Fitch Questions Mexico’s Nearshoring Gold Rush, Predicts Tricky 2024 for LatAm Debt

Todd Martinez, senior director in Fitch Ratings’ sovereigns group, spoke to Bloomberg Línea at the Americas Society/Council of the Americas’ BRAVO event in Miami

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October 24, 2023 | 02:00 AM

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Miami — Next year will likely be a “tricky” one for Latin American debt, Todd Martínez, senior director in Fitch Ratings’ sovereigns group, told Bloomberg Línea during the Americas Society/Council of the Americas’ (AS/COA) annual BRAVO event in Miami on October 20.

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The analyst, responsible for analysis and ratings of sovereign credits across Latin America, also raised questions about a nearshoring “gold rush” in Mexico, as foreign direct investment data has not yet ticked up above historical averages.

After initially frightening markets, Chilean President Gabriel Boric and Colombia’s Gustavo Petro are now seen by Fitch as unlikely to provoke any changes in their country’s sovereign rating.

In Brazil, the Lula da Silva administration will continue to benefit from strong domestic demand, despite a significant slowdown in economic activity next year. What’s more, Martínez pointed to “a lot of opportunity in the green energy transition globally, in which Brazil has a big role to play”.


We see upside in the microeconomic agenda of Lula on some fronts”, the analyst said.

The following conversation was edited for length and clarity.

Bloomberg Línea: It’s been a year and a half since set Gabriel Boric took office in Chile, one of the stars of Latin America in terms of its fixed income market. What are your conclusions on how his government has impacted Chile’s sovereign rating standing, and how do you foresee the prospect of any radical reforms playing out on the risk side?


Todd Martínez: So, we’ve had Chile at its current rating of ‘A-’ with a stable outlook for several years, so since Boric took office we’ve kept this rating and I think that reflects the fact that even though he’s a president from the left who has pledged a redirection in policies, we haven’t seen any major redirection of macroeconomic policies or any big changes in microeconomic policies either. He nominated a pretty sensible finance minister, Marcel, and the finance ministry for example has left the central bank to continue to do its job and pursue practical monetary policy, and hasn’t interfered in the exchange rate policy.

Yes, we’ve seen the fiscal position fluctuate wildly, but that’s mostly a reflection of the economic and copper price cycle; it’s not really a reflection of different policies under Boric. On the micro economic policies, he has outlined some pretty ambitious reforms he’d like to deliver, but is facing a lot of frosty reception in Congress to a lot of those.

And, at least on the constitutional reform process that’s been going on a while now, we don’t expect that to result in big change. What we’ve seen in Chile is the status quo which is sort of good news as it rules out really negative scenarios to us. But on the other hand the status quo of legislative gridlock but social discontent that isn’t being addressed is a pretty sub-optimal status quo. It’s making it hard to envision reforms that could really help Chile achieve higher growth. It means a period of uncertainty and social discontent that can continue weighing on confidence as well.

Would you attribute the Chilean currency tanking initially more to macro trends, to copper price dynamics, rather than to Boric’s agenda?


The fluctuations in the exchange rate, to some degree, may not just be reflecting external factors but domestic political concerns as well. At least from our point of view there hasn’t been big changes in policies that we thought warranted any modifications in the rating. But this exchange rate might be reflecting some market concerns on that front. Big depreciation in the Chilean peso a few years ago, recovery, but now another depreciation again. I think the latest depreciation though is probably mostly due to external factors, worries around China, and in copper prices, whereas there is this understanding from what we’ve heard that Boric is a president who’s not going to be able to carry out some some of some reforms that are of some concern to the market So we don’t see any big changes in Chile’s economic model.

There has been a similar sort of shift in the political landscape in Colombia, but the Colombian peso has been recovering strongly this year. What is your view on the Petro administration going forward into 2024?

It’s a similar story to Chile, and what is sort of unique in Colombia is that when Petro took office, the country hadn’t had a president from the left like him before. So in hindsight I think it’s pretty understandable why there was such a pronounced reaction in the exchange rate market, for example, but sort of similar to Chile. Since he took office we’ve seen that he’s actually pursued a fairly pragmatic macroeconomic policy. There’s been tax reforms and reduction in subsidies that have helped put the fiscal numbers in the right direction. He’s made some noise about monetary and exchange rate policy, but hasn’t followed through with any sort of concrete interventions. In macroeconomic economic policies he does have some ambitious reforms, but he’s lost his working coalition in Congress that is likely to be needed to see those across the finish line. So I think once again the market is expecting continued noise, but not any major policy deviations under Petro, and that’s led to somewhat of a relief rally in the Colombian peso after the selloff when he took office.


