Low rates support Latam sovereign debt affordability despite rising debt - Moody's


By Jamie McGeever

BRASILIA, Sept 23 (Reuters) - Low interest rates will help Latin American governments service their rising debt burdens, potentially for some time to come as low growth and inflation suggest borrowing costs are unlikely to rise much, ratings agency Moody's said on Wednesday.

Of the five sovereign credit profiles analyzed, Brazil and Colombia will benefit most from ultra-low rates, Moody's said, Chile and Peru boast low debt burdens and relatively high debt affordability, and Mexico's debt affordability is deteriorating.

"Lower rates will support debt affordability, as measured by interest payments as a percentage of government revenue, for the five sovereigns," Moody's said, adding, however, that this will be mitigated by weak economic growth.

The Moody's note comes as the surge in government deficit and debt across the region due to the COVID-19 pandemic has intensified the debate on how and when public finances should be brought back to health.

Brazil's government, in particular, has seen its debt load soar. But record low interest rates have improved its debt affordability "significantly", with interest payments dropping to 18% of revenue in 2019 from nearly 30% in 2015.

This ratio should fall further next year, Moody's said, noting that the central bank's policy rate is now just 2.00% compared with more than 14% in 2015. Considering its huge debt load, lower rates have had a "material positive" impact on its credit quality, Moody's said.

Mexico's interest payments will rise sharply to nearly 15% of government revenue next year from around 9.2% in 2015, Moody's said, noting that higher inflation limits the room for further rate cuts despite the "severe" economic downturn.

"It is unclear whether Mexico's debt affordability metrics will improve sustainably given that interest rates did not fall below their long-term average until the pandemic-induced economic contraction this year," Moody's said.

Colombia and Peru are most exposed to shifts in global interest rates and sovereign credit spreads given their large share of foreign currency debt, Moody's said, while the benefit to Chile is "not material" given its relatively high debt affordability and moderate debt burden of around 39% of GDP.

(Reporting by Jamie McGeever; Editing by Sandra Maler)

((jamie.mcgeever@thomsonreuters.com; +55 (0)11 97189 3169; Reuters Messaging: jamie.mcgeever.reuters.com@reuters.net))

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


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