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Latin America's Credit Ratings Are Blessed

Source: WSJ
By: KEJAL VYAS
08.05.2010

Latin America, already this year's world leader in credit-ratings upgrades, could see more improvements to its credit rankings over the remainder of 2010, Moody's Investors Service said in a set of new reports highlighting increasingly stronger economic growth in the region and prudent debt management.

The report underscores a trend seen across the developing world—not just in Latin America, but also in emerging Asian countries—where growing domestic consumer markets and sound financial systems have protected these economies from the worst of the global financial crisis. Many of these countries are now emerging faster than the more mature markets of the world and with very low deficits.

"Solid financial systems meant no need for massive bailouts," Moody's noted saying that government deficits on average only rose to 3% in 2009, "and we expect it will fall this year."

There already have been six sovereign-debt upgrades in Latin America this year by Moody's—the most of any other region in the world—and three countries have positive outlooks, suggesting that more upgrades are likely in the near term. Uruguay, Bolivia and Paraguay, which still carry speculative ranking, are on the list for upgrades. The latter two are benefitting from diminishing political turmoil and faster economic growth which is reducing risks.

The six upgrades were Jamaica, Dominican Republic, Nicaragua, Guatemala, Panama and Chile. The latter two are investment grade: Panama carries a Baa3 rating and Chile an Aa3.

The ratings firm also noted that financing options also have improved for the region. While many smaller countries have been able to lower debt burdens, even the larger ones like Mexico, Brazil, and Colombia, which have financing needs close to 8% of gross domestic product, aren't strained because of their growing domestic debt markets, which limits the need for external funding. On average, the financing needs of countries in the region stand at less than 5% of GDP for 2010.

"Governments across the region increasingly finance themselves domestically, in their own currency, at longer [maturities], and with reduced roll-over risk," Moody's said in the reports.

Fixed-income investors have been eager to add exposure to these parts of the world with around $20 billion flowing into emerging-market bond funds so far this year, already an all-time high, according to research firm EPFR Global. As a result, yields on sovereign emerging market debt have dropped to historic lows. The average yield on J.P. Morgan's benchmark Emerging Market Bond Index Global has been hovering around and even dipped below 6% for the first time in the past few weeks.

Emerging nations have been able to tap international capital markets at record low yields. Brazil, for example, recently raised $759 million in an add-on sale to its existing global bonds maturing in 2021 at a yield of 4.547%, a record low.

Additional evidence of the region's economic strength came Wednesday when Argentina's economy minister Amado Bourdou said the country's economy will expand by 7% this year, topping earlier estimates. The economy was expected to grow just 2.5% in the 2010 budget, for example.

Analysts at RBC also raised their outlook for Argentina's growth to 6.5% this year from 5% saying that "strong growth in Argentina's top-trading partners, high commodity prices, and election-related spending are likely to lead to a strong growth rebound in 2010."

The country's volatile bonds outperformed the market, rising 2.23% on J.P. Morgan's Embig. Its risk premiums dropped by 0.29 percentage point to 6.82 percentage points over U.S. Treasurys. Argentina hasn't sold sovereign debt on international markets since its $100 billion debt default in 2001.

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