Latin America: Country Risk Ratings

Argentina (ARG)

The overall risk level for Argentina is medium-high. Since the beginning of the Javier Milei Presidency, some protests have been scheduled by the opposition and various social movements. The protests were somewhat isolated and did not significantly affect Milei's popularity, which remains above 50%. Therefore, the political violence risk is at medium, as we believe opposition forces will not be able to intensify the protests. The government initially failed to pass a broad law to deregulate several sectors of the economy in Congress, but it has now been passed with several changes, marking a significant victory for the government. Consequently, legal and regulatory risk is at medium-high, as the government continues to try to change regulations to promote a market-friendly Argentina. For similar reasons, political interference risk is also at medium-high.

Recently, the economic situation in Argentina has been marked by a deceleration in inflation rates to around 5% monthly, which is still high but lower than the 25% recorded in December. However, this deceleration has come at a cost, with the Argentine economy contracting by 2.6% (q/q) in the first quarter and poverty rates exceeding 50% of the population.

Sovereign non-payment risk is at medium-high. The delicate fiscal situation of Argentina, which relied on monetary emissions from the Central Bank to fulfill its obligations, is something the current government is trying to address. So far, the strong fiscal adjustment is preventing the Central Bank from financing deficits, but doubts remain about whether this will be feasible. Argentina aims to achieve a zero fiscal deficit in 2024. Exchange transfer risk is high due to Argentina's low level of reserves. Although the situation has improved somewhat due to an improved trade balance resulting from lower internal demand, the risk remains high. The risk of doing business is also high due to Argentina's fragile economic situation. The government's inability to provide stimulus is also high, as the focus is now on reducing the fiscal deficit to zero, and we foresee no fiscal stimulus in the next two years. On the other hand, the banking sector vulnerability risk is at medium-low. Despite the fragile economic situation, banks in Argentina have an adequate level of liquidity and are not at risk of bankruptcy.

Brazil (BRA)

Brazil's overall risk level remains Medium, the same level as our March analysis. The political violence risk is at Medium-High. The country is still very divided between left and right, reflecting the results of the past election in which President Lula won by a narrow margin. Investigations into an alleged coup attempt by Bolsonaro supporters are ongoing in the Supreme Court, although the accusations against Bolsonaro are not advancing at the moment. As Bolsonaro is unable to participate in the elections, the search for his successor among right-wing politicians continues. Legal and regulatory risks are at Medium-High, with the executive trying to increase government revenues, implying changes in the tax rates. Additionally, next year new tax rates will be defined as part of broad tax reforms, implying new rules in the next two years.

Supply chain disruption risk is also at Medium-High. The severe floods in the southern region of the country risk causing some shortages of agricultural goods, although those risks seem controlled at the moment. Sovereign non-payment risk is also at Medium-High as Brazil holds one of the highest debt-to-GDP ratios, standing at 76.8%. Luckily, most of this debt is in domestic currency, not reliant on external flows. Moreover, the government is having difficulties complying with the new fiscal framework, recently changing its target and postponing the zero primary deficit target to 2025.

Exchange Transfer risk remains at Medium. Although the Brazilian economy is relatively closed, the level of reserves is adequate at the moment, reaching over 50% of GDP, and FDI flows are able to compensate for the current account deficits. Recently, some movements in the exchange rate were registered, reflecting some uncertainty related to the sustainability of the fiscal policy. The risk of doing business remains high as Brazil's regulations are not very business-friendly and the bureaucracy still consumes a significant amount of companies' time. Finally, the inability of the government to provide stimulus is at Medium-High. The high level of debt and the uncertainty around fiscal policy curtail the government's ability to provide further stimulus to the economy. Banking sector vulnerability is at medium as the banking system still has an adequate level of reserves despite the high interest rates. In October, Brazil will hold municipal elections. We expect the current polarization to continue, with the far-right led by Jair Bolsonaro likely to elect a significant number of mayors.

Bolivia (BOL)

Overall risk level for Bolivia is high. The biggest new risk permeating Bolivia now is the alleged attempt coup from General Zuniga against the leftist President Luis Arce. After being fired from this post for saying that he will arrest former President Evo Morales should he run for election, Zuniga moved tanks towards the government quarter in which Arce was gathering with other Ministries. Luckily, the coup attempt lasted only four years and Zuniga is on arrest now. However, Zuniga stated that the coup was staged between his and Arce, and former President Morales, who broke his alliance with Arce, also stated the coup was staged. The truth is the economic situation in Bolivia is difficult with foreign reserves reaching only USB 1Bln. Political violence risk is at medium-high as we cannot rule out other coup attempts and unconstitutional attempts of military intervention in the current government. Legal and regulatory risk is at very high as the government will seek to change the rules in Bolivia to couple with the crisis. For similar reasons, political interference risks is also at medium-high.

