Economy

Fitch: COVID-19 is a major risk factor for the downgrade of Latin American economies

Even in the face of Brazil's slow response to the pandemic, BofA says the real is the region's currency with more chances of thriving before the dollar

200 reais note are seen after Brazil's Central Bank issues the new note in Brasilia, Brazil September 2, 2020. Photo: REUTERS/Adriano Machado/File Photo
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  • Fitch analysts said that the way the region handles this second wave of infections, the pace of vaccine distributions, and the general weakness of public health systems would be closely monitored;
  • BofA’s survey shows that the Brazilian real is the main bet among the region’s currencies that will perform better in the next six months.

Latin American economies will recover (to some extent) this year of the 2020 recession. However, the risks, almost all, still point to a more negative scenario, depending mainly on the response to the COVID-19 pandemic. That’s what Fitch Ratings’ analysts say.

Slower growth will also undermine governments’ efforts to bring deficits and public debt back to a more sustainable and downward path, as the second wave of infections raises public pressure for increased spending.

Shelly Shetty, Fitch’s sovereign managing director, said the way the region handles this second wave of infections, the pace of vaccine distributions, and the general weakness of public health systems will be closely monitored.

READ ALSO: Only five Latin American countries have started vaccination against COVID-19

“We don’t see many upside risks … (we see) several downside risks,” Shetty said in an online presentation.

Peru will register the largest growth in the region this year, exceeding 5%, while Brazil‘s economy will grow just over 3%, limited by an expected tightening of fiscal policy, she said. The recovery is expected to be supported by China’s 8% growth, strong global commodity prices, accommodative domestic monetary policy, and favorable base effects.

“Consolidation will be a multi-year process,” she said, stressing that over half of all Latin America sovereign ratings outlooks are negative, the highest for any region in the world, and with no positive outlooks.

READ ALSO: Pressured by food prices, inflation ends 2020 at the highest level in 4 years in Brazil

Brazilian real is main investor bet among Latin American currencies

Despite the slow response of Brazil to the pandemic, the real is the biggest bet among the currencies that will perform better in the next six months, according to a Bank of America (BofA) survey of investors and institutional clients.

READ ALSO: Exchange rate imbalance between the Brazilian real and the dollar will persist in 2021, say analysts

In the survey released on Wednesday, the real was cited by 44% of respondents as the currency that will record the best performance in the next six months. The Mexican peso, with 33% of the votes, came in second place.

Regarding the projections for the exchange rate, the BofA survey showed that 69% of respondents see the dollar below BRL 5.10 at the end of 2021. Most responses are concentrated in the range between BRL 4.81 and BRL 5.10.

Most respondents expect the growth of the Brazilian economy to be between 2% and 4% in 2021. BofA projects a rate of 3.5%.

Translated by LABS