Economy

Probability of default dropped on LatAm's two largest economies

The economic crisis that hit Brazil and Mexico because of pandemic did not result in many bankruptcies or defaults thanks to measures to preserve economic activity

Construction site in Brasilia, Brazil.
Photo: Dênio Simões/Agência Brasília
  • The Brazilian companies in the consumer discretionary sector have the largest probability of default (PD) – stands at 3.97%;
  • The Mexico’s PD levels across sectors remain higher of the Brazilian levels, but have also dropped to levels seen before March 2020.

The probabilities of default of Latin America’s two largest economies, Brazil and Mexico, dropped to pre-pandemic levels, indicating that the arrival of vaccines and better planning have alleviated bankruptcy fears. 

The analysis, made by S&P Global Market Intelligence, indicates that the Brazilian companies in the consumer discretionary sector have the largest probability of default (PD) – stands at 3.97% –, while other sectors like industrials and financials companies show probabilities of less than 2%.

The score represents the odds that a company will default in the next year based on fluctuations in the company’s share price and other country and industry related risks.

Image: S&P Global Market Intelligence

The Mexico’s PD levels across sectors remain higher of the Brazilian levels, but have also dropped to levels seen before March 2020. The largest probability of default is from the Mexicans companies in the consumer discretionary sector too, as in Brazil, at 7.8%. Communication services and energy companies show a probability of default of 5.4% and 3.2%, respectively.

Image: S&P Global Market Intelligence

According to S&P, the two countries adopted very different measures to preserve economic activity in the face of the COVID-19 pandemic. While Brazil managed to boost production by spending about 10% of GDP on stimulus and aid packages, Mexico spent only 1.1% of its GDP.

The macroeconomic crisis that hit both countries, however, did not result in many bankruptcies or defaults for companies. Only four defaults were reported by S&P Global Ratings in Mexico during 2020, and only three in Brazil, thanks to facilities to renegotiate loans and debts.

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“The economic decline in 2020 was brutal, but there were [government] support measures and refinancing was abundant, which allowed the default rate to remain much lower than we expected” said Diego Ocampo, Senior Director & Sector Lead for Latin America at S&P Global Ratings.