Supply chain disruption risks is at medium-high, the delicate economic situation and especially, the lack of US dollar could disrupt the supply chains in Bolivia. Sovereign payment risk is at high, with a fiscal deficit of around 8% of the gdp and a low level of reserves, the risk of not complying with its obligation is increasing in Bolivia. The inability of government to provide stimulus is also at high in Bolivia as there is limited fiscal space to stimulate the economy. The Banking sector vulnerability is at medium. Although the economic situation is delicate risks of bankruptcy are not in sight, the low level of foreign reserves in the central bank could deteriorate the banking sector situation in the next years.

Chile (CHL)

Our overall risk assessment for Chile is medium-low. Despite some political issues regarding the non-approval of the new Constitution, which is currently on hold with no prospects of being approved, President Gabriel Boric is currently in a situation where he does not have enough support to make critical changes to the current market-friendly environment of the Chilean Constitution.

Despite registering subpar growth in the latest quarter, inflation is controlled at 4.2%, with expectations aligned with the Central Bank's target of 3.0%. This alignment is allowing the Central Bank to cut the policy rate, which is currently at 5.75%. Political violence risk is medium-low. Despite Gabriel Boric holding a small approval rate of 30%, Chilean institutions seem to be functioning well, and there are no violent protests against him at the moment. Legal and regulatory risk is also medium-low due to the current government's difficulties in changing the pro-market framework in which the Chilean economy operates.

Supply-chain disruption risk is medium-low. Despite the Chilean economy not performing at its best, it is very unlikely that we will see supply-chain disruptions, as the economy is relatively well supplied. Political interference risk is medium-low; Chilean institutions continue to function, and there is no indication that current political figures intend to change this in the short term. Sovereign non-payment risk is medium-low, as Chile continues to maintain fiscal discipline with a debt-to-GDP ratio at controlled levels of 41%. Exchange transfer risk is medium-low, as Chile is not suffering from any currency shortages, given the central bank's adequate level of reserves.

The risk of doing business is medium-low, as Chile maintains its usual market-friendly framework, which is unlikely to change. Banking sector vulnerability is also medium-low, as the banking sector currently has an adequate level of liquidity, and the cutting of the policy rate further improves the situation. Finally, the risk of the government's inability to provide stimulus is also medium-low, as there is still some fiscal space for the Chilean government to stimulate the economy if desired.

Colombia (COL)

Colombia’s overall risk remains at a medium level. Political violence is a medium risk, and the outlook is puzzling. President Gustavo Petro will reach the halfway point of his four-year term this August, but his popularity has steadily declined. For instance, the polling agency Invamer reported a disapproval rate of 62% in July 2024 (versus 58% in February 2024). President Petro faces this situation primarily due to his 2022 tax reform and his proposals for changing the constitution, and labor, pension, and health reforms. One major concern has been the possibility of convening a National Constituent Assembly in response to the stagnation of his reforms in Congress. Some interpret this as an attempt by President Petro to stay in power after his term ends. However, the proposal is unlikely to proceed given his lack of support in Congress, and any attempt to advance it through a decree could be blocked by the court. This has generated uncertainty among the population regarding the country’s policy direction and economic outlook. The health reform, which aimed to strip power from insurers and expand access to healthcare, was rejected by a senate committee last April. This is seen as a defeat for Petro’s government, although a new bill is expected to be proposed in the coming months. The labor reform, which among other things aims to protect workers and restore unions, has progressed in Congress, although the reform must still pass three debates to become law, El Pais newspaper reported. In a victory for Petro’s government, the pension reform passed in the lower house. The reform, which is set to take effect in July 2025, includes the following key provisions: workers will contribute up to 2.3 minimum wages to the public system; a new fee will be introduced for pension funds on assets under management; and a savings fund will be established and managed by Banco de la República. The difficult and uncertain political environment has led to massive protests and young Colombians to leave the country, which coupled with corruption, lack of infrastructure, issues related to the enforcement of existing regulations, and the exposure to climate events such as droughts make the risk of doing business and supply chain disruptions in Colombia medium-high and medium, respectively. Consistent with this context, the country’s weak rule of law, intellectual property rights violations, and counterfeiting cases make legal and regulatory factors a medium-high risk. From an economic standpoint, the IMF expects Colombia to grow 1.1% and 2.5% in 2024 and 2025, respectively. Likewise, the Fund projects the country’s public debt (as percentage GDP) at 54.4% in 2024 and 2025 in 55.6%. In this environment, the risk of sovereign non-payment is medium, while the inability of the government to provide stimulus is medium-low risk. However, the outlook is troublesome. For instance, the country’s Public Credit Director has highlighted the importance of raising the debt ceiling; failure to do so could lead to a default in debt payments. Similarly, Colombia is on track for its widest fiscal deficit since the Covid-19 pandemic due to falling tax revenues, which will lead to a contractionary fiscal policy, reflected in a cut in the 2024 budget by USD 5 billion as announced by the Finance minister. Finally, the banking sector, which is experiencing rising nonperforming loans, remains liquid, well-provisioned, which makes it a medium risk.

