The four main issues that will influence credit quality are: higher interest rates sustained over time, reforms and regulations, adaptation to structural changes and polarization.
In its most recent report, the credit rating agency Moody's Ratings has pointed out the various credit implications faced by Latin American companies, derived from four main themes that will influence global credit quality in 2024: higher interest rates sustained over time, reforms and regulations, adaptation to structural changes and polarization.
Against this backdrop, it stands out that high financing costs are reducing both spending flexibility and margins, especially for more than two-thirds of Latin American companies with speculative ratings. In addition, other risks are identified, such as the results of elections, such as those in Mexico, and the economic slowdown in China, as well as environmental risks and social tensions.
Regarding the economic outlook for Brazil and Mexico in 2024, a slowdown in growth is anticipated after a surprisingly strong 2023, although consumption still shows resilience in Mexico. The region is also experiencing an increase in decarbonization efforts and increased concern about the physical risk of climate change.
On the other hand, the relaxation of financing conditions and GDP growth are expected to benefit the financial sector, which will expand its loan portfolio. Additionally, credit conditions for Latin American non-financial companies are expected to ease in 2024, but high interest rates will continue to limit performance, especially in consumer-oriented sectors such as food and protein.
In the field of transportation and energy, it is highlighted that although passenger traffic is a good sign for Latin American airlines, economic and social risks pose threats to the favorable context for airports. Meanwhile, the expansion of renewable energy generation and improving credit metrics for power companies are positive trends, but transmission and utility companies must increase their investment to support the energy transition in Latin America.
Regarding the banking situation, it is anticipated that the easing of monetary policy will likely benefit the net interest margins of Latin American banks. Although the tightening of lending rates will reduce interest income, lending rates will only decline slightly due to remaining high interest rates and banks' ability to set them.
Finally, digitalization is expected to be crucial to maintaining the profitability and competitiveness of Latin American banks in a context of intense competition and changes in customer needs. Additionally, banks will continue to adopt stricter risk-based capital frameworks as a safeguard against financial crises.
