Latin America to Face Tighter Credit Conditions in 2023: Moody’s
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Latin America to Face Tighter Credit Conditions in 2023: Moody’s

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Sofía Hanna By Sofía Hanna | Journalist and Industry Analyst - Thu, 02/09/2023 - 15:43

Worldwide financial conditions are improving and although markets are starting to hum a more cheerful tune, the legacy of previous shocks continues to unfold. During Moody’s CIO Summit, the firm suggested that Latin America, among other emerging markets, is relatively well prepared for the impending recession. 


Moody’s forecasts two scenarios for 2023. The baseline scenario considers possible inflation with low subsidies, policy tightening pausing in 2H23 and only some countries falling into a recession. However, Moody’s downside scenario forecasts a “sticky” inflation that would bring along a continued tightening of financial conditions, a deepening of the EU’s energy crisis, potential shocks in other regions and a deep recession. One factor that has stood out since 2020, which could be considered the starting point of tightening financial conditions, was that emerging markets showed an unexpected level of resilience. 


“We have to consider that the COVID-19 pandemic was not a financial crisis,” says Atsi Sheth, Managing Director Global Head of Strategy and Research, Moody’s Investors Service. Moody’s positive forecast suggests a global inflation rate of 5%, while the negative forecast considers a new pandemic shock and a financial crisis that could rise the inflation rate to 14%, the highest since 2009. 


Latin America’s default rate is currently lower than the global rate and has fallen in dollar volume since the pandemic. The 2023 outlook for the region remains negative, however, as the region has to deal with higher borrowing costs, weak investment prospects, persistent social tensions and sluggish economic growth. Some countries like Brazil, Colombia and the Dominican Republic have already reached their 2019 output levels; however, Mexico and Peru have not. “Against this backdrop, social policy effectiveness will be key in designing targeted social programs to avoid waste and investing resources toward desired social outcomes,” reads Moody’s report. New investors are turning to Latin America, but policies will be key for them to bet on the region. “What discourages investors are not new rulings, but the frequency in which they are made and implemented,” said Ricardo Torresi, Managing Director, Regional Investment Manager, Latin America, Zurich Global Investment Management, during the summit. 

Mexico’s credit profile reflects its large, diversified economy. However, it also shows weak Gross Domestic Product (GDP) growth, a deteriorating institutional framework balanced by prudent macroeconomic policymaking and moderate fiscal strength. “Public finances are broadly stable, but ongoing support to PEMEX and other spending commitments will remain challenging. The rebound in GDP after the pandemic has lagged that of Baa-rated peers”, reports Moody’s. 

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