Latin American markets in 'relatively good position' to handle stormy market weather, Fitch says

By Aaron Hochman-Zimmerman

New York, Aug. 21 - Sell-offs and dropping currencies are not enough to sink Latin American sovereign issues, Fitch Ratings said in a report released Tuesday.

Fitch admits that recent moves by investors to liquidate assets makes its forecast "less benign," but the rating agency highlights that "most sovereigns in the region are fully funded for the remainder of the year."

Currently, it may be difficult for issuers to place local-currency denominated debt in the international market. Brazil, Colombia, Uruguay and Peru have done so earlier in the year, but there are many positives on the Latin American horizon.

Flexibility is a strength Latin American countries have provided for themselves with sophisticated financial management.

Many countries have worked to improve their local markets, which gives governments a wider variety of potential investors.

Improvements in Latin American economies have also left them more self-sufficient and in less need of external financing.

Also, "the widespread prevalence of flexible exchange rates in the region should provide flexibility to most Latin American sovereigns in dealing with current external conditions," said Fitch's sovereign group senior director, Shelly Shetty in the report.

Despite the benefits, a concern exists that too much external involvement in local debt could more easily infect local markets with global problems.

Due to the current turmoil there is a hesitancy on the part of investors to add risk, but the higher-grade sovereigns have performed well.

"Investment grade sovereigns such as Chile (A) and Mexico (BBB) are in a better position to weather the current external shock, due to their robust policy regimes, deeper local markets and healthy international liquidity," the report said.

Brazil (BB+) has satisfied its external capital requirements for the rest of the year, but internal turmoil plagues the otherwise fundamentally sound country.

Although current conditions are harsh, Fitch's long-term outlook remains generally positive.

"Fitch believes that going forward most countries could face a higher interest burden on external debt issuance," the report said, adding: "With a significantly lower regional external debt stock there is unlikely to be a sharp deterioration in aggregate external debt service flows."

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