/raid1/www/Hosts/bankrupt/TCRLA_Public/240516.mbx
T R O U B L E D C O M P A N Y R E P O R T E R
L A T I N A M E R I C A
Thursday, May 16, 2024, Vol. 25, No. 99
Headlines
A R G E N T I N A
ARGENTINA: Grinds to Halt on 2nd Strike of Milei Presidency
B A H A M A S
FTX GROUP: Files Amended Reorganization Plan
B R A Z I L
BANCO DO ESTADO: Fitch Puts 'BB-' LongTerm IDR on Watch Negative
BRAZIL: Succumbs to the Retail Apocalypse It Staved Off for Years
STATE OF MARANHAO: Fitch Affirms 'B' LongTerm IDR, Outlook Stable
C H I L E
CHILE: Central Bank Says Economy Recovering But Some Sectors Lag
C O L O M B I A
CANACOL ENERGY: Fitch Cuts USD500M Sr. Unsec. Notes Rating to 'CCC'
D O M I N I C A N R E P U B L I C
DOMINICAN REPUBLIC: Receives US$10-Billion in Remittances Last Year
DOMINICAN REPUBLIC: Reports Lowest Inflation Rate in 46 Months
G U A T E M A L A
BANCO INDUSTRIAL: Moody's Affirms 'Ba1' Deposit Ratings
U R U G U A Y
URUGUAY: IMF Says Economy is Expected to Strongly Rebound in 2024
- - - - -
=================
A R G E N T I N A
=================
ARGENTINA: Grinds to Halt on 2nd Strike of Milei Presidency
-----------------------------------------------------------
Buenos Aires Times reports that Argentina practically ground to a
halt as a massive general strike called by the nation's main union
federation challenged President Javier Milei's government and its
severe austerity.
In the nation's capital, streets were mostly empty, with very
little public transport. Many schools and banks closed their doors
while most shops were shuttered. Garbage was left uncollected,
according to Buenos Aires Times.
Rail and port terminals were closed, while the industrial action
forced the cancellation of hundreds of flights, leaving airports
semi-deserted. Some buses - from firms that did not take part in
the strike - were running in the morning, although with few
passengers, the report notes. Cars were circulating, but traffic
levels were similar to that seen on weekends, the report relates.
The port of Rosario, which exports 80 percent of the nation's
agro-industrial production, was all but paralysed in the midst of
its busiest season, the report discloses.
The 24-hour protest was called by labour unions in support of "a
dignified wage" for Argentines battling a severe economic crisis,
with annual inflation nearing 300 percent and poverty affecting one
in two people, the report says.
Yet the nationwide strike, called by the CGT umbrella grouping, did
not include plans for a mobilization of unionized workers, the
report notes. It is the second mass walkout of President Milei's
time in office - he has only been in office for six months, the
report relays.
The action comes as the government attempts to secure passage
through Congress of a sweeping reform bill that, among other
things, would amend existing labour laws, the report discloses.
Buenos Aires relates that union leaders say they reject the
austerity imposed by Milei and reiterated their opposition to the
so-called 'Ley de Bases' law.
The CGT's leaders accuse Milei and his government of rejecting
"social dialogue" and implementing "a brutal adjustment that
especially affects the lower income sectors, the middle classes,
retirees and pensioners," the report relays.
CGT co-leader Hector Daer celebrated the "forcefulness" of the
strike and said its size proved that "the government has to take
note," the report discloses.
Voicing the government's line, Presidential Spokesperson Manuel
Adorni described the strike as "an attack on the pocket and against
the will of the people," stating that it affected those who most
need to work and put "a plate of food on the table," the report
relays.
The report notes that Milei's chief spokesman said the CGT and
other unions were "people who have curtailed the progress of
Argentines over the last 25 years."
"This is a strike that damages and complicates the lives of many
people," said Adorni at his daily press conference, the report
says.
"It is an absolutely incomprehensible strike" based on "extortion
and threats," he claimed, branding union leaders "the
fundamentalists of backwardness," the report relays.
He said all state employees that adhered to the strike would have a
day's pay deducted, the report discloses.
Security Minister Patricia Bullrich, one of the government's most
outspoken ministers, called on the population to "go out to work"
at an impromptu press conference held at a bus stop in
Constitucion, one of the main transport hubs in the capital, the
report notes.
"There are means of transport for those who want to go to work,"
Bullrich claimed, failing to acknowledge the thousands of buses
that were not in service, she added.
With television cameras in tow, she then boarded a bus to travel
back to her office, though she did not have enough credit on her
Subte transport card and had to use an aide's, Buenos Aires
relates.
Government officials claimed that some buses that were running had
been attacked, though they did not specify where the incidents had
taken place, the report discloses.
Recession and Austerity
Argentina is experiencing a severe economic recession, with
inflation hovering at around 290 percent year-on-year, the report
notes.
Since taking office, Milei has embarked upon a strict campaign of
austerity, the report relays. Public spending cuts allowed the
government to record a budget surplus in the first quarter of the
year for the first time since 2008, but it came at the cost of
thousands of layoffs, the elimination of subsidies, rising utility
rates and the deterioration of wages and pensions, the report
says.
Milei insists his "plan is working" and has said the protests go
"against what people voted five months ago." But critics say
Milei's few wins have come at the cost of the poor and working
classes, and are unlikely to last, the report discloses.
Data published by the INDEC national statistics bureau on showed
that industrial activity in March fell 21.2 percent year-on-year,
while construction plunged 42.2 percent over the same period - the
largest fall since April 2020, when activity was paralysed due to
the quarantine imposed amid the Covid-19 pandemic, the report
relays.
Amid the economic slump, social unrest is picking up, the report
notes. Protests are becoming an almost daily occurrence, with
three demonstrations taking place, the report relates.
The CGT-led general strike is the second against Milei's policies,
following one staged on January 24, which did include a
mobilisation on the streets, the report says.
"The situation facing workers is not ideal, I think a strike is
necessary, but for political reasons our company does not adhere to
the strike," said Juan Di Geronimo, a 32-year-old employee at the
Dota bus company, the report discloses.
The largest protest of recent weeks took place on April 23, when
hundreds of thousands of people marched across the country in
defence of the public universities, whose annual budgets have been
slashed by Milei, the report discloses.
"Public opinion has shown itself willing to mobilise on certain
issues that it considers to be collective goods and that are above
political polarisation," said political scientist Gabriel Vommaro,
the report relays.
Despite a slight decline in April, several recent polls show
Milei's popularity remains strong, with his approval rating
hovering between 45 percent and 50 percent, the report notes.
"His support remains quite solid," said Vommaro.
Critics, however, question how long his voters will continue to
back him if things remain as they are, the report relays.
"The limit of the adjustment is the capacity of resistance of those
who have felt the adjustment," said Carlos Heller, a former banker
and Peronist lawmaker who is critical of the government, the report
adds.
About Argentina
Argentina is a country located mostly in the southern half of South
America. Its capital is Buenos Aires. Javier Milei is the current
president of Argentina after winning the November 19, 2023 general
election. He succeeded Alberto Angel Fernandez in the position.
Argentina has the third largest economy in Latin America. The
country's economy is an upper middle-income economy for fiscal year
2019, according to the World Bank. Historically, however, its
economic performance has been very uneven, with high economic
growth alternating with severe recessions, income maldistribution
and in the recent decades, increasing poverty.
The IMF's executive board completed on August 23, 2023, the fifth
and six reviews of Argentina's 30-month Extended Fund Facility
(EFF), and approved a US$7.5-billion disbursement to Argentina as
part of the larger program, which refinances payments Argentina
owes the institution from a previous bailout that failed to
stabilize the economy in 2018. Argentina would receive another IMF
disbursement in November of about US$2.75 billion pending another
staff-level agreement and board approval.
S&P Global Ratings, on March 15, 2024, raised its local currency
sovereign credit ratings on Argentina to 'CCC/C' from 'SD/SD' and
its national scale rating to 'raB+' from 'SD'. S&P also raised its
long-term foreign currency sovereign credit rating to 'CCC' from
'CCC-' and affirmed its 'C' short-term foreign currency rating. The
outlook on the long-term ratings is stable. In addition, S&P
revised its transfer and convertibility assessment to 'CCC' from
'CCC-'.
S&P said the stable outlook on the long-term ratings balances the
risks posed by pronounced economic imbalances and policy
uncertainties with the favorable change in near-term debt service
obligations. S&P also expect no further debt exchanges that it
would likely consider to be distressed.
Fitch Ratings upgraded on June 13, 2023, Argentina's Long-Term
Foreign Currency (FC) Issuer Default Rating (IDR) to 'CC' from
'C'and affirmed the Long-Term Local Currency (LC) IDR at 'CCC-'.
Fitch typically does not assign Outlooks to sovereigns with a
rating of 'CCC+' or below.
