Operating and financial conditions have deteriorated for Latin American non-financial corporates through the first half of 2023, due to slow economic growth and difficult financing conditions, Fitch Ratings says. However, the ratings agency says it believes the worst has passed from a corporate credit perspective as nearly 90% of issuer Ratings Outlooks are Stable. Key variables to watch include the reopening of cross-border markets, the timing and speed of policy rate decreases and the magnitude of, and issuer response to, the cyclical economic downturn.
Fitch projects growth to remain weak in the region due to constrained consumer spending and low investment levels as a result of policy uncertainty. External markets are not providing relief as commodity prices fall.
Weak consumer demand, declining commodity prices and high interest rates have pressured Latin American corporates’ cash flow. These challenges, in combination with closed local and cross-border markets for an extended period, led to several negative rating actions in the past six months.
Downgrades occurred across multiple sectors during the past 12 months but telecommunications, media and technology issuers were at the forefront of the regional credit deterioration, with six downgrades. Key reasons were declining average revenue per user, the sale of assets and dividend distributions of proceeds, plus weak corporate governance.
Brazilian issuers account for the majority of Latin American corporate downgrades in 1H23. A benchmark interest rate of 13.75%, the reluctance of banks to lend and the closing of local capital markets following the disclosure of Americanas’ accounting irregularities proved hard hurdles to overcome.
Fitch says it does not expect rating downgrades for many cyclical issuers despite declining prices and margins. Downgrade risk is highest for petrochemical companies due to the potential downturn length and the negative free cash flows at current spreads. Fitch expects polyethylene supply will be taken off line to balance the market, but the timing is highly uncertain.
Prices for copper and iron ore are expected to decline throughout the second half of 2023 and into 2024. Most mining companies have strong business positions that will allow FCF to remain neutral. Others will need to reduce capex or dividends to hold debt levels steady. Zinc producers have the weakest medium-term prospects given its low importance to energy transition.
Indications of cross-border markets reopening is a key variable to watch that will be crucial to stabilizing long-term credit quality in the region. Cross-border markets are not a viable option for most issuers and local debt capital markets remain dormant in several countries. High-yield issuers struggled to find banks willing to increase exposure to these corporates.
The timing and pace of policy rate decreases is another important factor for sector performance. Latin American central banks increased rates quicker and more sharply than peers. Cash flow pressure will continue for high-yield issuers as well as consumers until interest rates decline sharply. The timing remains uncertain as central banks are reluctant to cut rates despite political pressure and declining inflation for historical reasons.