Corporations throughout Latin America are continuing to struggle as low consumption and investment activity persist due to the ongoing slow economic growth in the region, according to a new report from Fitch Ratings. The big three credit rating agency believes that this means there is unlikely to be a credit recovery for Latin America as a whole in 2017, with the situation in Brazil remaining particularly bleak.
“Corporates have been negatively affected by elevated interest rates in several countries and rising taxes,” said Paula Bunn, analyst at Fitch Ratings. “Consumer demand continues to be weak and commodity prices remain at moderate levels.”
The median net leverage ratio in the region was 3.1x in 2016 with a median gross leverage ratio of 4.9x. “Cuts to capex and dividends have resulted in about half of issuers being free cash flow neutral or positive,” said the New York-based rating agency in a statement.
Net leverage for Colombian corporates sits at 3.1x. Adding to the cause for concern in Colombia is that “heavy investments between 2012 and 2015 are taking longer than anticipated to translate into positive cash generation,” according to Fitch. “Free cash flow burn is extremely high, at close to 8%, despite capex returning to maintenance levels.”
Chile has been hampered even more significantly by slow economic growth, weak copper prices, and low pulp prices, said the agency, leading to low investment returns. Fitch noted that elevated taxes and increased regulation “continue to stifle the pace of investments.”
The best story in the region comes from Mexico, where corporates “have the strongest balance sheets in the region due to modest levels of investments over the past five years.” Mexican corporates have a median net leverage at 2.5x, leaving them “well positioned to withstand slow growth and rising interest rates,” per Fitch.
In Argentina, corporate credit risk “remains manageable” with a net leverage below 3x, said Fitch Ratings. For Peruvian corporates, net leverage remains low at 2.7x despite “aggressive policies” that pushed companies in the Andean nation to invest “at an unprecedented level” from 2012 to 2014.