The upgrade of the FC IDR reflects that Fitch no longer deems a
default-like process to have begun, as the authorities have not
signaled a clear intention to follow through with an intra-public
debt swap announced in March. The new 'CC' rating signals a default
event of some sort appears probable in the coming years, regardless
of the outcome of upcoming elections. The affirmation of the LC IDR
at 'CCC-' follows the peso debt swap in June that Fitch did not
deem to be a "distressed debt exchange" (DDE).
Moody's Investors Service, in September 2022, affirmed Argentina's
Ca foreign-currency and local-currency long-term issuer and senior
unsecured ratings. The outlook remains stable. The decision to
affirm the Ca ratings balances Argentina's limited market access,
weak governance, and history of recurrent debt restructurings with
recent efforts to marshal fiscal and monetary measures to start
addressing underlying macroeconomic imbalances in the context of
the IMF program that was approved in 2022, according to Moody's.
DBRS, Inc. confirmed Argentina's Long-Term Foreign Currency Issuer
Rating at CCC and downgraded its Long-Term Local Currency Issuer
Rating to CCC from CCC (high) on March 3, 2023.
=============
B A H A M A S
=============
FTX GROUP: Files Amended Reorganization Plan
--------------------------------------------
Gursimran Kaur at Reuters reports that crypto exchange FTX will
have between $14.5 billion to $16.3 billion to pay its creditors
and customers, according to an amended reorganization plan filed by
the company in a U.S. bankruptcy court.
FTX said it has anticipated the figure based on monetizing assets,
most of which were investments owned by Alameda Research, a
crypto-focused hedge fund controlled Sam Bankman-Fried, FTX
Ventures businesses, and litigation claims, according to Reuters.
The amount for distribution includes assets under the control of
the chapter 11 debtors, as well as those controlled by liquidators
of FTX Bahamas Digital Markets, Bahamas Securities Commission,
liquidators of FTX's Australia unit, the United States Department
of Justice (DOJ) and several private parties, the statement added,
the report notes.
The company said the amended plan focuses on a series of
settlements reached consensually with the key stakeholders
including cases that are still subject to court approval, the
report relays.
The plan put forward by FTX creates a "convenience class" for
creditors with claims of $50,000 or lower, under which it
anticipates that majority of the creditors will receive about 118%
of the amount of their claims within 2 months if approved by the
court, the report discloses.
"We are pleased to be in a position to propose a chapter 11 plan
that contemplates the return of 100% of bankruptcy claim amounts
plus interest for non-governmental creditors," CEO John Ray said,
the report relays.
In February, the distressed crypto currency trading platform had
$6.4 billion in cash, the report notes.
Earlier this year, FTX founder Sam Bankman-Fried was sentenced to
25 years in prison by a judge for stealing $8 billion from
customers, the report says.
FTX, once among the world's top crypto exchanges, shook the sector
in November 2022 by filing for bankruptcy, leaving an estimated 9
million customers and investors facing billions of dollars in
losses, the report adds.
About FTX Group
FTX is the world's second-largest cryptocurrency firm. FTX is a
cryptocurrency exchange built by traders, for traders. FTX offers
innovative products including industry-first derivatives, options,
volatility products and leveraged tokens.
Then CEO and co-founder Sam Bankman-Fried said Nov. 10, 2022, that
FTX paused customer withdrawals after it was hit with roughly $5
billion worth of withdrawal requests.
Faced with liquidity issues, FTX on Nov. 9, 2022, struck a deal to
sell itself to its giant rival Binance, but Binance walked away
from the deal amid reports on FTX regarding mishandled customer
funds and alleged US agency investigations. Bankman-Fried agreed
to step aside, and restructuring vet John J. Ray III was quickly
named new CEO.
FTX Trading Ltd (d/b/a FTX.com), West Realm Shires Services Inc.
(d/b/a FTX US), Alameda Research Ltd. and certain affiliated
companies then commenced Chapter 11 proceedings (Bankr. D. Del.
Lead Case No. 22-11068) on an emergency basis on Nov. 11, 2022.
Additional entities sought Chapter 11 protection on Nov. 14, 2022.
FTX Trading and its affiliates each listed $10 billion to $50
billion in assets and liabilities, making FTX the biggest
bankruptcy filer in the US this year.
According to Reuters, SBF shared a document with investors on Nov.
10, 2022, showing FTX had $13.86 billion in liabilities and $14.6
billion in assets. However, only $900 million of those assets were
liquid, leading to the cash crunch that ended with the company
filing for bankruptcy.
The Hon. John T. Dorsey is the case judge.
The Debtors tapped Sullivan & Cromwell, LLP as bankruptcy counsel;
Landis Rath & Cobb, LLP as local counsel; and Alvarez & Marsal
North America, LLC as financial advisor. Kroll is the claims
agent, maintaining the page
https://cases.ra.kroll.com/FTX/Home-Index
The Official Committee of Unsecured Creditors tapped Paul Hastings
as counsel, FTI Consulting, Inc., as financial advisor, and
Jefferies LLC as the investment banker. Young Conaway Stargatt &
Taylor LLP is the Committee's Delaware and conflicts counsel.
Montgomery McCracken Walker & Rhoads LLP, led by partners Gregory
T. Donilon, Edward L. Schnitzer, and David M. Banker, is
representing Sam Bankman-Fried in the Chapter 11 cases.
White-collar crime specialist Mark S. Cohen has reportedly been
hired to represent SBF in litigation. Lawyers at Paul Weiss
previously represented SBF but later renounced representing the
entrepreneur due to a conflict of interest.
===========
B R A Z I L
===========
BANCO DO ESTADO: Fitch Puts 'BB-' LongTerm IDR on Watch Negative
----------------------------------------------------------------
Fitch Ratings has placed the ratings of the following Brazilian
issuers on Rating Watch Negative due to the uncertain impacts
stemming from the heavy rains and flooding in most of the state of
State of Rio Grande do Sul:
- Banco do Estado do Rio Grande do Sul S.A. (Banrisul)
- Banco Cooperativo Sicredi S.A. (Banco Sicredi)
- Cooperativa de Economia e Credito Mutuo dos Medicos de Porto
Alegre Ltda. - Unicred Porto Alegre
A complete list of rating actions follows at the end of this
release
KEY RATING DRIVERS
Issuer Default Ratings (IDRs), Viability Rating and National
Ratings
Banrisul, Banco Sicredi and Unicred Porto Alegre
The ratings were placed on Rating Watch Negative, reflecting the
challenges posed by the recent natural disaster in most of the
state of Rio Grande do Sul. The severe flooding compromised
important infrastructure in the region such as roads,
communications infrastructure, energy distribution, water/health
logistics, as well as negative consequences for agribusiness.
How, and to what extent, each issuer has been effected is not yet
known; however, the weather event will represent a major challenge
for the preservation of the credit quality, profitability and
capital ratios for the entities reviewed. These entities have
unique operating characteristics, with credit operations and risk
profiles notably concentrated (or with relevant part of credit
operation) in the state of Rio Grande do Sul.
Shareholder Support Rating - SSR
Banrisul
Banrisul's Viability Rating (VR) and SSR are aligned. However,
Banrisul's SSR was placed on Negative Watch, reflecting
fast-evolving uncertainties regarding the state of Rio Grande do
Sul's capacity and willingness to support the bank given the
previously mentioned challenges. Fitch believes the significant
adverse effects the state has suffered may require a reallocation
of resources, prioritizing the reconstruction of the state over
financial support for the bank, if necessary.
RATING SENSITIVITIES
Factors that Could, Individually or Collectively, Lead to Negative
Rating Action/Downgrade
Issuer Default Ratings (IDRs), Viability Rating and National
Ratings
Banrisul, Banco Sicredi and Unicred Porto Alegre
Fitch expects to resolve the Negative Rating Watch within the next
six months. Fitch also expects that the quarterly financial results
of these financial institutions, as well as the disclosures of
emergency aid from the Federal Government of Brazil and the State
Government of Rio Grande do Sul, will bring better visibility into
the potential short and medium-term effects that this event will
have on the institution's financial profiles and, ultimately, on
their ratings.
Shareholder Support Rating - SSR
Banrisul
Fitch will continue to monitor support capacity and propensity due
to possible negative impacts in the state of Rio Grande do Sul.
Factors that Could, Individually or Collectively, Lead to Positive
Rating Action/Upgrade
Banrisul, Banco Sicredi and Unicred Porto Alegre
An upgrade is unlikely at this time.
ESG CONSIDERATIONS
The highest level of ESG credit relevance is a score of '3', unless
otherwise disclosed in this section. A score of '3' means ESG
issues are credit-neutral or have only a minimal credit impact on
the entity, either due to their nature or the way in which they are
being managed by the entity. Fitch's ESG Relevance Scores are not
inputs in the rating process; they are an observation on the
relevance and materiality of ESG factors in the rating decision.
