Government-Related Entity Challenges May Raise Fiscal Pressures For Latam Sovereigns

Pressures from systemically important Latin American (LatAm) government-related entities (GREs) are not expected to directly affect sovereign ratings, Fitch Ratings says in a new report. However, they could indirectly raise fiscal pressures and financing needs of governments that already face sizeable fiscal challenges.

Ratings of several GREs with key roles in their respective economies and sectors have faced pressure in recent years. Downgrades to PEMEX (B+/Stable, Mexico) and Petroperu (CCC+, Peru) were driven by weakening standalone credit profiles (SCPs). Ecopetrol (BB+/Stable, Colombia) and ENAP (A-/Stable, Chile) were downgraded after negative sovereign actions. Both factors have contributed to downgrades of CODELCO (BBB+/Stable, Chile).

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The GREs’ strategic importance incentivizes governments to support them, and they are contingent liabilities to the sovereigns. Fitch says it does not think these would drive negative sovereign actions on their own if they materialized, because the level of support would be manageable, or because these liabilities are already incorporated into our sovereign analysis.

Fitch did not include LatAm GRE debt in its sovereign debt figures, as per our principal approach that focuses on consolidated general government debt. But the ratings firm says it considers it in qualitative analysis. Mexico’s ‘BBB-’/Stable rating is adjusted down by one notch from the Sovereign Rating Model output via Fitch’s Qualitative Overlay, as support for PEMEX has become material and sustained.

Neither did Fitch adjust the ratings of Chile (A-/Stable) or Peru (BBB/Negative), as support for CODELCO and Petroperu has not become recurrent and remains limited. Nevertheless, the recent deterioration in their SCPs underscores the possibility that they may require more direct financial support. ENAP will likely receive sustained, but not material, support from the Chilean authorities. Ecopetrol has not received support from Colombia (BB+/Stable) in the past decade.

The report “GREs Under Pressure Could Affect Fiscal Outlook in Some LatAm Countries” is available at www.fitchratings.com or via the link above.