Moody’s Investors Service points out in a new report that the 2023 outlook for non-financial companies in Latin America is negative, due to internal factors such as constant inflation, sociopolitical challenges and various external risks at the global level.
“While there will be a deterioration in credit quality in 2023 from recent high levels, non-financial companies in Latin America are not as exposed to this deterioration globally as are companies in other regions,” says Marcos Schmidt, Moody’s Associate Managing Director.
“Rated non-financial companies in the region have some leeway in terms of credit metrics and liquidity,” adds.
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Commodity prices are likely to remain cyclically strong through 2023, partly due to geopolitical risks such as Russia’s invasion of Ukraine. Although several Latin American countries will benefit from high commodity prices next year, the difficult credit environment will limit corporate debt issuance.
The rising cost of living will expose social inequalities as political polarization deepens in some countries. The increase in the cost of living could fuel social tensions and exacerbate inequality, in addition to worsening institutional mistrust and increasing demands to reduce inflation in the face of a limited capacity of governments to provide support to families and companies in vulnerable situations, which which keeps the risk of social instability high.
Most Latin American countries are a long way from enacting decarbonization laws that would have measurable credit effects. Except for Chile, most commodity-dependent countries have been slow to demand changes from companies.
In addition, the region faces credit risks due to increasingly frequent climate changes, such as rising sea levels, droughts, floods, and extreme weather events.
While Moody’s has not issued any negative rating actions in the region so far based solely on any cyberattack, there are clear negative credit implications for companies most exposed to cyberattack. Rising cyber defense demands and costs will reduce the profitability of Latin American companies in the future as threats proliferate. Lawsuits for high-profile incidents involving data from a large number of customers would create significant risk in the region.
Moody’s could revise its outlook to stable if inflation levels recede, which would translate into looser monetary policy and a general improvement in expected revenues and business conditions. Factors that could trigger an outlook change to positive include sustained growth in gross domestic product and revenue, reduced inability to pay, and rapidly improving credit fundamentals in most key sectors.