Entity/Debt Rating Prior
----------- ------ -----
Banco do Estado
do Rio Grande
do Sul S.A. LT IDR BB- Rating Watch On BB-
ST IDR B Rating Watch On B
LC LT IDR BB- Rating Watch On BB-
LC ST IDR B Rating Watch On B
Natl LT AA+(bra)Rating Watch On AA+(bra)
Natl ST F1+(bra)Rating Watch On F1+(bra)
Viability bb- Rating Watch On bb-
Shareholder Support bb- Rating Watch On bb-
Subordinated LT B Rating Watch On B
Cooperativa de
Economia e
Credito Mutuo
dos Medicos de
Porto Alegre
Ltda. – Unicred
Porto Alegre Natl LT A(bra)Rating Watch On A(bra)
Natl ST F1(bra)Rating Watch On F1(bra)
Banco Cooperativo
Sicredi S.A. Natl LT AA+(bra)Rating Watch On AA+(bra)
Natl ST F1+(bra)Rating Watch On F1+(bra)
BRAZIL: Succumbs to the Retail Apocalypse It Staved Off for Years
-----------------------------------------------------------------
globalinsolvency.com, citing Bloomberg News, reports that the
retail shakeout has reached Brazil, where local players are
starting to restructure and consolidate amid stiff competition from
foreign giants like Amazon.com Inc., MercadoLibre Inc. and Shein
Group Ltd.
Though e-commerce reshaped retailing in the US and Europe even
before the pandemic, a confluence of economic, financial and
logistical circumstance kept the South American nation insulated
from the trend until later, according to globalinsolvency.com.
That means the bankruptcies, mergers and strategic shifts that have
rippled through the sector elsewhere are now coming for some of the
biggest Brazilian chains, the report notes.
The report relays that Marcelo Noronha, the top executive at Banco
Bradesco SA, flagged retail as one of the weakest segments of the
Brazilian economy right now.
"When compared with other sectors, there are more challenges for
retailers," he told reporters, the report discloses.
Grupo Casas Bahia SA - one of country's most popular chains - filed
an out-of-court recovery plan to reschedule around 4.1 billion
reais ($802 million) in debt payments, the report relays.
And credit has been tight ever since the downfall of Americanas SA
in an accounting scandal last year, which put the entire sector
under the microscope, the report notes. There's also a growing
wave of tie-ups. Pet Center Comercio e Participacoes SA, known as
Petz, agreed to be bought by its rival Cobasi last month, the
report relays. And in February, Arezzo Industria e Comercio SA
purchased Grupo de Moda Soma SA in a bid to create a retail giant,
the report adds.
About Brazil
Brazil is the fifth largest country in the world and third largest
in the Americas. Luiz Inacio Lula da Silva won the 2022 Brazilian
general election. He was sworn in on January 1, 2023, as the 39th
president of Brazil, succeeding Jair Bolsonaro.
S&P Global Ratings raised on Dec. 19, 2023, its long-term global
scale ratings on Brazil to 'BB' from 'BB-'. The outlook on the
long-term ratings is stable. S&P affirmed Brazil's global scale
short-term ratings at 'B' and its national scale long-term rating
at 'brAAA'. S&P also raised the transfer and convertibility
assessment on the country to 'BBB-' from 'BB+'. S&P said, "The
stable outlook reflects our expectation that Brazil will maintain
a
strong external position, thanks to strong commodity output and
limited external financing needs. We also believe Brazil's
institutional framework can sustain stable and pragmatic
policymaking based on extensive checks and balances across the
executive, legislative, and judicial branches of government. We
expect a very gradual fiscal correction but anticipate fiscal
deficits will remain large."
Fitch Ratings affirmed on Dec. 15, 2023, Brazil's Long-Term
Foreign-Currency Issuer Default Rating (IDR) at 'BB' with a Stable
Outlook. Fitch said Brazil's ratings are supported by its large and
diverse economy, high per-capita income, and deep domestic markets
and a large cash cushion that support the sovereign's financing
flexibility and its high local-currency debt share. Strong external
finances support resilience to shocks, underpinned by a flexible
exchange rate, robust international reserves and a sovereign net
external creditor position. The ratings are constrained by weak
economic growth potential, relatively low governance scores, high
and rising government debt/GDP, and budgetary rigidities. A new
fiscal framework introduced this year aims to anchor a gradual
consolidation process and address these fiscal weaknesses, but its
effectiveness is increasingly unclear.
Moody's credit rating for Brazil was last set at Ba2 in 2018 with
stable outlook. Moody's affirmed the Ba2 issuer ratings and
senior unsecured bond ratings in April 2022.
DBRS Inc., on August 15, 2023, upgraded Brazil's Long-Term
Foreign and Local Currency - Issuer Ratings to BB from BB (low).
At the same time, DBRS Morningstar confirmed Brazil's
Short-term Foreign and Local Currency - Issuer Ratings at R-4.
The trend on all ratings is Stable (March 2018).
STATE OF MARANHAO: Fitch Affirms 'B' LongTerm IDR, Outlook Stable
-----------------------------------------------------------------
Fitch Ratings has affirmed the State of Maranhao's Long-Term
Foreign and Local Currency Issuer Default Ratings (IDRs) at 'B'.
The Rating Outlook is Stable. Fitch has also affirmed Maranhao's
Short-Term Foreign and Local Currency IDRs at 'B', its Long-Term
National Scale Rating at 'BB+(bra) with a Stable Outlook, and its
Short-term National Scale Rating at 'B(bra)'. Fitch assesses
Maranhao's Standalone Credit Profile (SCP) at 'ccc'.
Maranhao's failure to provide proof of payment for the last
installment of its loan with Bank of America (BofA) in July 2023 in
the amount of USD56.2 million triggered the activation of the
sovereign guarantee and continues to weigh on the state's ratings.
The federal government was unable to activate counter guarantees
(constitutional transfers) as per the Supreme Court ruling - Ação
Civil Originária (ACO) No. 3586. There are ongoing discussions to
refinance this obligation towards the federal government.
Maranhao's 'ccc' SCP reflects the state's low willingness to pay
its debt service despite adequate operating balance. Fitch applies
a three-notch uplift to Maranhao's 'B' IDR and Stable Outlook from
its Standalone Credit Profile (SCP) based on intergovernmental
finance support. The federal government guarantees over 80% of the
state's debt.
KEY RATING DRIVERS
Risk Profile: 'Weaker'
The 'Weaker' assessment reflects Fitch's view that there is a high
risk of the state's ability to cover debt service with the
operating balance weakening unexpectedly over the scenario horizon
of 2024-2028 due to lower revenue, higher expenditure, or an
unexpected rise in liabilities or debt-service requirements.
Revenue Robustness: 'Weaker'
The Brazilian tax collection framework transfers to states and
municipalities a large share of the responsibility to collect
taxes. Constitutional transfers are a mechanism to compensate
poorer entities. For that reason, a high dependency on transfers is
considered a weak feature for Brazilian LRGs.
The primary metric for Revenue Robustness is the transfers ratio
(transfers to operating revenues). Fitch classifies LRGs that
report a transfer ratio above or equal to 40% as weaker and those
with a ratio below 40% as 'Midrange'. Maranhao reports a relatively
low fiscal autonomy, driving this factor to 'Weaker'. As of 2023,
transfers represented 45.2% of operating revenues, aligned with the
44.3% average for the 2019-2023 period.
Revenue Adjustability: 'Weaker'
Maranhao made substantial efforts to recover tax collection in the
last year by increasing the ICMS basic tariff to 20% from 18%. The
state has already approved another increase to 22%, which applies
from February 2024. The measure was an attempt to recover part of
the tax losses incurred following the National Congress movement of
June 2022, which limited the ICMS tariff over fuels and
electricity.
Tax collection in 2023 was still 6.36% below the previous year in
real values. Nonetheless, if the state had not acted to adjust
tariffs, losses would have been even larger. Fitch expects a
further recovery in 2024 as adjustment measures are fully
implemented.
In spite of the state's efforts, revenue adjustability is very
limited for Brazilian states and municipalities. Overall,
affordability of additional taxation is low given that tax tariffs
are close to the constitutional national ceiling. A small number of
taxpayers also represent a large share of tax collection, driving
this factor to weaker. The recent track record of federal
intervention creates further challenges for revenue adjustability.
Maranhao's lower income level, with per capita GDP at 41% of the
national average, and higher poverty rates, limits capacity for tax
collection growth through tariff increases.
Expenditure Sustainability: 'Midrange'
Responsibilities for Brazilian states are moderately
countercyclical since they are engaged in healthcare, education and
law enforcement. Expenditure tends to grow with revenues as a
result of earmarked revenues. States and municipalities are
required to allocate a share of revenues in health and education.
This results in a procyclical behavior in good times, as periods of
high revenue growth result in a similar behavior for expenditures.
However, due to the heavy weight of personal expenditures and
salary rigidity, downturns that result in lower revenues are not
followed by similar drops in expenditures.
