NEW YORK - It's a shaky outlook ahead for Latin American markets - at least that's what the consensus seemed to be at last week's meeting for the 2002 outlook for Latin America held by Standard and Poor's.

Argentine investors nearly wept at the announcement that S&P downgraded Argentina's sovereign rating once again, this time to double-C from triple-C-plus, coupled with the bad news that the International Monetary Fund (IMF) has said it will not bail the country out again.

During the conference, news that the IMF would not come to the country's aid, as it has continually done over the last year, seemed to trickle into the room. And at press time last week, Argentine President Fernando de la Rua was set to announce the much-anticipated restructuring plan - a plan which rating agencies would likely deem a default (see ASR 10/22/01).

According to Rosario Buendia, Latin American analyst at S&P, deals out of Mexico are the easiest to sell to investors in Latin America as a result of investor comfort, although there seems to be little action there these days.

On the other hand, despite its position at the brunt of the Argentine contagion, Brazil seems to be moving ahead with some deals and has others on deck. On the upside for Brazil, Mary Pech, an investor from Aegon Investments and Sanjeev Handa, an investor from TIAA-Cref, admitted there is appetite for Brazilian transactions.

S&P said Latin American markets have been tainted with negative rating actions in recent months, and possibly the most noteworthy are those in Argentina. The negative rating actions in Brazil, Mexico and other Latin American countries have been most heavily felt in the capital and commodity industries.

The downward trends are spun from the regional and economic slowdown, various political tensions, foreign exchange and interest volatility, low commodity prices, high debt leverage and increased financing risks.

The future

Pech said her portfolio of future flow transactions is slowly shrinking as past deals are nearing their end. "We want more of them, and we still have an appetite for credit card and remittance deals," Pech said. Handa said his appetite for existing assets and future flows has not changed since the events of September 11. "Our big concern is the changing treasury and the repricing of risk," he added.

What the future holds for the region in the coming months remains to be seen. However, according to Buendia there is a pipeline of diverse deal flows to be issued from state-owned as well as privately owned companies. The rating agency is currently mulling over a variety of transactions, including export future flows, MT100s, credit cards, remittances and deals that feature political risk insurance.

Different default risks

According to Kevin Kime, an analyst at S&P, the sources of default risk are different for privately owned and state-owned companies. Both private firms and state-owned firms face general credit risk - company risk and sovereign risks - and transfer and convertibility risk, the risk that a sovereign would impose currency controls that impede the servicing of foreign debt. State-owned entities are also exposed to a third risk, sovereign default and rescheduling risk, whereby foreign debt of the broad public sector could be consolidated with the sovereign and rescheduled.

Discussions about various forms of political risk insurance is something that has been on the rise since last year, and given the current situation throughout Latin America, it seems as though it will become a more prevalent issue in the coming months. Looking at the current market, Buendia posed the question, how important is transfer and convertibility risk now? According to Pech, it depends on the country. "What it all boils down to is how much yield do we have to give up in order to have [political risk] features?"

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