latin america covid-19 weekly update april 13, 2020 · crisis, along with falling oil prices and...
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Latin AmericaCOVID-19 WeeklyUpdate
April 13, 2020
Credit Conditions | Key Takeaways
– Overall. Emerging markets are facing severe stress resulting from three simultaneous shocks, as the COVID-19 pandemic spreads globally. All key emerging economies that we cover will fall into recession or see sharply lower growth in 2020
– Risks. Downside risks are significant. A prolonged outbreak will depress economic activity and stress health systems. Extended shock to investor sentiment could result in heightened refinancing risk, especially for low rated issuers.
– Credit. Global recession is heightening risk aversion, resulting in significant capital outflows from Emerging Markets, pressuring currencies and widening spreads. The sudden and substantial shock to global economy has impacted several sectors in Emerging market economies, pressuring credit ratings.
Latin America | Top Risks
4
*Risk levels may be classified as very low, moderate, elevated, high, or very high, are evaluated by considering both the likelihood and systemic impact of such an event occurring over the next one to two years. Typically these risks are not factored into our base case rating assumptions unless the risk level is very high.
** Risk trend reflects our current view on whether the risk level could increase or decrease over the next twelve-months.
Latin America Top Risks Risk Level Risk Trend
COVID-19 Spreading Across Latin America. COVID-19 is rapidly accelerating across in Latin America. Containment measures along with the negative effects on identified transmission channels (trade of goods, supply chains, commodity prices, people flows, and financial conditions) will erode economic growth and business conditions, triggering credit stress. Prolonged outbreak will depress activity and stress health systems. Extended shock to investor sentiment could result in heightened refinancing risk, especially for low rated issuers.
High Worsening
Volatile capital flows, fickle financing conditions, and currency pressures. The COVID-19 crisis, along with falling oil prices and global recession, has triggered significant risk aversion towards risky assets. Spreads have widened sharply across Emerging Markets. If the pandemic extends beyond the second quarter of 2020, refinancing risk will escalate, especially for speculative-grade rated issuers.
High Worsening
Commodity price volatility. The effects of the pandemic on global demand, along with tensions in the OPEC+ group, have caused commodity prices to tumble. We expect the plunge to be temporary and as the pandemic fades, demand for commodities, along with prices, should gradually recover. Falling commodity prices have mixed effects across Latin America. However, weak commodity prices curtail investor confidence for EMs, because such a scenario is usually driven by soft global growth.
Elevated Worsening
Regional political challenges. Policy uncertainty continues to undermine investment in Latin America, while social unrest has driven governments to apply extraordinary fiscal measures. Governments will face severe stress in tackling COVID-19, policy mistakes and failure to mitigate the spread of the virus could slow or delay the expected recovery.
High Unchanged
Latin America | Top Risks
Policy Mistakes And Failure To Mitigate The Virus Could Slow Or Delay The Expected Recovery.
COVID-19 Is Rapidly Accelerating Across Latin America
The Effects Of The Pandemic On Global Demand, Along With Tensions In The OPEC+ Group, Have Caused Commodity Prices To Tumble.
Adverse Investor Sentiment Towards Ems Is Pressuring Currencies And Liquidity. (Exchange Rate % Change)
Source: Chart 1 –Johns Hopkins Center for Systems Science and Engineering; Chart 2 – S&P Global Market Intelligence (Jan 1, 2020=100); Chart 3 – Bloomberg, S&P Global Ratings (Dec. 31, 2019=100); Chart 4 – S&P Global Ratings, Haver Analytics
60
70
80
90
100
110
Argentina Brazil Chile Colombia Mexico
(4.0)(2.0)0.02.04.06.08.0
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
f
2021
f
LatAm GDP Growth %
30
50
70
90
110
130
12/31/2019 1/31/2020 2/29/2020 3/31/2020
BRENT COPPER IRON ORE GOLD
-
5,000
10,000
15,000
20,000
Argentina Brazil Chile Colombia Mexico
31-Mar-20 1-Apr-20 2-Apr-20 3-Apr-20 4-Apr-205-Apr-20 6-Apr-20 7-Apr-20 8-Apr-20 9-Apr-20
COVID-19 Cases Last 10 Days
* Includes China, Hong Kong and Macau. Data as of Mar. 27, 2020. Source: S&P Global Ratings.
