Moody’s Sees Little Credit Risk from Brazil’s Slow Growth

Brazil’s persistently low economic growth over recent years has only limited implications for the economies and credit quality of the other Latin American countries, according to a report by Moody’s Investors Service.

The credit ratings agency (CRA) suggests that possible ‘slowdown contagion’ from Brazil will be limited because only a few countries have strong economic ties to Brazil, and these linkages are mainly through trade.

According to the report, entitled
‘Below-Trend Growth in Brazil Presents Limited Credit Risks to Rest of Latin America’
, within the region, trade exposure is particularly high in four countries: Paraguay, Bolivia, Argentina, and Uruguay.

A higher degree of economic openness – how much of economic activity involves imports and exports – heightens a country’s exposure to trade shocks. Countries with exposure to Brazil and a relatively high degree of openness include Paraguay and Bolivia, followed by Uruguay and Argentina.

“From a credit standpoint, the significance of below-trend growth in Brazil for the countries that we identify as most vulnerable will depend on how weak, or robust, their growth prospects are to begin with,” said Moody’s analyst Jaime Reusche, author of the report.

For instance, since Argentina’s growth rate has fallen to about 2%-3% from an average of 8.4% in 2004-08, persistently weak Brazilian growth could materially undermine already weakened growth dynamics.

For Uruguay, which after growing 6% on average from 2004-11 is now moving toward an annual rate more in line with potential growth of around 4%, Brazil’s slowdown will only contribute to the moderating trend already underway.

In Bolivia and Paraguay, a track record of relatively high growth despite persistent economic weakness in Brazil is the basis for Moody’s view that Brazil-related trade shocks would not necessarily lead to an abrupt adjustment in their growth dynamics.

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