FITCH Ratings says borrowing needs among Latin American governments will likely decline to US$428 billion in 2013, or 7.3 per cent of regional GDP.
The forecast represents a significant drop in financing needs from an average of nine per cent of GDP in the four years after the global financial crisis, according to a new Fitch Ratings report.
"Most of the decrease in the region's borrowing requirements stems from the reduction in domestic and external debt redemptions, resulting from adept liability management in several countries while fiscal deficits reduction contributes only marginally to the decline," said Shelly Shetty, head of Fitch's Latin America Sovereign Group.
The financing needs of some of the largest economies, including Brazil, Colombia and Mexico, are expected to fall, but — except for Colombia — will remain higher than the Latin American median of 5.9 per cent of GDP in 2013, reported Fitch.
The ratings agency noted that these countries show lower fiscal deficits but higher amortisations than their regional peers. However, the large absorption capacity of their domestic bond markets mitigates financing risks, the agency said.
The funding requirements of some of the smaller countries including Bolivia, Chile, Guatemala, Peru and Uruguay, are lower than the Latin American median thanks to their sustained growth, prudent fiscal management, low amortisations and ample financing flexibility. Proactive debt management could further extend government debt maturities, lower interest costs and support the development of local bond markets in some of these countries.
Fitch forecasts Ecuador, El Salvador, Dominican Republic, Panama and Venezuela to pose higher fiscal deficits than the regional median of 2.6 per cent of GDP in 2013. Argentina, Costa Rica and Jamaica are the only countries where borrowing requirements are expected to exceed 10 per cent of GDP in 2013.
The drive towards domestic and local currency issuance will continue in 2013, with governments likely to raise up to 91 per cent of their total borrowing requirements from domestic sources, the report said, adding that countries will progressively lengthen maturities and substitute floating-rate debt for fixed rate obligations to insulate their sovereign debt portfolios from interest rate variations.
"Increasing foreign participation in government domestic debt markets will likely continue this year given the interest rate differentials with the developed world and stable to appreciating currencies in the region," said Cesar Arias, associate director in Fitch's Latin America Sovereign Group and co-author of the report.
"These portfolio inflows are broadening the investor base, enhancing market liquidity and improving debt composition."
As a result, Fitch forecasts external bond supply to increase only slightly to USD19.3 billion in 2013, covering a marginal 4.4 per cent of regional financing needs. While speculative grade sovereigns with narrower domestic investor bases are expected to ramp up international issuance in 2013 to cover fiscal gaps and finance infrastructure plans, placements by investment grade countries — which use external debt primarily to diversify their funding sources and provide liquidity to their long-term global benchmarks — could drop by eight per cent relative to 2012.
Fitch's special report '2013 Latin America Government Financing Needs: Back to Pre-Crisis Levels amid Improved Debt Management' is available at 'www.fitchratings.com'.