Emerging Markets COVID-19 Related Rating Actions
0
5
10
15
20
25
30
Argentina Brazil Chile China* Colombia India Indonesia Malaysia Mexico Russia Turkey
Downgrade Outlook / CreditWatch Revision
LatAm Macro Outlook | Social Distancing Impact
88
Source: Haver, S&P Global Ratings Calculations. Mild scenario assumptions: durable goods decline by 40%, nondurable goods dec line by 25%, and one third of services decline by 75%, versus pre-virus outbreak trend. Severe scenario assumptions: durable goods decline by 75%, nondurable goods by 25%, and one half of all services decline by 75%, versus pre-virus trend.
Consumer Spending Categories
Chile Mild Scenario
Chile Severe Scenario
Colombia Mild Scenario
Colombia Severe Scenario
Mexico Mild Scenario
Mexico Severe Scenario
Durable Goods -0.2% -0.4% -0.1% -0.2% -0.1% -0.2%
Nondurable Goods
-0.6% -0.6% -0.6% -0.6% -0.6% -0.6%
Services -0.7% -1.0% -0.8% -1.2% -0.8% -1.2%
Total Impact On Annual GDP Growth, %
-1.4% -1.9% -1.5% -2.0% -1.4% -1.9%
Impact Of One Month Of Social Distancing On Annual GDP Growth (Consumption Channel)
LatAm Macro Outlook | Some Countries Had Pre-Existing Economic Weakness
99
(4)
(2)
0
2
4
6
8
10
Argentina Brazil Chile Colombia Mexico
Pre GFC Five-Year Average Pre COVID-19 Five-Year Average 2019
Source: S&P Global Ratings. Haver Analytics.
Real GDP Growth, %
Sovereigns and International PublicFinance
Joydeep MukherjiSector Specialist – [email protected]
Daniela BrandazzaSector Specialist – International Public [email protected]
Sovereign Ratings | Assessing The Strain
11
Joydeep Mukherji, New York. +1-212-438-7351, [email protected]
– Lots of uncertainty regarding possible damage to the global economy propelled widespread volatility in equities, credit conditions and commodity prices.
– What started as a supply chain disruption has become a demand shock resulting in large monetary and fiscal stimulus from government.
– We assume COVID-19 to be a temporary hit. We expect a most likely U shape recovery, coming in 2021.
– We are focusing on three factors to assess if a sovereign can absorb the shock while maintaining its current ratings.
– The duration and severity of the epidemic
– The timeliness and adequacy of the policy response
– The underlying economic and political resilience –Pre COVID-19 Financial and Economic Health
1. ECONOMIC OUTLOOK
Source: Ratings as of April 9, 2020 as published on S&P Global’s Global Credit Portal.
Sovereign Ratings | Latin America And Caribbean
**Outlook/CreditWatch: Stable, Positive, Negative
Bermuda A+/A+Chile A+/AA-Aruba BBB+/BBB+ Panama BBB+/BBB+ Peru BBB+/A-Turks and Caicos BBB+/BBB+**Curacao BBB/BBB **Mexico BBB/BBB+Uruguay BBB/BBB **Trinidad & Tobago BBB-/BBB Montserrat BBB-/BBB-**Colombia BBB-/BBB
**Bahamas BB+/BB+
Paraguay BB/BB
Bolivia BB-/BB-
**Brazil BB-/BB-
Dominican Republic BB-/BB-
Guatemala BB-/BB
Honduras BB-/BB-
Jamaica B+/B+
Costa Rica B+/B+
Barbados B-/B
Belize B-/B-
El Salvador B-/B-
Nicaragua B-/B-
**Suriname CCC+/C
**Ecuador CCC-/CCC-
**Argentina SD/SD
Venezuela SD/CCC-
Latin American Local and Regional Governments:Mexico leading the number of negative outlooks after covid-19 outbreak
LRGs were already facing fiscal restrictions before covid-19 outbreak, and debt levels do not restrict their ratings overall at present.
When COVID-19 outbreak started in the different countries:
Argentine LRGs had negative outlooks on their low ratings due to own particular situations and in some cases we believe that a default is virtually inevitable. We still have ratings above Argentina (currently at SD).
Brazilian LRGs had and currently have all ratings with stable outlooks, but budgetary risks loom, while the central government is trying to pass a law to help LRGs to refinance their debts with the federal government and public banks.
Mexican LRGs faced a combined shock due to covid-19 measures and lower oil prices; both situations with the power to significantly pressure public finances in the short to medium term. We changed the Outlook of 33% of rated Mexican states to negative and 13% were downgraded, still with negative outlook.
