Investors are beginning to punish weak governments

The Corona crisis has accelerated a process that has already begun to emerge in recent months: Investors and rating agencies are paying closer attention to the quality of the governments in the countries and are increasingly incorporating this in their risk assessments.

by Alexander Busch, Latin America correspondent for Handelsblatt and Neue Zürcher Zeitung

 

This week the rating agency Fitch downgraded the outlook for its risk assessment for Brazil from stable to negative. The third-largest agency explicitly explained this, among other things, by the increasing tensions between the government and Congress. The agency sees the chances of new reforms in the period after the Corona crisis as significantly reduced due to the confrontational course in politics.

The analysts are not yet changing Brazil’s credit rating, which is currently at BB-, i.e. three notches below investment grade. However, a further downgrade has now become more probable in the next revision. This will make loans for Brazil, both government and companies, more expensive. A rating is like a grade that is used to assess confidence in the country. The worse it turns out, the more interest creditors demand.

In recent weeks there have been similar risk increases for political reasons elsewhere in Latin America. Standard & Poor’s downgraded Chile due to growing social tensions between the government and the population. However, Chile continues to have an investment grade from the agency.

In Mexico, Fitch reduced the credit risk of both the state and the state-owned oil company Pemex. Mexico’s credit rating is now only one notch above that of junk bonds. The downgrade was made because of the weak performance of the government of President Andrés Manuel López Obrador during the pandemic, who has no strategy on how to respond to the crisis. Pemex also needs growing government subsidies because the president has ordered the oil company to increase its production. The production costs per barrel are higher than the yield.

The only exception among the latest negative revisions in the region is Colombia, where analysts blame the lower oil price and the Corona crisis for the weaker rating – and not the government.

The Corona crisis thus acts as a test for the governments in Latin America: Irrational or inconsistent policies, as in Brazil and Mexico, are now immediately punished by investors – and no longer tolerated, as was the case until recently.

COVID-19 in Latin America

Development of case numbers in the region


Currently reported cases in the countries

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