Ecuador (ECU)

Ecuador’s overall risk remains medium-high. Political violence in the country is also medium-high. Daniel Noboa took office in October 2023 after succeeding former President Guillermo Lasso, who left office amid turmoil. Since taking over, Noboa has faced the challenge of addressing growing insecurity, which has transformed Ecuador from a safe country to one of the most insecure in the region. Consequently, addressing insecurity has become his top priority and slogan. For instance, in May, the government declared a nationwide 60-day state of emergency and an internal armed conflict, including curfews and mobility restrictions. In response to these insecurity challenges, the president called for a referendum in April 2024. It included eleven clauses, nine of which were approved, all related to insecurity; the two that were not approved concerned economic reforms. The positive response from the population to the referendum reflects President Noboa’s popularity. While recent polls suggest that his popularity is declining, he remains one of the most popular leaders in the region. Since Noboa is completing the term of Guillermo Lasso, his current term is set to end in May 2025. Nevertheless, many argue that he will seek reelection, and at this point, without strong opposition, he is poised to continue governing. Moreover, in a demonstration of his commitment to combating insecurity and corruption, he dispatched local police to apprehend former Vice President Jorge Glas, who had sought refuge in the Mexican embassy, eliciting criticism from numerous countries for violating the Vienna Convention. Consistent with this context the risk of legal and regulatory is deemed high. Indeed, illicit payments for official favors and embezzlement of public funds persist as aspects of Ecuadorian corruption culture. Several high-level officials have been involved in cases of corruption, including former president Rafael Correa and former Vice President Maria Vicuna. In addition to these obstacles, insecurity and natural disasters make the supply chain disruptions a medium risk. For instance, a drought affecting hydro-electricity production has led to massive and recurring power outages. The difficulties outlined above elucidate why the risk of doing business in Ecuador is high. Even though some modifications have been introduced to the legal scheme designed to attract foreign capital and promote investment, other elements contribute to this rating. The challenging political landscape has caused some institutional reforms to stall. Additionally, the inconsistent application and interpretation of existing laws, high hiring costs, and volatile investment policies further weaken the business environment in Ecuador. In terms of economic developments, the IMF expects the country to grow 0.1% in 2024 and 1.2% in 2025. Moreover, public debt as percentage of GDP is estimated by the Fund at 56.3% and 56.4% in 2024 and 2025, respectively. In this regard, both the inability of the government to provide stimulus and the sovereign non-payment risks are rated medium. Ecuador's fiscal position is deteriorating; consequently, the government has slashed gasoline subsidies and increased the Value Added Tax from 12% to 15% to cover expenses related to the illegal drug trade. In terms of public debt, it is characterized by being one of the lowest in the region, with elevated sovereign spreads. Moreover, the country has not been able to access international capital markets since 2019.

Guyana (GUY)

Our overall risk assessment for Guyana is currently medium-high. In 2024, news about Guyana has been dominated by tensions with its neighbour, Venezuela. Venezuela held a referendum in December asking its citizens whether they believe one-third of Guyana's territory belongs to Venezuela. Venezuela has contested this territory for several decades, and the dispute dates back to colonial times. Recently, a significant oil deposit was discovered in this contested territory. Fortunately, it seems that this Venezuelan manoeuvre is more related to electoral prospects rather than an actual movement to invade this territory.

