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Fitch: Sovereign Rating Implications of Catastrophes in LatAm and Caribbean
October 30, 2017 / 4:06 PM / in a month

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. DIRECTORS AND SHAREHOLDERS RELEVANT INTERESTS ARE AVAILABLE here. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE. Copyright © 2017 by Fitch Ratings, Inc., Fitch Ratings Ltd. and its subsidiaries. 33 Whitehall Street, NY, NY 10004. Telephone: 1-800-753-4824, (212) 908-0500. Fax: (212) 480-4435. Reproduction or retransmission in whole or in part is prohibited except by permission. All rights reserved. In issuing and maintaining its ratings and in making other reports (including forecast information), Fitch relies on factual information it receives from issuers and underwriters and from other sources Fitch believes to be credible. Fitch conducts a reasonable investigation of the factual information relied upon by it in accordance with its ratings methodology, and obtains reasonable verification of that information from independent sources, to the extent such sources are available for a given security or in a given jurisdiction. The manner of Fitch’s factual investigation and the scope of the third-party verification it obtains will vary depending on the nature of the rated security and its issuer, the requirements and practices in the jurisdiction in which the rated security is offered and sold and/or the issuer is located, the availability and nature of relevant public information, access to the management of the issuer and its advisers, the availability of pre-existing third-party verifications such as audit reports, agreed-upon procedures letters, appraisals, actuarial reports, engineering reports, legal opinions and other reports provided by third parties, the availability of independent and competent third- party verification sources with respect to the particular security or in the particular jurisdiction of the issuer, and a variety of other factors. Users of Fitch’s ratings and reports should understand that neither an enhanced factual investigation nor any third-party verification can ensure that all of the information Fitch relies on in connection with a rating or a report will be accurate and complete. Ultimately, the issuer and its advisers are responsible for the accuracy of the information they provide to Fitch and to the market in offering documents and other reports. In issuing its ratings and its reports, Fitch must rely on the work of experts, including independent auditors with respect to financial statements and attorneys with respect to legal and tax matters. Further, ratings and forecasts of financial and other information are inherently forward-looking and embody assumptions and predictions about future events that by their nature cannot be verified as facts. As a result, despite any verification of current facts, ratings and forecasts can be affected by future events or conditions that were not anticipated at the time a rating or forecast was issued or affirmed. The information in this report is provided “as is” without any representation or warranty of any kind, and Fitch does not represent or warrant that the report or any of its contents will meet any of the requirements of a recipient of the report. A Fitch rating is an opinion as to the creditworthiness of a security. This opinion and reports made by Fitch are based on established criteria and methodologies that Fitch is continuously evaluating and updating. Therefore, ratings and reports are the collective work product of Fitch and no individual, or group of individuals, is solely responsible for a rating or a report. The rating does not address the risk of loss due to risks other than credit risk, unless such risk is specifically mentioned. Fitch is not engaged in the offer or sale of any security. All Fitch reports have shared authorship. Individuals identified in a Fitch report were involved in, but are not solely responsible for, the opinions stated therein. The individuals are named for contact purposes only. A report providing a Fitch rating is neither a prospectus nor a substitute for the information assembled, verified and presented to investors by the issuer and its agents in connection with the sale of the securities. Ratings may be changed or withdrawn at any time for any reason in the sole discretion of Fitch. Fitch does not provide investment advice of any sort. Ratings are not a recommendation to buy, sell, or hold any security. Ratings do not comment on the adequacy of market price, the suitability of any security for a particular investor, or the tax-exempt nature or taxability of payments made in respect to any security. Fitch receives fees from issuers, insurers, guarantors, other obligors, and underwriters for rating securities. Such fees generally vary from US$1,000 to US$750,000 (or the applicable currency equivalent) per issue. In certain cases, Fitch will rate all or a number of issues issued by a particular issuer, or insured or guaranteed by a particular insurer or guarantor, for a single annual fee. Such fees are expected to vary from US$10,000 to US$1,500,000 (or the applicable currency equivalent). The assignment, publication, or dissemination of a rating by Fitch shall not constitute a consent by Fitch to use its name as an expert in connection with any registration statement filed under the United States securities laws, the Financial Services and Markets Act of 2000 of the United Kingdom, or the securities laws of any particular jurisdiction. Due to the relative efficiency of electronic publishing and distribution, Fitch research may be available to electronic subscribers up to three days earlier than to print subscribers. For Australia, New Zealand, Taiwan and South Korea only: Fitch Australia Pty Ltd holds an Australian financial services license (AFS license no. 337123) which authorizes it to provide credit ratings to wholesale clients only. Credit ratings information published by Fitch is not intended to be used by persons who are retail clients within the meaning of the Corporations Act 2001

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