Negative bias on our Latam LRG ratings in 2020
13
Latin American LRGs | Increasing Budgetary Risks As Other Regions
14
Corporates
Diego OcampoSector Specialist – [email protected]
Luis MartinezSector Specialist – [email protected]
Corporates & Infrastructure | 41 Downgrades Since The Outbreak
16Source: S&P Global Ratings since Feb-27 to April 8, 2020
0 5 10
Transportation
Infrastructure
Consumers
Oil & Gas
Retail
Miscellaneous
Utilities
Power Generation
Telecom & Cable
Real Estate & Homebuilders
Metals & Mining
Conglomerates & Investment…
Capital Goods & Building Materials
Hotels & Other Lodging Places
Notches
Downgrades Upgrades
0
2
4
6
8
10
12
14
16
18
Argentina Chile Brazil Mexico Rest ofLatam
Not
ches
Corporates & Infrastructure | Brazil & Mexico Concentrated The Bulk Of The Actions
17
Source: S&P Global Ratings since Feb-27 to April 8, 2020
0 2 4 6
Real Estate & HomebuildersConglomerates & Investment
Holdings
Utilities
Infrastructure
Power Generation
Argentina
0 2 4 6
Infrastructure
Transportation
Consumers
Retail
Capital Goods & Building Materials
Miscellaneous
Automotive
Forest Products & Packaging
Brazil
0 2 4 6
Transportation
Metals & Mining
Retail
Oil & Gas
Infrastructure
Chile
0 2 4 6
TransportationTelecom & Cable
ConsumersInfrastructure
UtilitiesOil & Gas
RetailMiscellaneous
Hotels & Other Lodging PlacesAutomotive
Mexico
April 8 Feb 27
Corporates & Infrastructure | Downgrade Potential Remains High In Corporate LatAm
18
Source: S&P Global Ratings as of Feb-27 and April 8, 2020
Stable53%
Negative26%
Positive1%
Watch Neg19% Stable
56%
Negative18%
Positive25%
Watch Neg2%
Corporates & Infrastructure | DowngradePotential Remains High In Corporate LatAm
19
Source: S&P Global Ratings as of April 8, 2020
0% 20% 40% 60% 80% 100%
ConsumersConsumers - Protein
AgribusinessTransportation
Oil & GasTelecom & Cable
Capital Goods & Building MaterialsRetail
Power GenerationUtilities
InfrastructureFleet Management and RACReal Estate & Homebuilders
Forest Products & PackagingMetals & Mining
Conglomerates & Investment HoldingsEngineering & Construction
AutomotiveChemicals
Watch Neg Negative Stable Positive Median Rating
BB+
BB-
B+
BB-
BB
BB
BB
BB-
BB-
BB
B+
BB+
BB-
BB
BBB-
BB+
CCC
BB-
BB-
Infrastructure | Sensitivity analysis
Infrastructure`s subsector sensitivity to the coronavirus spread versus liquidity headroom
Liquidity headroom: sensitivity to revenue decline to move sources over uses below 1.0x
Low: below 25%
Medium: range of 25% to 45%
High: above 45
21
Airports
Ports
Toll Roads
Refineries
Regulated Utilities
Unregulated Utilities
Water Utilities
Gas Pipeline
Transmission Lines
Social Infrastructure
0%
25%
50%
75%
100%
0% 25% 50% 75% 100%
Liqu
idit
y H
eadr
oom
Subsector Sensitivity to COVID-19
Low Medium High
Low
Med
ium
Hig
h
Infrastructure | The Main Variables To Monitor
22
Energy demand
– Potential reductions in energy demand during the lockdown period, which might hurt working capital for utilities
– Spot prices volatility
Traffic trends
– Extended lockdown, beyond our current base case:
– for airports we consider three severe months of air traffic decline, with peak declines of about 90%.
– light vehicles traffic as commuter volumes have dropped by more than 50% in the first two weeks after the lockdown
– heavy vehicle volumes have stayed relatively stable, sustained by an increase in e-commerce and demand for essential consumer products. Heavy vehicles will take the hit on demand from worse economic conditions in the second half of the year.
– 15% drop in volumes handled by container ports, as the impact from COVID-19 is delayed.
Oil and gas prices
– Slowing demand that might impede the performance of refining entities and regasification and liquefaction plants,
– Slump of oil prices will ease costs for these plants.
Investment plans
– Supply from Chinese contractors/suppliers
– All relevant ongoing capex plans. We will crosscheck each concession contract's flexibility levels, sunset dates, and force majeure events.
Group support
– The credit quality of international groups, especially from European and Asian parents
– Delays in support from shareholders, even when already committed.
Sovereign rating
– Typically expect infrastructure assets are capped at the ratings to the sovereign’s levels.