Maranhao demonstrates moderate control over expenditure growth,
with sound margins. Operating margins averaged 11.8% in the
2019-2023 period. The state is current on its payroll bill and has
no significant delays for the payment of suppliers. Operating
expenditure increased 9.2% annually on average between 2019 and
2023, slightly below operating revenue growth of 9.6%.
Maranhao has recently required entry to the Plano de Promoção do
Equilibrio Fiscal (PEF), which is a federal government plan to
support fiscal sustainability of states and municipalities. Under
this program, the state has to implement measures that lead to
fiscal balance and will benefit from federal guarantees for new
loans for investments. The state is currently working on its PEF
plan.
Expenditure Adjustability: 'Weaker'
Brazilian local governments operate under a fairly rigid cost
structure, driving this factor to 'Weaker'. As per the Brazilian
Constitution, there is low affordability of expenditure reduction,
especially for the payroll bill and pensions. As a result, whenever
there is an unpredictable reduction in revenues, operating
expenditure does not automatically follow suit.
Maranhao's personal expenditures corresponded to 45.2% of total
expenditure in 2023. This expense has very limited flexibility for
adjustments given salary rigidity and the limited ability to manage
human resources or pensions.
Other operating expenditures amounted to 47.6% of total
expenditures in 2023. Adjustments are possible but are still
limited by constitutional mandates on health and education, and
constitutional transfers to municipalities. Capex represented 6.4%
of total expenditures in 2023 and 7.8% on average, between 2019 and
2023. Historically, Brazilian LRGs have often relied on investment
cuts when facing a more challenging economic scenario.
Liabilities & Liquidity Robustness: 'Weaker'
Maranhao's failure to provide proof of payment for the last
installment of its loan with BofA in July 2023 triggered the
activation of the sovereign guarantee.
The state had a debt contract with the BofA that should have been
fully amortized in 2023. The last amortization of the BofA loan was
expected for July 24, 2027. Maranhao failed to provide proof of
payment for the last installment of its loan with BofA in the
amount of BRL 266.42 million for principal plus interest, converted
from USD 56.2 million.
The failure to provide proof was followed by the activation of the
sovereign guarantee and a subsequent sovereign payment on July 27,
2023, within the grace period. The state had another episode of
failure to pay principal and interest on the BofA loan in July
2020, so this was the second time in three years that the state has
resorted to external support to perform its debt service.
There is a moderate national framework for debt and liquidity
management since there are prudential borrowing limits and
restrictions on loan types. Under the Fiscal Responsibility Law
(LRF) of 2000, Brazilian LRGs have to comply with indebtedness
limits. Consolidated net debt for states cannot exceed 2x or 200%
of net current revenue. Maranhao reported a debt ratio of 16.6% as
of December 2023. The LRF also sets limits for guarantees at 22% of
net current revenue. Maranhao reported a guarantee ratio of 2.95%
as of December 2023.
There is moderate off-balance sheet risk stemming from the pension
system, which is a burden for most Brazilian LRGs, especially for
states given their mandate over education and public security.
Another significant contingent liability refers to the payment of
judicial claims, the so-called "precatorios". The national congress
has determined that subnational governments must fully amortize
such liabilities until 2029.
Access to new loans is restricted as Brazilian LRGs are not allowed
to access the market through bond issuances. Lenders consist mainly
of public commercial and development banks and multilateral
organizations. Often, loans are guaranteed by the federal
government, especially for foreign currency loans. For that reason,
the federal government has strict control over new lending to
LRGs.
Liabilities & Liquidity Flexibility: 'Weaker'
Fitch evaluates these factors as 'Weaker' due to the state's short
cash position in the last three years.
A framework exists for providing emergency liquidity support from
the federal government via the granting of extended maturity over
the prevalent federal debt portion. Fitch assesses the entity's
available liquidity to differentiate between 'Weaker' and
'Midrange' for liabilities and liquidity flexibility.
The Brazilian National Treasury analyzes the liquidity rate for
LRGs to assess which entities qualify for federal government
guarantees (Capacidade de Pagamento), which is measured by the
LRGs' short-term financial obligation to net cash.
The federal government's threshold to rate this ratio 'A' is 100%.
Fitch has set a threshold of 100% for the average of the last three
years (2021-year-end 2023) and for the last year-end results
available (December 2023), which would result in a 'Midrange'
assessment for this factor.
Maranhao reported a three-year average liquidity ratio of 294.5%.
As of December 2023, the metric reached 176.8%, corroborating with
the 'Weaker' assessment.
Debt Sustainability: 'aa category'
The Fitch rating forward looking case scenario indicates that the
payback ratio (net adjusted debt to operating balance), the primary
metric of the debt sustainability assessment, will reach an average
of 2.5x for the 2026-2028 period, aligned with a 'aaa' assessment.
The actual debt service coverage ratio, the secondary metric, is
projected at 1.9x for 2026-2028, aligned with an 'a' assessment.
Fiscal debt burden is projected at 14% for the same period. Fitch
applies an override to the overall debt sustainability because the
secondary metric is positioned two categories below the primary
metric.
ESG Governance - Creditor Rights: Maranhao's recent use of
sovereign support to cover its external debt service reflects the
breach of legal documentation stating full debt service payments
and the state's very low willingness to pay.
DERIVATION SUMMARY
Maranhao's SCP of 'ccc' is positioned through ratings definitions
and reflects substantial credit risk, considering the state's low
willingness to pay for its debt service without resorting to
external support. Fitch assesses the state's Risk Profile as
'Weaker'. Maranhao's debt sustainability is assessed at 'aa' under
Fitch's rating case. A 'Weaker' Risk Profile, coupled with a debt
sustainability score of 'aa', would typically lead to an SCP in the
'bb' category. However, Fitch is also factoring in the recent
failure of payment as an issuer-specific key rating driver, as per
Fitch's LRG master criteria.
Maranhao's national scale rating of 'BB+(bra)' is based on a
national peer comparison.
KEY ASSUMPTIONS
Risk Profile: 'Weaker'
Revenue Robustness: 'Weaker'
Revenue Adjustability: 'Weaker'
Expenditure Sustainability: 'Midrange'
Expenditure Adjustability: 'Weaker'
Liabilities and Liquidity Robustness: 'Weaker'
Liabilities and Liquidity Flexibility: 'Weaker'
Debt sustainability: 'aa'
Support (Budget Loans): '3'
Support (Ad Hoc): 'N/A'
Asymmetric Risk: 'N/A'
Rating Cap (LT IDR): 'N/A'
Rating Cap (LT LC IDR) 'N/A'
Rating Floor: 'N/A'
Quantitative assumptions - Issuer Specific
Fitch's rating case is a "through-the-cycle" scenario, which
incorporates a combination of revenue, cost and financial risk
stresses. It is based on 2019-2023 figures and 2024-2028 projected
ratios. The key assumptions for the scenario include:
- Yoy 4.8% increase in operating revenue on average in 2024-2028;
- Yoy 5.3% increase in tax revenue on average in 2024-2028;
- Yoy 6.3% increase in operating expenditure on average in
2024-2028;
- Net capital balance of - BRL 2,374 million on average in
2024-2028;
- Cost of debt: 9.1% on average in 2024-2028.
Liquidity and Debt Structure
As of December 2023, adjusted debt totaled BRL4.3 billion. Fitch
included BRL248 million of unrestricted cash when estimating
Maranhao's net adjusted debt.
Issuer Profile
Maranhao has a population of about 7 million or roughly 3% of
Brazil's total population. Its revenue sources are strongly
influenced by transfers from the national government. The main
spending responsibilities cover education, healthcare and law
enforcement. Maranhao's per capita GDP is equivalent to 41% of
national per capita GDP.
RATING SENSITIVITIES
Factors that Could, Individually or Collectively, Lead to Negative
Rating Action/Downgrade
- Maranhao's IDRs could be downgraded if Fitch believes federal
support to service guaranteed debt has weakened;
- Maranhao's Long-Term SCP could be downgraded if Fitch believes
there is an increased possibility of failure to pay principal and
interest without external support in the following 12-24-month
period.
Factors that Could, Individually or Collectively, Lead to Positive
Rating Action/Upgrade
- Maranhao's Long-Term IDRs could be upgraded if Fitch believes the
state's willingness to service debt on a timely manner and without
federal support has improved.
ESG CONSIDERATIONS
Maranhao, State of has an ESG Relevance Score of '5' for Creditor
Rights due the recent use of sovereign support to cover its
external debt service, which reflects the breach of legal
documentation stating full debt service payments and the very low
willingness to pay, which has a negative impact on the credit
profile, and is highly relevant to the rating, resulting in an
implicitly lower rating.
Maranhao, State of has an ESG Relevance Score of '4' for Population
Demographics due to the negative weight the state's poverty rate
has on its revenue raising ability and the pressing demand for
expenditures in health, education and other social services, which
has a negative impact on the credit profile, and is relevant to the
rating[s] in conjunction with other factors.
