Amid disappointing first quarter economic growth of just 1.1% in Colombia, Fitch Ratings recently revealed that it has assigned a negative outlook to one out of every five corporates in the country, a figure well below that of several of its regional peers.
Among large investment-grade economies in Latin America, only Brazil has a worse percentage of corporates with a negative outlook. After Brazil (51% negative) and Colombia (20%), the New York-based rating agency has assigned negative outlooks to 19% of corporates in Chile, 12% in Peru, 9% in Mexico, and 6% in Argentina. Overall, 73% of Colombian corporates are stable, 7% are positive, and 20% are negative.
Despite the raw numbers, Fitch Ratings, in a summary of its reports, did list Colombia alongside Peru, Argentina, and Mexico as having an overall “positive-to-stable environment” while Brazil and Chile “continue to struggle.” This is the result of Colombia’s portfolio of analyzed corporates being revised from negative to stable following the same action being taken by Fitch for Colombia’s sovereign rating in March.
While the country is not out of the woods yet, a major tax reform passed last December has also helped to shore up the national budget following the large shortfalls that have been created by lower oil revenues since the price of crude began to fall in late 2014. However, certain sectors — notably telecommunications and airlines — “continue to face tight liquidity positions, weakened operating cash flows, competitive pressures, and declining demand,” according to Fitch.
The standing of Colombian corporates certainly falls well short of the improving situation in both Peru and Argentina. Fitch Ratings said that “sector trends for Peruvian corporates have stabilized” and that few corporates now face refinancing risk. Overall, 88% are listed as stable with 12% having a negative outlook.
In Argentina, a recently perilous economy is regaining its footing. Now, 94% of the portfolio analyzed by Fitch has a stable outlook compared to 87% at the end of 2016, and “macro-variables and external liquidity are expected to improve.” The agency did say, however, that politics “remain a risk as the policy shift underway may not hold through economic and electoral cycles.”
By contrast, the situation continues to appear grave in Brazil, where heightened political turmoil is disrupting virtually all aspects of the economy and government. Though Fitch Ratings expects the ratio of corporate downgrades to improve this year compared to 2016, the country will still likely face more downgrades than upgrades in 2017. “Potential sovereign downgrades, increasing refinancing risks, and inability to reduce leverage are downgrade risks,” stated Fitch.
Contagion from Brazil, on top of low commodity prices, is also weighing on companies in Chile. Three corporates in the country were downgraded in 2016, and 19% now have a negative outlook. “With the exception of three linked to the sovereign, the negative outlooks are due to deteriorating capital structures following the weak commodity cycle or exposure to Brazil,” stated Fitch Ratings.
While Brazil and Chile face the most challenging conditions, the ratings agency also highlighted the risk that next year’s elections present in Mexico, where the economy continues to also face political risk surrounding the uncertainty of the North American Free Trade Agreement (NAFTA) and other policy positions from the White House.
“Recent political developments in Brazil could destabilize the expected recovery in the country,” said Jay Djemal, director of Fitch Ratings. “The uncertainties surrounding the outcomes of the Chilean presidential election in November alongside general elections in Brazil and Mexico in 2018, and their effects on investor confidence, could also apply the brakes on anticipated improvement in credit profiles.”