October 30, 2017 / 4:06 PM / a year ago

Fitch: Sovereign Rating Implications of Catastrophes in LatAm and Caribbean

(The following statement was released by the rating agency) Link to Fitch Ratings' Report: Sovereign Catastrophe Risk in Latin America and the Caribbean (Assessing the Economic and Rating Implications of Natural Disasters) here NEW YORK, October 30 (Fitch) Sovereign credit ratings incorporate a significant degree of a sovereign's exposure to natural hazards, according to Fitch Ratings' Special Report on sovereign catastrophe risk in Latin America and the Caribbean. Ratings incorporate the legacy costs of past disasters as well as the capacity of governments and economies to absorb losses from future events. To the extent that catastrophe risk is already embedded in the rating level, disaster-driven rating actions are likely to be rare. Indeed, in the recent history of Fitch-rated Latin America and Caribbean (LAC) sovereigns, no rating action can be tied exclusively to a natural disaster. The economic impact of natural catastrophes is typically localized and temporary, while ratings take a broader and longer view. Unless the events are of such a magnitude that they generate sustained fiscal pressures or adverse debt dynamics, the knock-on effects are likely to dissipate early on in the forecast horizon, all else being equal. Furthermore, the stimulus from recovery and reconstruction often overcompensates for lost output or revenues, rendering the growth and fiscal impacts of disasters difficult to predict. In cases where credit profiles have deteriorated in the aftermath of a disaster, the event itself often acts as a catalyst rather than the primary cause. Catastrophes tend to accentuate pre-existing credit weaknesses, such as a lack of policy flexibility, financing options or fiscal buffers, as in Ecuador following the April 2016 earthquake. Conversely, sovereigns with strong fundamentals going into a catastrophe usually emerge with their credit profiles intact. This was the case in Chile after the devastating February 2010 earthquake, and more recently in Mexico after the September 2017 earthquakes. Sovereign catastrophe risk is therefore determined as much by the level of available resources to meet disaster-related contingent obligations, as by the exposure to natural hazards that give rise to them. This relationship between exposure and mitigants is captured by the disaster deficit index (DDI), a version of which is calculated in the special report for select LAC sovereigns. The correlation between DDIs and sovereign credit ratings is noteworthy: higher-rated sovereigns such as Mexico, Chile and Colombia also have high DDI scores (i.e. lower disaster deficits), whereas lower-rated sovereigns, such as Costa Rica, the Dominican Republic and Ecuador, score lower in the DDI. The fiscal costs of past natural disasters in the LAC region vary greatly depending on the magnitude of the shock and the size of the economy. For large and diversified economies, the fiscal cost of recovery and reconstruction for average, uninsured catastrophe losses over the past decade has been modest, ranging from around 0.1% of general government spending in Brazil to 0.6% in Mexico. For less frequent but higher-magnitude events, such as the hurricanes that struck Jamaica and Central America in the recent past, post-disaster spending can rise to 5%-20% of general government expenditures. A number of LAC sovereigns maintain contingency reserves, sovereign catastrophe insurance and disaster credit lines with multilaterals to protect budgets and balance sheets. High levels of property insurance penetration also reduce the reconstruction burden borne by the sovereign. In the absence of such mitigants, the cost of plugging disaster-related budgetary shortfalls can be punitive, as several recent cases highlighted in this report illustrate. The full report is available at www.fitchratings.com or by clicking on the link above. Contact: Arend Kulenkampff Director +1 646-582-4720 Fitch Ratings, Inc. 33 Whitehall Street New York, NY 10004 Shelly Shetty Senior Director +1 212-908-0324 Charles Seville Senior Director +1 212-908-0277 Media Relations: Benjamin Rippey, New York, Tel: +1 646 582 4588, Email: benjamin.rippey@fitchratings.com. Additional information is available on www.fitchratings.com ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEB SITE AT WWW.FITCHRATINGS.COM. PUBLISHED RATINGS, CRITERIA, AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE, AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE CODE OF CONDUCT SECTION OF THIS SITE. 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