UNPAID BILLS ARE ON THE RISE IN LATIN AMERICA. ALL YOU NEED TO KNOW ABOUT IT
As the economic effects of the COVID-19 pandemic continue to manifest themselves in the various countries of Latin America, the first signs of non-payment by companies in the region are also appearing.
At Credit Report, we know that now is the best time to strengthen credit analysis in international trade, both for new clients who may find themselves in the market and for those who are regular clients.
Two major credit rating agencies, Moody’s and Fitch, agree that several factors are influencing this increase in corporate defaults in Latin America. Below, you will find a summary with everything you need to know about defaults in the region.
What factors are driving the trend of defaults in Latin America?
Fitch’s director of debt ratings for Latin America, Shelly Shetty, specified that the trend of defaults is not only related to the economic shock produced by the new coronavirus but also to a fall in the prices of oil and other raw materials such as iron, copper or uranium, which are essential to the region’s foreign trade.
“We have to be aware that we are analyzing the probability of default. Countries are becoming more vulnerable and we will take action to reflect that increased vulnerability,” Shetty said in a video conference broadcast by the firm.
What are the estimated rates for the region in 2020?
Moody’s has increased its projection of corporate default rates to between 6.8% and 10.2% by the end of the year in Latin America. This was mainly driven by a growing trend of corporate defaults that totaled 2.2% at the end of May.
Which countries have the worst default projections?
Another coincidence between Moody’s and Fitch ratings is the countries with the highest probability of default in the short term: Argentina, Brazil and Mexico.
Companies based in these three Latin American countries have the worst default projections not only because of the severe recession that the region will face due to the strength of the COVID-19 pandemic. These firms are also influenced by their dependence on the export of raw materials and the fall in prices of these products on the international market, as well as the brake on tourism activity.
What other countries appear in the projections of non-payment?
Chile, Colombia and Panama were other nations included in Moody’s default projections. While Fitch apart from these three countries also adds Uruguay, Bolivia, Costa Rica and Aruba.
Although the financial balances of each company are different in these countries, the major rating agencies agree that these economies will be affected by a multiplicity of negative impacts received due to the COVID-19 pandemic and other variables that were already present, but now have the potential to worsen in the midst of the economic recession.
Which sectors can be prioritized for payments?
Moody’s believes that mining companies in Chile and Peru, as well as other companies associated with oil activity, can receive strong support from central governments to maintain their operations.
The rating agency also projects that the most important loans can be granted to these mining and oil sectors, as well as to other companies that, although they are private, tend to have a strong backing in state investments.
Which sectors are weak in coping with their defaults?
As with the global economic outlook, tourism and airlines are perceived as two of the sectors with the greatest weaknesses in meeting their previous commitments.
Not only are airlines such as Avianca of Colombia or Latam of Chile declared bankrupt, but international tourism seems to be one of the last sectors to obtain complete fluidity after the control of the COVID-19 pandemic.
Mitigating credit risk has to be one of the key objectives for any international trade company at this time and at Credit Report we can help you evaluate credit lines with companies present in any Latin American country.