Maranhao, State of has an ESG Relevance Score of '4' for Rule of
Law, Institutional & Regulatory Quality, Control of Corruption
because the government's effectiveness and institutional and
regulatory quality were not sufficient to prevent the state from
resorting to external financial support, which has a negative
impact on the credit profile, and is relevant to the rating[s] in
conjunction with other factors.
Maranhao, State of has an ESG Relevance Score of '4' for Human
Development, Health and Education due to its Human Development
Index (calculated as a geometric average of health, education and
income), which is close to the bottom of the ranking among
Brazilian states, which has a negative impact on the credit
profile, and is relevant to the rating[s] in conjunction with other
factors.
The highest level of ESG credit relevance is a score of '3', unless
otherwise disclosed in this section. A score of '3' means ESG
issues are credit-neutral or have only a minimal credit impact on
the entity, either due to their nature or the way in which they are
being managed by the entity. Fitch's ESG Relevance Scores are not
inputs in the rating process; they are an observation on the
relevance and materiality of ESG factors in the rating decision.
Entity/Debt Rating Prior
----------- ------ -----
Maranhao, State of LT IDR B Affirmed B
ST IDR B Affirmed B
LC LT IDR B Affirmed B
LC ST IDR B Affirmed B
Natl LT BB+(bra)Affirmed BB+(bra)
Natl ST B(bra) Affirmed B(bra)
=========
C H I L E
=========
CHILE: Central Bank Says Economy Recovering But Some Sectors Lag
----------------------------------------------------------------
globalinsolvency.com, citing Reuters, reports that Chile's central
bank said that the economy is broadly recovering, though some
sectors have lagged and financial market depth has not yet returned
to levels seen before the coronavirus pandemic.
The bank pointed to the South American country's commercial,
construction and real estate sectors as having fallen behind, which
it said had elevated the possibility of defaults, according to
globalinsolvency.com.
"The external scenario continues to be the main source of risks for
local financial stability," according to the bank. Meanwhile, the
finances of local companies and individuals had broadly improved,
it said in a half-year stability report, globalinsolvency.com
discloses.
The monetary authority added that in the consumer sector, while
more people were failing to meet mortgage payments, this remained
at a relatively low level, the report says. Household finances
were overall seen stabilizing thanks to rising incomes and smaller
financial burdens, according to the report, the report adds.
===============
C O L O M B I A
===============
CANACOL ENERGY: Fitch Cuts USD500M Sr. Unsec. Notes Rating to 'CCC'
-------------------------------------------------------------------
Fitch Ratings has downgraded Canacol Energy Ltd.'s (CNE) Long-Term
Foreign and Local Currency Issuer Default Ratings (IDRs) to 'CCC'
from 'B'. Fitch has also downgraded CNE's USD500 million senior
unsecured notes due in 2028 to 'CCC'/'RR4' from 'B/RR4'.
The downgrade to 'CCC' reflects the deterioration of CNE's
liquidity after reporting a cash balance of $25 million in 1Q24,
falling below the $40 million negative rating sensitivity.
KEY RATING DRIVERS
Tight Liquidity: As of 1Q24, CNE reported USD25 million in cash,
which is below Fitch's previous rating trigger of a minimum cash
balance of USD40 million. The company reported a USD14.2 million
cash burn during the quarter, USD6.7 million of which stems from a
voluntary dividend paid. In its earnings call, the company reported
it had an increased cash balance of USD43 million, as of April
30th. CNE's liquidity is tight and commensurate with the 'CCC'
rating category, as it faces interest payments of USD14.4 million
due on May 24th, and estimated cash taxes of USD35 million in
2Q24.
The company has lowered its capex guidance to USD120 million (down
from the previous USD 138 million), which could potentially
pressure growth prospects. Fitch estimates that, on average, CNE
will generate $60 million of EBITDA each quarter and will be FCF
neutral to negative, depending on capex allocation.
Higher Leverage: Fitch's base case projects that CNE's debt to PDP
reserves will average $45.0/boe and $15.0/boe of debt to 1P,
respectively over the next three years, applying a reserve
replacement ratio of 91% between 2024-2026. EBITDA leverage will
approximate 3.0x in 2024, and remain at or below approximately 3.4x
over the next two years.
Strategic Pivot: CNE's strategic shift to a spot sale approach has
been implemented despite the risk of a downgrade. Fitch has
consistently listed this as a negative rating sensitivity. As the
largest private gas producer in Colombia, CNE is well-positioned to
capitalize on the country's gas shortage, facing limited
competition and holding take-or-pay contracts with strong
off-takers. The company supplies gas to Colombia's Caribbean
coast—a region that relies heavily on CNE - and that has
diminishing local gas reserves and limited connectivity to the
national electric grid.
Low Reserves Life: CNE reported its third consecutive year of
declining 1P reserves in FY2023, marked by capacity restrictions at
some of CNE's gas fields, due to issues at the Jobo gas treatment
facility, as well as at certain producing wells. PDP reserves were
reported at 17mmboe, 39% lower than incorporated in Fitch's
previous projections. The reserve life index was 1.5 years based on
current production levels. 1P reserves were 52mmboe and reserve
life index of 4.4 years, below the weighted average life of
contracts estimated at 4.5 years.
DERIVATION SUMMARY
CNE's credit profile is weaker when compared to other independent
gas producers in both Latin America and North America, including
Hunt Oil Company of Peru L.L.C., Sucursal del Peru (BBB/Stable),
CNX Resources Corporation (BB+/Stable), Ascent Resources Utica
Holdings, LLC (B+/Positive) and Comstock Resources, Inc.
(B+/Negative).
CNE has a strong competitive position, due to the sector's high
start-up costs and limited conventional gas reserves. However, its
strategic switch towards increasing exposure to the gas spot market
compares negatively to peers. Hunt Oil is the closest peer in the
region. It owns an equity stake in the Camisea blocks 86 and 56 in
Peru, which are strategically important for that country, providing
86% of its natural gas supply. Similarly, CNE is regionally
important to the Caribbean coast of Colombia, which is a large
consumer of gas and is very comparable to Camisea.
Fitch estimates that CNE's 2024 total debt to EBITDA is at 3.0x,
higher than Hunt's 1.0x, and above average among its U.S. peers
(CNX, Ascent and Comstock) of 1.4x, as CNE deploys its capex plan.
Fitch projects CNE's total debt to 1P to average $16.0/boe over the
next four years, which is highest among all peers.
KEY ASSUMPTIONS
- Gas production volumes of 160,000 Mcf/d in 2024;
- Average contracted gas sales of 124,000Mcf/d between 2024-2027;
- Average realized price net of transportation of $6.5 per USD/Mcf
in 2024; $6.0 per USD/Mcf between 2025 through 2027;
- Opex average of $.0.45 USD/Mcf between 2024 through 2027;
- Royalties average of $0.90 USD/Mcf between 2024 through 2027;
- G&A cost average of $0.50 USD/Mcf between 2024 through 2027;
- FY 2024 capex of USD120 million;
- No additional dividend distributions over the rating horizon.
RECOVERY ANALYSIS
The recovery analysis assumes that Canacol would be a going concern
(GC) in bankruptcy and that it would be reorganized rather than
liquidated.
GC Approach:
- A 10% administrative claim.
- The GC EBITDA is estimated at USD200 million. The GC EBITDA
estimate reflects Fitch's view of a sustainable,
post-reorganization EBITDA level upon which Fitch bases the
valuation of Frontera.
- EV multiple of 3.0x.
With these assumptions, Fitch's waterfall generated recovery
computation (WGRC) for the senior unsecured notes is in the 'RR2'
band. However, according to Fitch's Country-Specific Treatment of
Recovery Ratings Criteria, the Recovery Rating for corporate
issuers in Colombia is capped at 'RR4'. The Recovery Rating for the
senior secured notes is therefore 'RR4' with a WGRC output
percentage at 31%.
RATING SENSITIVITIES
Factors that Could, Individually or Collectively, Lead to Positive
Rating Action/Upgrade
- An upgrade is unlikely but may be considered if CNE is able cover
service debt, maintenance capex and interest with FCF and cash on
hand on a sustained basis.
Factors that Could, Individually or Collectively, Lead to Negative
Rating Action/Downgrade
- A Fitch defined default process has commenced.
LIQUIDITY AND DEBT STRUCTURE
Tight Liquidity: As of 1Q24, CNE had cash on hand of USD25 million.
The company reported on their 1Q24 earnings call having a cash
balance of USD43 million. CNE faces interest payments of USD 14.4
million due on May 24th, and cash taxes of USD36 million are due by
the end of 2Q24.
The company has a manageable debt maturity profile, with its first
major maturity expected to be the USD200 million drawn from the RCF
in 2027, followed by the USD500 million bond maturity in 2028.
ISSUER PROFILE
Canacol Energy Ltd. (CNE) is a publicly listed exploration and
production company focused on onshore natural gas in Colombia. The
company's average production was 32,366 boe/d in 2023YE, 98%
corresponded to natural gas. As of 2023, CNE had 52mmboe of 2P
natural gas reserves and 1P reserve life of 4.4 years.
