NEW YORK--(BUSINESS WIRE)-- Without an extension of the exceptional, decade-long commodity cycle and significant commodity price increases, further progress for Andean sovereign creditworthiness will depend on stronger policy frameworks that reduce vulnerabilities and improve weak structural factors, according to a new Fitch Ratings report.
'While a particular set of challenges confronts investment grade and speculative Andean sovereigns, progress in structural factors such as institutional strength, income levels, international trade integration, competitiveness and increasing investment are key to continuing to make progress up the rating scale,' Said Erich Arispe, Director in Fitch's Sovereign Group.
Creditworthiness in the Andean region improved over the past decade underpinned by the accumulation of foreign assets, debt reduction, improved macroeconomic performance and reduced political instability.
The intra-regional ratings gap has increased though. Peru and Colombia reached Investment Grade and Bolivia moved into the 'BB' category in early October 2012, while Venezuela and Ecuador remain in the highly speculative 'B' category.
Most Andean sovereigns have the capacity to withstand the external pressures from a temporary drop in commodity prices and sluggish global economic growth because of their policy flexibility, reduced external financing needs and healthy financial sectors. Nevertheless, the degree of economic strength and rating resilience is likely to vary across sovereigns depending on how robust their policy frameworks are, as well as their fiscal and external buffers.
Favorable debt dynamics and a record of macroeconomic stability allow Peru and Colombia to respond to external shocks and support domestic demand through counter-cyclical fiscal and monetary policies. Among speculative Andean sovereigns, Bolivia has the maximum fiscal space due to its low government indebtedness.
Venezuela and Ecuador could respond to a sharp adjustment in external conditions to prevent destabilizing balance of payments or fiscal pressures by imposing measures such as import restrictions. Even so, their potential policy actions could have substantial costs for external liquidity, sources of financing, and growth.
At this time, Fitch does not anticipate a replay of the 2003-2011 commodity cycle.
'If commodity prices remain stable, policy choices and reforms will be key to sustainable progress in the region's creditworthiness in the medium term', added Arispe.
The Andean region could strengthen policy frameworks, build-up fiscal and external buffers and increase the mining and hydrocarbons output to mitigate risks from commodity dependence.
The special report 'The Andean Region After the Commodity Decade' is available at 'www.fitchratings.com'.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research: The Andean Region After the Commodity Decade
Eric Arispe, +1-212-908-9165
One State Street Plaza
New York, NY 10004
Cesar Arias, +1-212-908-0358
Santiago Mosquera, +1-212-908-0271
Elizabeth Fogerty, New York, +1-212-908-0526
Source: Fitch Ratings