– Transactions that have revenue off-takers that depend on counterparty risk could also be affected by sovereign rating actions.
Liquidity position
– NO debt refinancing under the current conditions, unless already committed. O
– Ability to sustain the cash cushion will depend on the extent and duration of the pandemic.
$
23
Toll RoadsAirports
Ports
Infrastructure | Transportation
0%
20%
40%
60%
80%
100%
OMA GAP Aerodom AA200 Tocumen Cerealsur
Liquidity cushion Passenger traffic trigger
Airport Rating Headroom
Copyright © 2020 by Standard & Poor's Financial Services LLC All rights reserved
0% 20% 40% 60% 80% 100%
TCP
Santos Brasil
Paita
Panama Canal
North America Asia Europe Latin America Other
Ports' Cargo Exposure
Source: S&P Global Ratings
0% 20% 40% 60% 80% 100%
Heavy traffic Light traffic
Toll Roads' Traffic ExposureBreakdown per type of traffic
Source: S&P Global Ratings.
Copyright © 2020 by Standard & Poor's Financial Services LLC. All rights reserved
Financial Institutions
Cynthia Cohen FreueSector Specialist – Financial [email protected]
Alfredo CalvoSector Specialist – Financial [email protected]
25
Financial Institutions | Operating Performance Will Be Tested Amid The Coronavirus Outbreak
– Mexican financial institutions now operate under weaker economic conditions derived from the combined shocks of COVID-19 and lower oil prices.
– Brazil’s economy and fiscal performance will suffer in 2020 after the virus shock and extraordinary government spending, setting the stage for a challenging operating environment for the financial system.
– After grappling with social unrest, the Chilean economy and financial system now face the impact from the COVID-19, resulting in financial volatility, supply-demand disruptions, and plummeting commodities prices.
– In Colombia, COVID-19 and lower oil prices weakened its external profile. A prolonged global and local economic slowdown or if access to external funding worsens, financial institutions will be more vulnerable.
– Argentine banks face very challenging economic conditions because of measures that could weaken their credit fundamentals and now exacerbated by the COVID-19 pandemic.
26
0 10 20 30 40 50 60
Argentina
Brazil
Chile
Colombia
Mexico
Trinidad & Tobago
Number Of Downgrades And Outlook Revision
Financial Institutions Downgrades Financial Institutions Outlook Change
29%
9%
59%
2% 1%
Outlook Distribution As Of April 10
Negative C.W. Negative Stable Positive C.W. Positive
Financial Institutions | Rating Actions Since The Beginning Of COVID-19 Outbreak In The Region
27
44%
2%
49%
5%
Outlook Distribution As Of April 10
Negative C.W. Negative Stable Positive
0 1 2 3 4 5 6 7 8
Colombia
Mexico
Number Of Downgrades And Outlook Revision
Insurance Companies Downgrades Insurance Companies Outlook Change
Insurance | Rating Actions Since The Beginning Of COVID-19 Outbreak In The Region
Structured Finance | Seven Emerging Risks In Latin America Securitization
1 Transactions with low levels of liquidity reserves
2 Government or servicer relief programs
3 Closed stores of servicers using buy-here/pay-here collection process
4 Closing of stores in shopping mails backing rated CMBS transactions
5 Impact of potential obligor, counterparty, and sovereign downgrades
6 Effect of social distancing on the cash flow for transactions linked to transportation
7 Persistent deterioration of the collateral performance
Source: S&P Global Ratings
Structured Finance | March-April Rating Actions
– 16 downgrades.
– 31 issues have been placed on CW with Negative implications.
– Most rating actions have been in ABS Consumer deals, particularly in Argentina.
– In addition, rating actions were taken on deals that are linked to the sovereign ratings of Mexico and Ecuador.
Related Research
– The Spread Of The Coronavirus To Erode Credit Quality Of Latin American Infrastructure Assets, April 7, 2020
– COVID-19: Emerging Market Local Governments And Non-Profit Public-Sector Entities Face Rising Financial Strains, April 6, 2020.
– COVID-19: Coronavirus-Related Public Rating Actions On Corporations, Sovereigns, And Project Finance To Date , April 4, 2020
– Credit Conditions Emerging Markets: COVID-19 Magnifies Risks, March 31, 2020
– COVID-19 Credit Update: Latin America Structured Finance Is In Lockdown, Mar 27, 2020
– Latin American Banks Will Cope With Coronavirus Fallout But At The Expense Of Asset Quality, March 24, 2020
– Mexican Insurers' Solid Capital And Liquidity Help Counteract Impact From COVID-19 Outbreak, March 24, 2020
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