ESG CONSIDERATIONS
Canacol Energy Ltd. has an ESG Relevance Score of '4' for Exposure
to Social Impacts due to the potential impact of social pressures
and possible pushback from the communities in the region where it
operates. This has a negative impact on the credit profile, and is
relevant to the ratings in conjunction with other factors.
Canacol Energy Ltd. has an ESG Relevance Score for Management
Strategy of '4' given the change it their contract strategy as it
is no longer consistent with its previous assessment of the
company's business profile as a utility-like company. In Fitch's
view, this change will bring higher volatility to cash flows and
profitability. This has a negative impact on the credit profile,
and is relevant to the ratings in conjunction with other factors.
Canacol Energy Ltd. has an ESG Relevance Score for Financial
Transparency to '4' due to untimely disclosure of unexpected
production capacity restrictions the Jobo gas treatment facility as
well as certain of its producing wells that commenced in August
2023. This has a negative impact on the credit profile, and is
relevant to the ratings in conjunction with other factors.
The highest level of ESG credit relevance is a score of '3', unless
otherwise disclosed in this section. A score of '3' means ESG
issues are credit-neutral or have only a minimal credit impact on
the entity, either due to their nature or the way in which they are
being managed by the entity. Fitch's ESG Relevance Scores are not
inputs in the rating process; they are an observation on the
relevance and materiality of ESG factors in the rating decision.
Entity/Debt Rating Recovery Prior
----------- ------ -------- -----
Canacol Energy Ltd. LT IDR CCC Downgrade B
LC LT IDR CCC Downgrade B
senior unsecured LT CCC Downgrade RR4 B
===================================
D O M I N I C A N R E P U B L I C
===================================
DOMINICAN REPUBLIC: Receives US$10-Billion in Remittances Last Year
-------------------------------------------------------------------
Dominican Today reports that President Luis Abinader highlighted
that Dominicans living abroad contribute approximately $10 billion
in remittances to the country's economy, with a significant portion
directed towards the construction sector.
Currently, there are 2,846,716 registered Dominicans residing
abroad, spread across 240 associations in 30 countries. This data
is sourced from the sociodemographic registry of Dominicans abroad,
according to Dominican Today.
The majority of Dominicans abroad reside in the Americas,
accounting for 2,569,078 individuals (90.2%), followed by Europe
with 274,885 (9.7%), and a smaller fraction, 2,753 Dominicans
(0.1%), dispersed across other parts of the world, the report
notes.
Among the countries with the largest Dominican populations are the
United States (2,396,784), Spain (193,653), Puerto Rico (54,025),
Italy (28,912), and Canada (22,125), the report relays. The
distribution of Dominicans abroad shows that 53.5% are women and
46.5% are men, the report discloses.
President Abinader highlighted the efforts of INDEX, which has
conducted 374 activities aimed at these communities, focusing on
cultural promotion, training, social initiatives, and sports
activities, the report says. Additionally, new offices have been
established in Argentina, Chile, London, and Orlando, along with 11
fully operational physical spaces abroad to cater to Dominican
needs, the report notes.
INDEX has forged alliances to provide public services and policies
closer to Dominican communities, the report relays. Initiatives
include legal assistance and psychological therapy services
provided by the Ministry of Women, the establishment of three
Banreservas branches in Madrid, New York, and Miami, and Infotep's
virtual training program offering 42 study areas in 22 countries,
the report adds.
About Dominican Republic
The Dominican Republic is a Caribbean nation that shares the island
of Hispaniola with Haiti to the west. Capital city Santo Domingo
has Spanish landmarks like the Gothic Catedral Primada de America
dating back 5 centuries in its Zona Colonial district. Luis Rodolfo
Abinader Corona is the current president of the nation.
TCR-LA reported in April 2019 that Juan Del Rosario of the UASD
Economic Faculty cited a current economic slowdown for the
Dominican Republic and cautioned that if the trend continues,
growth would reach only 4% by 2023. Mr. Del Rosario said that if
that happens, "we'll face difficulties in meeting international
commitments."
An ongoing concern in the Dominican Republic is the inability of
participants in the electricity sector to establish financial
viability for the system.
On December 4, 2023, the TCR-LA reported that Fitch Ratings has
affirmed Dominican Republic's Long-Term Foreign-Currency Issuer
Default Rating (IDR) at 'BB-' and revised the Outlook to Positive
from Stable. Fitch says the Positive Outlook reflects a trend
improvement in governance, and robust growth prospects that should
lead to continued gains in per capita income. According to Fitch,
growth has decelerated in 2023, but it expects Dominican Republic
to recover to high levels during 2024-2025. External liquidity
metrics have improved in recent years, and foreign currency share
of government debt is on a downward path.
In August 2023, Moody's Investors Service changed the outlook on
the Government of Dominican Republic's ratings to positive from
stable and affirmed the local and foreign-currency long-term issuer
and senior unsecured ratings at Ba3. Moody's said the key drivers
for the outlook change to positive are: (i) sustained high growth
rates have enhanced the scale and wealth levels of the economy; and
(ii) a material decline in the government debt burden coupled with
improved fiscal policy effectiveness will support medium-term debt
sustainability.
The affirmation of the Ba3 ratings balances the Dominican
Republic's strong economic growth dynamics and relatively contained
susceptibility to event risks, with a comparatively weaker fiscal
position, reflecting long-standing credit challenges which include:
(i) a shallow revenue base compared to peers, (ii) weak debt
affordability metrics, and (iii) high exposure to foreign currency
borrowing.
S&P Global Ratings, in December 2022, raised its long-term foreign
and local currency sovereign credit ratings on the Dominican
Republic to 'BB' from 'BB-'. The outlook on the long-term ratings
is stable. S&P affirmed its 'B' short-term sovereign credit
ratings. S&P also revised its transfer and convertibility (T&C)
assessment to 'BBB-' from 'BB+'. The stable outlook reflects S&P's
expectation of continued favorable GDP growth and policy continuity
over the next 12-18 months that will likely stabilize the
government's debt burden.
In February 2023, S&P said its BB ratings reflect the country's
fast-growing and resilient economy. It also incorporates the
country's historical political and social challenges in passing
structural reforms to contain fiscal deficits, despite recent
improvements in the electricity sector. The ratings are constrained
by relatively high debt, a hefty interest burden, and limited
monetary policy flexibility.
DOMINICAN REPUBLIC: Reports Lowest Inflation Rate in 46 Months
--------------------------------------------------------------
Dominican Today reports that the Central Bank (BCRD) of the
Dominican Republic disclosed that the Consumer Price Index (CPI)
experienced a slight decrease of 0.10% in April, marking a notable
interannual inflation rate of 3.03%. This figure represents the
lowest inflation rate observed in the past 46 months, according to
reports.
The statement issued by the central bank highlighted that the
current year-on-year inflation rate falls within the lower end of
the target range set in the monetary program, which aims for a
range of 4.0% ±1.0%, according to Dominican Today.
Addressing the underlying inflation over the last twelve months,
the BCRD clarified that it stood at 3.99% in April, maintaining
alignment with the objectives outlined by the monetary institution,
the report relays. This particular metric, as emphasized in the
statement, offers valuable insights for guiding monetary policy by
excluding items that typically do not respond to liquidity
conditions, such as volatile food prices and fuel costs, the report
notes.
With an interannual inflation rate of 3.03% recorded in April 2024,
the Dominican Republic is positioned among the countries with the
lowest inflation rates in Latin America, excluding dollarized
economies like Panama, Ecuador, and El Salvador, according to the
BCRD statement, the report adds.
About Dominican Republic
The Dominican Republic is a Caribbean nation that shares the island
of Hispaniola with Haiti to the west. Capital city Santo Domingo
has Spanish landmarks like the Gothic Catedral Primada de America
dating back 5 centuries in its Zona Colonial district. Luis Rodolfo
Abinader Corona is the current president of the nation.
TCR-LA reported in April 2019 that Juan Del Rosario of the UASD
Economic Faculty cited a current economic slowdown for the
Dominican Republic and cautioned that if the trend continues,
growth would reach only 4% by 2023. Mr. Del Rosario said that if
that happens, "we'll face difficulties in meeting international
commitments."
An ongoing concern in the Dominican Republic is the inability of
participants in the electricity sector to establish financial
viability for the system.
On December 4, 2023, the TCR-LA reported that Fitch Ratings has
affirmed Dominican Republic's Long-Term Foreign-Currency Issuer
Default Rating (IDR) at 'BB-' and revised the Outlook to Positive
from Stable. Fitch says the Positive Outlook reflects a trend
improvement in governance, and robust growth prospects that should
lead to continued gains in per capita income. According to Fitch,
growth has decelerated in 2023, but it expects Dominican Republic
to recover to high levels during 2024-2025. External liquidity
metrics have improved in recent years, and foreign currency share
of government debt is on a downward path.
