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Fitch Report: Emerging economies outperform developed ones, the case of Latin America.

Stephen Joynt Chief Executive Officer Fitch Ratings

Stephen Joynt Chief Executive Officer Fitch Ratings

With early-2010 data providing conflicting indications over the sustainability of the global recovery, Fitch Ratings believes the largest emerging market (EM) economies are demonstrating a greater resilience than their developed market peers, underlining the prospect of a two-speed return to trend growth levels.

In turn, this is leading to a relatively faster rate of recovery in the credit quality of non-financial corporate issuers domiciled in the major emerging markets.

However, given the challenges still facing the global economy, the agency cautions that the recovery momentum being generated by the leading EMs could be curtailed by a number of variables – including stubbornly high US unemployment levels; an absence of recovery in the US housing market; increased protectionism impacting global trade; and potential policy mis-steps by leading economies’ central banks and governments, as they seek to time their exit from stimulus-induced loose fiscal and monetary policies.

Any or all of these factors could still produce a “double-dip” recession scenario, which would have a substantial negative impact on corporates in EM economies – and particularly those that are more exposed to, and dependent on, global export markets.

In Latin America (LatAm), Fitch is seeing an improvement in market sentiment, as well as a return to a more “normal” business environment. Liquidity risk, in particular, has declined as the availability of financing recovered strongly in the second half of last year.

Since the middle of 2009, several non-bank corporates with ratings that range from ‘B’ to ‘BBB’ have successfully tapped the debt capital markets. Total cross-border issuance volume by non-financial corporates during this time period was $36.1bn. This compares with about $5.6bn during the first half of 2009, and less than $5bn during all of 2008.

As a result of these capital market conditions, plus above-average support provided by relationship banks and government development banks, capital structures can generally be described as above average. Debt amortisation schedules appear manageable for most rated companies in the region.

Commodity prices play a key role in credit risk, and are also expected to have a significant impact on GDP growth.

Leading the growth will be Brazil, with a projected GDP growth rate of 5.3 per cent in 2010. Mexico is projected to grow by three per cent during 2010, after falling sharply during 2009.

The outlook for the Latin American commodity producers, specifically metals and mining, is stable in 2010. The companies in this region have been better able to weather the global downturn than their international peers, despite significant falls in operating profit during 2009.

Demand should improve in the region for many commodities – owing to government stimulus programmes, which have increased construction activity, industrial production, and infrastructure projects.

China also continues to be a key market for these companies, and its demand for commodities such as iron ore and copper is anticipated to be strong in 2010.

Assuming limited M&A activity, rating actions should be minimal during 2010, and leverage should begin to return to pre-credit crisis levels. READ MORE HERE.-

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