THE overall improvement in credit quality that Latin American and Caribbean sovereigns have generally experienced over the last decade will be abating says Moody’s Investors Service, as external conditions become less supportive and economic growth is slower.

In a less forgiving macroeconomic environment, domestic policies will play an increasingly important role in shaping credit quality.

“We do not foresee major changes to macroeconomic conditions in the region. Many of these sovereigns have made progress in structural reforms, improved fiscal sustainability and have manageable government debt levels,” says Jaime Reusche, Moody’s vice-president and senior analyst in the latest annual ” Sovereign Outlook: Latin America and the Caribbean.”

“As external conditions become less supportive, sovereigns across the region could face credit pressures if structural economic features deteriorate, complacency sets in and institutional enhancements are not fortified or continued.”

Economic growth across the region is likely to remain below the rates recorded over the past decade, although most countries will experience a pickup in economic activity from 2013.

Because external conditions have become less supportive growth momentum will likely have to be generated domestically, says Moody’s.

The average growth rate in the region will be 3 per cent during 2014 according to Moody’s. Countries in Central America and the Caribbean will tend to post lower growth rates.

Strong economic growth over the last decade supported an improved fiscal performance. For 2014, Moody’s expects government deficits to remain moderate, supporting relatively stable debt ratios.

In the report, Moody’s presents assessments of five key credit performance drivers for 28 countries including growth positions, fiscal positions and external balances.

Moody’s notes that 18 of the 28 sovereigns discussed in the report have ratings with stable outlooks with the remaining 10 evenly split between positive outlooks and negative outlooks.

During 2013, rating downgrades in Latin America and the Caribbean surpassed upgrades for the first time since 2003 with four downgrades during the year and two upgrades.

For several years, negative rating actions were concentrated in countries in Central America and the Caribbean. However, recent rating changes – including a downgrade of Argentina – show that South America is not immune to negative actions says Moody’s.