External tailwinds are unlikely to lead to a significant uplift in
Central America's creditworthiness, says Fitch Ratings in a new special
report. While external finances and inflation across the region have
benefited from the U.S. recovery and lower oil prices, the outlook for
growth, public finances and structural issues is more mixed.
Nonetheless, the new external backdrop could be a stabilizing factor in
credit trends in the region, especially given the negative bias of
ratings in recent years. Currently, only one country (Costa Rica) has a
After a decade-long commodity boom that benefited Latin America's
commodity exporters, low oil prices and stronger U.S. growth are now
creating a more positive environment for oil importers in Central
America and the Dominican Republic. As a result, Fitch expects regional
growth of 4.3% in 2015-2017 to significantly outperform the Latin
American average of 0.7% during that period.
These tailwinds should support the dynamic economies of Panama and the
Dominican Republic, although some growth moderation is expected on
cooling domestic investment, while Costa Rica's economy is slowing on
the closure of Intel's microchip plant. El Salvador and Guatemala could
sustain higher growth rates than seen in the past decade, although
structural bottlenecks from crime and human capital continue to restrain
'Economic recovery in the U.S. could generate positive spillovers for
the region due to strong linkages in terms of remittances, exports,
tourism and foreign direct investment,' said Shelly Shetty, Head of
Fitch's Latin America sovereign team. 'How countries use the tailwinds
to re-build buffers and policy space and improve competitiveness through
reforms will be key for credit trends in the region,' added Shetty.
However, the Fed liftoff could tighten financing conditions and increase
currency volatility. The greater reliance of sovereigns and banks on
external funding has increased the sensitivity to adverse changes in
external financing conditions in El Salvador and Costa Rica. The
Dominican Republic could face challenges in the context of limited
exchange rate flexibility given its weak external liquidity position.
Lower oil prices are expected to narrow regional current account
deficits to 3.2% in 2015-2017, from 5.2% in 2012-2014, and to reduce
inflation to 2.1% from 3.8%. Cheaper energy could also support
consumption and investment by boosting the disposable income of
households and reducing production costs for firms, but the impact will
depend on different degrees of pass-through to consumer prices and
diversification of energy matrices.
The fiscal impact of cheaper oil will be mixed due to varying energy
subsidy and fuel tax schemes. Fitch projects deficits to be stable at an
average 3.4% in 2015-2017 and debt to rise moderately in most countries
during the same period. 'Energy subsidy savings in Panama and the
Dominican Republic are creating fiscal space, although this may mostly
be use to accommodate other spending plans rather than for deficit
reduction,' said Todd Martinez, Associate Director in Fitch's sovereign
team. 'High deficits in Costa Rica and El Salvador could persist absent
structural reforms,' added Martinez.
A favorable external context for the region could improve conditions for
advancing reforms, reversing the deterioration in credit metrics, but
politics could get in the way. Fiscal reforms in Costa Rica and pension
reform in El Salvador could face legislative hurdles, as could
institutional reforms to electoral and public contracting laws in
Guatemala and Panama. The Dominican government's legislative majority
and broad popular support could favor reform momentum after the May 2016
Fitch's special report 'Central America: Common External Tailwinds,
Mixed Credit Trends' is available at 'www.fitchratings.com'.
Additional information is available at www.fitchratings.com.
Central America: Common External Tailwinds, Mixed Credit Trends
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