SANTIAGO, Chile Panelists at this year's annual Inter-American Development Bank (IDB) conference cited bad credit as a major culprit in Latin America's difficulty in accessing the financial markets and argued that improving creditor rights is the best immediate step in the right direction.
According to an IDB report, 18 out of 20 Latin American countries noted that access to credit was the ultimate concern for entrepreneurs in the region. The IDB also said that countries with tighter credit constraints are unable to grow, and it is those areas that also experience an overall stunted growth.
According to Alvaro Feller, president of Chile-based Feller Rate, an affiliate of Standard and Poor's, there are only two Latin American countries that have an investment-grade sovereign rating - Chile with an A-minus rating, and Uruguay with a BBB-minus rating.
"I would say that for most Latin American countries it is not that easy to go to the international capital markets because of the relatively low ratings," Feller said.
However, market sources say that if a country's credit quality is low, the incentive for investing into it is clearly reduced as a result of the existing risks - the environment is not conducive to potentially encouraging the business to succeed.
If there is a lack of interest in the country as a result of the sovereign rating, one market participant noted, "No matter what kind of transaction it is, be it a capital markets issue or a securitization issue, the ability to pay back those funds has to be there."
fix creditor rights
IDB sources suggest that one way Latin American countries can improve credit ratings is to improve creditor rights in the financial markets. Sources say the notion resembles a current initiative in the United States, whereby it is becoming easier for creditors to foreclose on bad debts and at the same time, they will have less write-offs.
At the moment, in emerging markets, the long process and the complicated legal system make it difficult to foreclose on certain types of assets and therefore, it becomes easier for creditors to stay away from that type of transaction.
Included in improving creditor rights is the ability for the creditor to repossess collateral in the event of default.
Collateral can act as a leverage for the creditor, and according to an IDB report, can help to reduce certain problems that often arise, like credit rationing and underinvestment.