 Negative Rating Drivers A sharp increase in public debt burden Crystallization of significant contingent liabilities from the financial sector Gross domestic savings (% of GDP) Commodity dependence Consumer prices (annual average % change) 18.3 47.7 5. 29.7 11.2 2.1 Governance Indicators Political Stability 1 5 Volatility of CPI General government debt (% of GDP) General government debt maturities (% of GDP) 3.2 54.7 1. 1.6 39.7 4.2 Control of Corruption Rule of Law Source: World Bank (29), Fitch Ratings Gov't Effectivness Brazil 'A' Median General govt. interest payments (% of revenue) Current account balance (% of GDP) NXD (% of CXR) Net sovereign external debt (% of CXR) 14.2-2.3 24. -49.9 5.5 2.8-1.9-25.8 1/7/211 22
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