Colombia and Brazil Feel the Pain as Fitch Ratings Sets Sovereign Downgrade Record in 2016

Fitch Ratings has made an historic number of downgrades to sovereign ratings this year, the agency announced last week at a conference in New York. Emerging markets, especially those in Latin America, have been the hardest hit, and Colombia experienced some of the bad news first hand when its sovereign rating was put on negative watch in July. The agency also downgraded Colombia’s long-term local currency issuer default rating and long-term senior unsecured local currency bonds from BBB+ to BBB.

The prolonged slump in oil prices and the depreciation of the peso have been the biggest causes for concern in Colombia. And the story is similar throughout the globe, said Tony Stringer, chief operating officer of Fitch Sovereigns at Fitch’s third annual Global Sovereign Conference on September 15.

“The record number of sovereign downgrades in 2016 overwhelmingly reflects weaknesses in emerging markets, caused by a combination of lower commodity prices and a strong dollar,” said Stringer. “Looking ahead, negative outlooks on emerging market sovereigns continue to dominate — and will likely lead to more downgrades — whereas the key issues facing developed market sovereigns are political risks and high debt levels.”

Shelly Shetty, Fitch’s head of Latin American sovereigns, expanded further on the specific problems in Latin America. She pointed to the low growth, political challenges, government debt, and fiscal deficits that have been sweeping the region.

“While strengthened external liquidity buffers and improved policy frameworks in recent years have prevented a faster deterioration in credit ratings [in Latin America], the importance of making progress on structural reforms to boost productivity and investment prospects is gaining importance to reverse the downshift in trend growth and help improve the outlook for fiscal accounts and debt trajectories,” said Shetty.

Brazil, the largest economy in the region, takes on unique significance and saw its standing damaged even further in May when Fitch cut its rating deeper into junk territory, putting it at BB with a negative outlook. The ongoing recession, impeachment of former President Dilma Rousseff, and the related corruption scandal continue to drive down the prospects of what some once considered the world’s premier emerging market darling.

That said, the worst may be over for Brazil, according to Mario Mesquita, chief economist at Itaú Unibanco. “Activity seems to be stabilizing, although a sustainable recovery hinges on the approval of reforms,” said Mesquita at the event in New York.