The Brazilian economy is performing strongly this year, but dealing with what is still a high-interest rate environment, a slowdown in growth is expected next year. What is your view on Brazil?

Our projections are 3.2% growth this year, which is a big upward revision for what we were expecting earlier. We’re expecting a slowdown to 1.3% next year. On one hand that is a pretty significant slowdown, but I would highlight that it is almost entirely reflecting the expectation that there will be a normal agricultural harvest after the record strong one this year. So netting out this sector and looking at domestic demand, we really have solid growth this year going to next year, as fiscal policy becomes less supportive, but monetary policy loosens and becomes more supportive.

On the downside, Brazil has a lot of fiscal challenges. Lula began his term with a big spending increase and is promising that he’ll get the deficit back down over time by raising taxes and achieving administrative gains in tax collections. He’s having a hard time passing a lot of those in Congress, so that’s a risk. If Brazil can’t show the fiscal numbers moving in the right direction that could have a negative impact on confidence, on financial markets, on monetary policy and therefore on the growth outlook.

On the positive side, even though Lula’s promising a return to a more state-led growth model that didn’t work so well in the past, one of his marquee reforms is a tax reform that does move in the right direction in addressing one of the country’s biggest bottlenecks. There’s also a lot of opportunity in the green energy transition globally, in which Brazil has a big role to play. We see upside in the macroeconomic agenda of Lula on some fronts.


Do you see Mexico beginning to capitalize on the nearshoring trend with greater strength next year, one marked by presidential elections?

This is the hottest topic right now and one we’re thinking about a lot. I have to say we’ve looked a lot at some data, and I have to say it’s hard to see the nearshoring story in all the data. FDI data in Mexico, at least looking through the second quarter this year, is not any higher than its historic average, and the component of greenfield FDI -new equity investment in land, parks and equipment- is not showing this gold rush from nearshoring.

On the other hand, investment numbers are looking pretty good. They’re moving in the right direction. Anecdotally you hear a lot of talk of very busy industrial parks. To some degree, in a passive policy scenario, without the government doing anything, there’s going to be some nearshoring benefit, but it could be much greater in an active policy scenario, where there are efforts to court that investment and address some of the bottlenecks that are keeping some investors cautious.


I think the main one is electricity access. This is a government that doesn’t have an energy policy that’s very conducive to private investment in electricity, and namely in renewables, and that’s something that a lot of these potential nearshoring investors are wanting to see. They want confidence in access to affordable electricity and also green electricity, because a lot of companies are subject to their own ESG requirements that may require them to source from green sources. Right now the Mexican policy is not particularly conducive to that. I see the focus more on tax incentives, which is a recent announcement Mexico has made, rather than on this more important issue.

So the base scenario would be more of the same in 2024 in Mexico, because the expectation is for the ruling party to win the elections?

Yes, absolutely. We never really have firm baselines on who’s going to win an election. We look at all the scenarios and decide how much risk we see in any of them. But at least in Mexico no matter who wins the presidency, whether it’s the opposition and whether it’s the the candidate from the ruling party, I think we’re likely to see broad policy continuity, and I think we do hear some optimism on the part of the private sector that even If it’s the Morena candidate, there could be a somewhat more pragmatic energy policy, one that’s more conducive to private investment in electricity and green electricity.


Moving on to the debt market as a whole in Latin America, what kind of 2024 can we expect in terms of rates and issuances?

It’s going to be tricky. On the one hand you have the 10-year US Treasury bonds at 5%. That means countries are going to have to pay a much higher cost to issue than they were before. This isn’t unique to Latin America, it’s a challenge faced by the whole world. We also expect that most countries are going to have to borrow more, because last year the fiscal numbers were looking very good, but we think we’ve reached an inflection point, where last year inflation was helping the revenues, but was affecting spending more slowly, because it has to feed through via indexation mechanisms and budgets, which have more of a lag.

This year we’re seeing the opposite. Revenues are coming down as inflation moderates, but spending is reflecting all those pressures from higher past inflation. So deficits are rising almost everywhere. That includes Mexico, Brazil and Chile. It does not include Colombia, there are some exceptions. And that means that going into next year countries are going to be in a position where they have to probably borrow more and at somewhat costlier rates. I think that’s going to put more emphasis on countries maybe needing to rely more on their domestic markets, where rates hopefully will be coming down in most places.

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