Looming Elections in Colombia and throughout Latin America May Affect Country Credit Ratings, Says Fitch Ratings

Fitch Ratings says that elections throughout Latin America over the next 18 months could have large implications for credit ratings. In a new report, the New York-based rating agency lays out that six countries — including the three largest in the region in Brazil, Mexico, and Colombia — will have new presidents, and many incoming leaders will be facing sluggish economic growth and low revenues.

How these new leaders respond, amid “adverse debt dynamics” and a need for “fiscal consolidation,” will have a major effect on their ratings going forward, according to the big three rating agency.

Photo: Colombian President Juan Manuel Santos got his peace deal with the FARC, but the implementation of the accord and the trajectory of the economy will be in someone else’s hands by this time next year. (Credit: Presidencia de la República)

“The next administrations in both Chile and Colombia will face challenges to achieving fiscal
consolidation, which will be central to those countries’ rating trajectories,” stated Fitch Ratings in its report.

While Colombia’s election, which will be held next May, will be significant to the rating outlook if it leads to economic policy shifts, the larger uncertainly comes in the form of the nation’s politically charged and controversial peace deal with the Revolutionary Armed Forces of Colombia (FARC). “While Colombia’s rating outlook is stable, fiscal consolidation will be challenged by low growth and the implementation of the peace agreement with the FARC,” stated Fitch.

In addition to presidential changes in the three most populous nations, Chile, Costa Rica, and Paraguay all have elections looming that, due to term limits, will see the government come under new leadership. Venezuela has an election planned as well, although the current economic protests, political turmoil, and social unrest there mean that a new vote could come sooner than initially scheduled. Congressional elections in Argentina and El Salvador could also have ramifications that affect ratings in those countries, stated Fitch.

Fitch Ratings highlights that concerns are especially abundant in Brazil, which continues to deal with a political crisis that has its president in the crosshairs, and Mexico, where the saber-rattling trade agenda of President Donald Trump has put a cloud over the future of the North American Free Trade Agreement (NAFTA).

“Elections will be particularly important for rating dynamics in countries with a negative rating
outlook, such as Chile, Brazil and Mexico,” stated Fitch. “Chile’s low economic growth environment and higher fiscal deficits have led its debt burden to double over the past five years. In Brazil, a series of corruption scandals have engulfed the political establishment and increased political uncertainty
and could lead to greater contentiousness in the next elections … In Mexico, sluggish economic growth and institutional weaknesses, such as the high incidence of crime and the perception of increased corruption, have reduced President Pena Nieto’s popularity. Upcoming NAFTA negotiations are also influencing the political uncertainty.”

While the specific political climate in each nation could have a large impact, the rating agency does note that it expects the transition of power “to be smooth” everywhere “with the possible exception of Venezuela.” And though the elections themselves represent uncertainty, they will likely only have a rating impact “if accompanied by marked shifts in policies … A marked policy shift away from market-friendly policies could weigh on the credit profiles of Argentina, Brazil and Mexico,” stated Fitch Ratings.