In August 2023, Moody's Investors Service changed the outlook on
the Government of Dominican Republic's ratings to positive from
stable and affirmed the local and foreign-currency long-term issuer
and senior unsecured ratings at Ba3. Moody's said the key drivers
for the outlook change to positive are: (i) sustained high growth
rates have enhanced the scale and wealth levels of the economy; and
(ii) a material decline in the government debt burden coupled with
improved fiscal policy effectiveness will support medium-term debt
sustainability.
The affirmation of the Ba3 ratings balances the Dominican
Republic's strong economic growth dynamics and relatively contained
susceptibility to event risks, with a comparatively weaker fiscal
position, reflecting long-standing credit challenges which include:
(i) a shallow revenue base compared to peers, (ii) weak debt
affordability metrics, and (iii) high exposure to foreign currency
borrowing.
S&P Global Ratings, in December 2022, raised its long-term foreign
and local currency sovereign credit ratings on the Dominican
Republic to 'BB' from 'BB-'. The outlook on the long-term ratings
is stable. S&P affirmed its 'B' short-term sovereign credit
ratings. S&P also revised its transfer and convertibility (T&C)
assessment to 'BBB-' from 'BB+'. The stable outlook reflects S&P's
expectation of continued favorable GDP growth and policy continuity
over the next 12-18 months that will likely stabilize the
government's debt burden.
In February 2023, S&P said its BB ratings reflect the country's
fast-growing and resilient economy. It also incorporates the
country's historical political and social challenges in passing
structural reforms to contain fiscal deficits, despite recent
improvements in the electricity sector. The ratings are constrained
by relatively high debt, a hefty interest burden, and limited
monetary policy flexibility.
=================
G U A T E M A L A
=================
BANCO INDUSTRIAL: Moody's Affirms 'Ba1' Deposit Ratings
-------------------------------------------------------
Moody's Ratings has affirmed all of Banco Industrial S.A.'s
ratings, including its long- and short-term local and foreign
currency deposit ratings at Ba1 and Not Prime, respectively, as
well as its foreign currency subordinate debt and junior
subordinate debt ratings at B1 and B3 (hyb), respectively. The
rating agency also affirmed the bank's long-and short-term
counterparty risk ratings and assessments at Ba1 and Not Prime, and
Ba1(cr) and Not Prime(cr), respectively. Banco Industrial's
baseline credit assessment (BCA) and adjusted BCA of ba3 were also
affirmed. The outlook on the long-term deposit ratings remains
stable.
RATINGS RATIONALE
In affirming Banco Industrial's ratings and assessments, Moody's
acknowledges the bank's strong commercial banking franchise in
Guatemala, which supports a consistent track record of good asset
quality indicators and steady profitability metrics. The bank's
credit profile continues to benefit from a funding structure that
is primarily comprised of low-cost and stable core deposits, while
its liquidity position remains steadily at strong levels. The
bank's BCA continues to be limited by its relatively low capital
metric measured by Moody's, which remains below other rated banks'
in the region.
As of December 2023, Banco Industrial's problem loan ratio was
1.2%, remaining above its average ratio of 0.7% for the past three
years, yet still lower than the 1.7% average of the banking system.
This relatively low delinquency rate is supported by a disciplined
risk management with conservative credit underwriting policies and
its business focus on low-risk commercial loans, which accounted
for 79% of total loans in 2023. The bank's strategy has focused on
diversifing its portfolio mix, targeting a share of 40% of retail
lending in the coming five years, leveraging its digital banking
platform. The consumer portfolio grew 39% in 12 months ended in
December 2023, supported by the strength of the economic activity
and strong consumer confidence. However, this will likely pressure
asset quality in the coming quarters. To mitigate the potential
risk of rising loan costs, Banco Industrial has been maintaining
adequate level of loan loss reserves that accounted for 174% of
problem loans in December 2023.
Capitalization remained modest at 8.1% tangible common equity to
risk-weighted assets (TCE/RWA) in December 2023, slightly above
7.9% one year prior. Banco Industrial's strong margins and good
profitability, with a net income to tangible assets ratio of 1.5%
in December 2023, has supported a consistent capital replenishment,
although dividend distribution policy remained high, averaging 60%
of net income in the past three years. The bank's TCE/RWA
incorporates the 100% risk weighting of government securities as
prescribed by Basel guidelines for Ba-rates sovereigns. Therefore,
on a regulatory basis, total capital ratio stood higher, at 14.2%
in December 2023, comfortably above minimum capital requirements.
Banco Industrial has a steady and low-cost funding structure,
underpinned by the largest deposit base in the country, mainly
sourced from the retail customer sector. However, there is some
reliance on market funding to finance dollar lending as its
foreign-currency loan-to-deposit ratio is one of the highest in the
banking system, at 176% in December 2023. However, the bank
maintains a diversified access to correspondent banks and the
stability in local currency somehow mitigates the refinancing risks
in foreign currency.
The Ba1 long-term deposit rating benefits by two notches of uplift
from the bank's ba3 BCA, incorporating Moody's assumption of very
high probability of government support in the case of need. This
assumption is supported by Banco Industrial's systemic importance
as the largest bank in the country with around 30% of market share
in deposits and loans in 2023. The outlook on the bank's ratings is
stable and incorporates Moody's expectation that Banco Industrial's
financial fundamentals will remain sound over the next 12 to 18
months.
FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS
Upward pressure on Banco Industrial's ba3 BCA could emerge from a
significant and sustained improvement in its capital position,
accompanied by steady asset quality and profitability metrics. An
upgrade of the Government of Guatemala's sovereign bond rating
would likely result in a corresponding change in the bank's deposit
ratings because of government support.
Conversely, Banco Industrial's deposit ratings would likely be
downgraded if the Government of Guatemala's bond rating were
downgraded. In addition, the BCA could be under pressure if the
bank's asset quality deteriorated on a consistent basis, causing a
significant reduction in profitability and capital.
The principal methodology used in these ratings was Banks
Methodology published in March 2024.
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U R U G U A Y
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URUGUAY: IMF Says Economy is Expected to Strongly Rebound in 2024
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An International Monetary Fund (IMF) staff team, led by Mr. Pau
Rabanal, visited Montevideo and held discussions on the 2024
Article IV consultation with Uruguay's authorities during April 23
to May 3. At the end of the consultation, the mission issued the
following statement, which summarizes its main conclusions and
recommendations.
Macroeconomic resilience and sound policies amid a
once-in-a-century drought and a difficult external environment
In 2023, Uruguay confronted the impact of a once-in-a-century
severe drought and external headwinds. From October 2022 to April
2023, rainfall was about 47 percent below historical averages,
affecting key agricultural areas, and causing significant direct
losses to the primary sector, especially for soybean production and
cattle farming. Agricultural output was mostly affected between the
last quarter of 2022 and the second quarter of 2023 when it
declined by 25 percent on a year-on-year basis, although it quickly
recovered in the second half of the year as rainfall normalized.
Amid a strong Uruguayan peso, the substantial depreciation of
Argentina's currency, particularly in the parallel market,
motivated important cross-border consumption flows taking advantage
of relatively cheaper Argentinian goods and services, doubling the
number of Uruguayans visiting Argentina in 2023. This situation
depressed commercial activity in Uruguay, particularly in border
cities, and weighed on domestic consumption and tax collection.
Against this backdrop, the economy remained resilient, owing to the
authorities' sound macroeconomic policies, the country's political
stability, and strong institutions. Despite the challenging
environment, Uruguay maintained favorable market access with
improved sovereign debt ratings and sovereign spreads at
historically low levels, including the lowest spreads in the
region. The current administration, in office since 2020, has
implemented a significant upgrade of the fiscal and monetary policy
frameworks and has advanced decisive structural reforms. In 2023,
the authorities approved a key pension reform, placing medium-term
public finances on a more sustainable path, and started
implementing an education reform. Consolidating these gains should
be the most important priority, as they provide the necessary
macroeconomic policy space to confront domestic and external risks
and support long-term growth.
While economic growth decelerated in 2023, inflation fell within
the target range, reaching its lowest level in the last eighteen
years. Real GDP growth was 0.4 percent in 2023. IMF staff estimates
that the impact of the drought on growth was about 1 percent in
2023. Employment rose to 1.7 million in 2023 (up 37,000), while the
unemployment rate continued to hover around 8 percent, and the
share of labor informality increased moderately relative to 2022
while remaining amongst the lowest in the region. Net FDI inflows
reached USD 4.2 billion (5.5 percent of GDP), providing more
resilient sources of external financing. CPI inflation fell from
8.3 percent in December 2022 to 5.1 percent in December 2023, the
lowest end-of-year value since 2005, owing to a strong
contractionary monetary policy response in 2022, the appreciation
of the Uruguayan peso, and falling import prices. Inflation
expectations have recently converged to the central bank target
range, reflecting gains in policy credibility, enhanced Central
Bank communication and the continued easing of price pressures in
the first quarter of 2024, with CPI inflation at 3.7 percent.
