Latin American Sovereign Credit Will Be Shaped By Political Outcomes in 2022

While Latin America rebounded quickly from the pandemic last year, momentum is expected to quickly fade in 2022. Accommodative macroeconomic policies are turning restrictive, price pressures are rising, and activity is approaching the region's productive capacity. The headline story for Latin America in 2022 will be weak growth and high inflation. However, more fundamentally, two problems that pre-existed the COVID-19 pandemic are reemerging as key constraints on the region's credit outlook: weak potential growth and fragile public finances. Rising commodity prices due to events in Ukraine may be positive for some net commodity exporters, like Brazil and Colombia, but these gains may be offset by the negative growth effects on key trading partners and potentially by capital flow volatility.

This commentary examines the credit outlook in 2022 for five Latin American countries where DBRS Morningstar has sovereign credit ratings: Brazil (BB (low), Stable), Mexico (BBB, Stable), Argentina (CCC, Stable), Colombia (BBB (low), Stable), and Uruguay (BBB (low), Positive). In our view, these five Latin American economies should be able to weather rising global interest rates and geopolitical tensions in 2022, in part due to strong global demand and favorable terms of trade. However, the outlook for sovereign credit in Latin America over the next few years will be largely shaped by political outcomes this year and the extent to which governments will be willing and able to address structural challenges.

“The recovery in Latin America is running out of steam and structural constraints are re-emerging,” said Michael Heydt, Senior Vice President, Global Sovereign Ratings. “The weak outlook heightens the importance of political developments this year. With elections in Colombia and Brazil, and an IMF program being negotiated in Argentina, it will be important to monitor whether the political environment becomes more or less conducive to much-needed reforms.”