Political violence risk is medium. Despite the contested results of the 2020 election, the country is relatively stable politically. Legal and regulatory risk is medium-high due to weak institutions in Guyana, making sudden changes to the rule of law possible. For similar reasons, political interference risk is also medium-high. Sovereign non-payment risk is medium. The debt-to-GDP ratio in Guyana is only 24%, and despite being a small economy, the boom in the oil sector is set to improve government revenues, mitigating most of the risks of an insolvency crisis. Exchange transfer risk is also medium, as oil revenues will boost the country's reserves, making a shortage of foreign currency unlikely. Banking sector vulnerability is medium-low. The country is experiencing a growth boom, and the banking system is currently strong.

Supply chain disruption risk is medium. Despite being a small economy, there is not a strong risk of disruption at the moment. This would only occur in the case of a conflict with Venezuela, but the chances of this happening are low at the moment. Finally, the risk of doing business in Guyana is high due to the country's weak institutions and business-unfriendly regulations.

Mexico (MXN)

Mexico's overall risk is medium-high. The biggest news in Mexico is related to the election results. Claudia Sheinbaum from Morena won as widely expected, building on López Obrador's legacy. However, the strong victory in the legislative houses, winning almost two-thirds to approve constitutional changes, was surprising. This raises fears of anti-market policies and a throwback in the quality of institutions in Mexico. The risk of political violence is high due to the high level of violence in Mexico, one of the countries with the highest murder rate per 100,000 inhabitants (26). Legal and regulatory risk is high due to the risk of the government implementing changes in the rule of law, especially now that Morena can make constitutional changes. This risk is even higher in the energy sector, which had reforms barred by the Mexican Supreme Court. Political interference risk is very high as the ruling party, Morena, will have more possibilities to directly interfere in the Mexican economy.

Sovereign non-payment risk is medium. Mexico still holds an adequate level of debt at 49%. Although Mexico will likely register higher deficits in 2024 and 2025, risks of non-payment are still controlled. Exchange rate transfer risks in Mexico are medium. Mexico holds an adequate level of reserves (18% of GDP), and the recent boom in exports to the United States makes the situation comfortable for the Mexican economy. The risk of doing business in Mexico remains medium-high due to the strong bureaucracy to open new businesses and the possible changes in the rules of the game that can derive from the ruling coalition, which can increase anti-market policies. Banking sector vulnerability is medium-low; the banking system in Mexico has an adequate level of liquidity and is not suffering from high rates. Finally, the inability of the government to provide stimulus is medium. The recent fiscal deficit tends to be transitory, with the government having fiscal space to further stimulate the economy if they wish.

Panama (PAN)

Panama’s overall risk is medium. In particular, political violence is also a medium risk. Recently, the country elected former security minister José Raúl Mulino as the next president for a five-year term. Mulino’s campaign began last February when he replaced former president Ricardo Martinelli, who had abandoned the campaign after being sentenced for money laundering, and concluded in May when he won 34.3% of the votes. However, his victory can be considered partial given that the ruling and allied parties only hold 15 seats in the 71-member assembly, which could complicate the approval of necessary reforms. The U.S. State Department highlights corruption and a lack of judicial capacity as issues that have either precluded further investment from foreign companies or complicated existing investments. Generally, there is skepticism about government transparency and effectiveness among the population, making the legal and regulatory environment a medium-high risk. On the supply chain front, the risk associated with disruptions is deemed medium. One of the most relevant concerns, which has recently impacted the country, relates to weather events—for instance, a historic drought has led to a reduction in Panama Canal transits. Other challenges include high government fiscal deficits, unemployment, inequality, and occasional large-scale protests, among others. Overall, its risk of doing business is assessed as medium. On the economic front, Panama’s GDP is expected to grow by 2.5% and 3.0% in 2024 and 2025, respectively. Moreover, the IMF foresees the country’s public debt as a percentage of GDP at 54.1% in 2024 and 55.1% in 2025. In this context, sovereign non-payment is a medium risk due to the challenging economic outlook and fiscal situation, with GDP growth projected to decrease to 2.5% in 2024, primarily due to the closure of the Cobre Panamá copper mine and higher financing costs. However, the significant progress in reducing the fiscal deficit from 10.0% in 2020 to 3.0% in 2023, combined with the government's planned 2025 budget to inspire confidence in global bond markets, indicates a level of fiscal responsibility. Moreover, President Mulino's focus on austerity, increased public investment, and a clear foreign policy is expected to generate confidence among business sectors and analysts. Government's inability to provide stimulus is a medium-high risk. Lastly, the vulnerability of the banking sector is also assessed as a medium-high risk. Even though the sector remains resilient, featuring liquidity and solvency buffers above regulatory requirements, low levels of non-performing loans, and expanding balance sheets, higher interest rates and a slowing economy increase the sector’s risk.