Monetary and fiscal policies supported the economy while preserving
credibility gains
As inflationary pressures cooled off, the Banco Central del Uruguay
(BCU) started its easing cycle in April 2023. The Monetary Policy
Committee of the BCU gradually lowered the monetary policy rate
from 11.5 percent at the start of 2023 to 8.5 percent in April 2024
as headline inflation reverted within the target range and
inflation expectations gradually declined. While cutting nominal
interest rates, the BCU kept a contractionary stance by keeping
ex-ante real rates above the neutral rate throughout 2023. At the
end of 2023, the authorities reaffirmed that the BCU inflation
target is the center of the target band (4.5 percent) in a
Macroeconomic Coordination Committee meeting. The authorities have
continued to not intervene in the foreign exchange market,
providing clarity and consistency on the main objectives of
monetary policy. The peso appreciated by 2.6 percent against the US
dollar in nominal terms during 2023, and by 7 percent on average in
real effective terms, driven by domestic and global factors.
Amid external headwinds and the severe drought, the fiscal deficit
increased during 2023. The deficit for the non-financial public
sector (NFPS), excluding cincuentones[1], widened to 3.2 percent of
GDP in 2023, driven by the smaller balance of the rest of the NFPS
(state-owned enterprises and local governments). The deficit of the
Central Government (including the Banco de Prevision Social) was
unchanged, despite the increased transfers to support
drought-affected sectors and the impact on tax collection caused by
the situation in Argentina. The faster-than-expected disinflation
in 2023, which is a welcome development, had adverse implications
for the fiscal accounts, because real spending in wages and social
security benefits increased while weighing on revenues as a share
of GDP, driven by a lower-than-expected GDP deflator. Extreme dry
conditions particularly affected the power company (UTE), forcing
lower hydropower generation and larger energy purchases from
neighboring countries. Gross NFPS debt increased to 64.5 percent of
GDP but remains below pandemic levels. The deficit and debt
outcomes are consistent with the targets of the fiscal rule in
2023, which are defined at the Central Government (including the
Banco de Prevision Social) level.
Uruguay's fiscal rule played a notable role in strengthening fiscal
discipline, while the pension reform approval improved longer-term
debt dynamics. Adherence to the rule for four consecutive years has
bolstered fiscal credibility, helping stabilize the debt-to-GDP
ratio under a sequence of negative shocks. The pension system
reform, that was approved in May 2023, will stabilize spending over
the medium term, by including a gradual increase in the retirement
age, a restructuring of pension contributions, and a revision of
the pension calculation basis towards OECD norms. The improved
fiscal outlook is being reflected in historically high sovereign
debt ratings and low sovereign spreads, including the lowest EMBI
spread in Latin America.
Outlook and Risks
The economy is expected to strongly rebound in 2024, while
macroeconomic risks are broadly balanced. The recovery of
agricultural exports, increased cellulose production, easing of
financial conditions and robust private consumption as real wages
recover and the price differential with Argentina normalizes are
expected to support a growth rate of 3.7 percent in 2024 and 2.9
percent in 2025. Inflation is projected to pick up in the second
half of 2024, but stay within the target range, following a gradual
easing of monetary policy and robust wage growth. Downside risks
are derived from a worsening of external financial conditions,
deterioration of international geopolitical tensions and the
potential for further extreme climate events. Upside risks draw
from events that could bring higher-than-expected agricultural
export prices or lower fuel import prices.
Policies to rebuild buffers, consolidate credibility gains, and
boost medium-term growth
Fiscal Policy
The 2024 revised budget is aligned with the fiscal rule targets and
social protection objectives. The projected NFPS deficit, excluding
cincuentones, of 3.1 percent of GDP balances deficit reduction with
safeguarding social spending, a sizeable share of total
expenditures. The ongoing disinflation could continue weighing on
the fiscal accounts in 2024. The post-drought growth momentum
creates opportunities for reinvigorating consolidation efforts.
However, capitalizing on these opportunities requires navigating
inherent spending rigidities that constrain policy options.
The crafting of the next five-year budget law provides an
opportunity to recalibrate the fiscal rule targets to place debt on
a downward path. Under current policies, the NFPS debt-to-GDP ratio
remains largely stable over the projection period with limited
near-term risks—as financing needs are manageable and market
access remains at favorable terms. While the current fiscal rule
has been successful at stabilizing the debt-to-GDP ratio under
challenging circumstances, further efforts are needed to ensure a
sustained downward path for the debt-to-GDP ratio and rebuild
fiscal buffers over the medium term, requiring lower targets for
the structural balance and net indebtedness pillars of the fiscal
rule.
Refinements to the fiscal framework would help consolidate recent
credibility gains. The successful implementation of the new fiscal
framework under challenging circumstances has strengthened policy
credibility. Within the current framework, the following
refinements could be considered: (i) adopting five-year binding
targets, consistent with lowering the debt-to-GDP ratio to a
reference level over the forecasting period, when the new budget
law is approved, (ii) establishing corrective mechanisms if escape
clauses need to be triggered or should slippages occur, (iii)
increasing the operational autonomy of the Advisory Fiscal Council,
including through adequate resources, in line with best
international practices, and (iv) exploring alternative
methodologies to estimate potential output, the output gap, and
desirable medium-term debt-to-GDP ratios.
Monetary and Exchange Rate Policy
Monetary policy should remain contractionary to ensure that
inflation and inflation expectations stay within the target range
in a sustained manner. Sustained monetary policy vigilance is
crucial for continuing to build credibility and supporting
de-dollarization efforts. The authorities should continue
emphasizing that the inflation target is the mid-point of the
target band (4.5 percent) in their public communications, to help
anchor expectations. Enhancing de jure central bank independence
would further improve credibility and support policy continuity.
The exchange rate should continue to be allowed to act as a shock
absorber and foreign exchange intervention should only be used to
address disorderly market conditions.
Financial Sector
The financial sector has remained resilient. The banking system is
well capitalized, highly liquid, and profitable. With capital
requirements for credit, market, operational and market risks, the
Uruguayan banking sector maintains almost twice the minimum
regulatory requirement. Amid higher international interest rates
and a more stable exchange rate, profitability increased. Despite
last year's economic slowdown and losses in the agricultural
sector, non-performing loans remained low with adequate loan loss
provisions. Financial intermediation remains low with the private
credit-to-GDP ratio at 30 percent while dollarization remains high
at 69 percent for deposits and around 49 percent for loans,
compared to other countries in the region.
The authorities have reaffirmed their commitment to enhancing their
supervision framework and creating an enabling environment for the
financial system to contribute to growth and development. The
Superintendency of Financial Services (SSF) should continue
pursuing efforts to upgrade its risk-based supervision framework,
by enhancing its stress-testing framework. Closing data gaps will
also be key in building more comprehensive measures for credit risk
analysis (i.e., probability of default, loss given default) and for
assessing system-wide FX liquidity and concentration risks.
Operationalizing the Pillar II capital add-ons will create an
opportunity to address the adverse effect on capital buffers from
the bank wealth tax. The BCU aims at creating an efficient,
integrated, and accessible payment system, promoting competition,
preserving financial stability, and fostering compliance with
AML/CFT regulations. Promoting the development of the peso capital
market and fostering greater competition in the retail banking
sector could provide more attractive investment opportunities and
alternative sources of funding, as well as lower lending-deposit
spreads.
Structural Policies
Efforts to continue implementing structural reforms are key to
unlock potential growth, create policy space to preserve the
country's safety net and social cohesion, and support favorable
sovereign debt ratings. The implementation of the education reform
is critical to provide the human capital Uruguay needs in the
medium-term to foster the adoption of innovative technologies and
increase productivity. Closing the labor force participation gender
gap could help improve long-run growth prospects. Strengthening
state-owned enterprises' corporate governance could further enhance
their management and efficiency. The deepening of Uruguay's global
integration should focus on pursuing efforts for trade
facilitation, addressing non-tariff barriers and red tape, and
reducing logistics costs. Reducing backward-looking indexation and
introducing more sectoral differentiation in wage negotiations
would support the disinflation process and competitiveness. The
increase in crime over the last decade, albeit from a low base and
amongst the lowest in the region, needs to be addressed before it
starts weighing on growth.
Uruguay has been a trailblazer in climate mitigation and finance,
but climate adaptation efforts need to be intensified. Uruguay has
been at the forefront of climate finance innovation, with the
issuance of its pioneering sustainability-linked bond and securing
access from multilateral banks to global-first loans with financing
conditions linked with the achievement of environmental targets.
Climate hazards have become more intense and frequent. Droughts are
becoming particularly relevant considering the output losses to the
agricultural sector, requiring recurrent fiscal interventions.
Against this backdrop, it is critical to enhance water resource
management, promote sustainability, and increase resilience.
*********
S U B S C R I P T I O N I N F O R M A T I O N
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