Fitch: Policy Choices to Determine Degree of Decoupling for Latin American Sovereigns.

NEW YORK -- Policy choices will determine how resilient the Latin American financial markets will be amid the global credit squeeze that is taking place, with policy mistakes likely to have much more severe consequences than before due to the less benign external backdrop, according to Fitch Ratings in its annual regional report that explores the likely impact of the current challenging external conditions on the economies of Latin America.

So far, the Latin American financial markets have largely decoupled from the credit crunch observed in developed markets in part due to the still favorable commodity prices outlook, improved public sector and external balance sheets, strengthened macroeconomic policy frameworks as well as lower reliance of Latin American sovereigns on international capital markets.

"Latin America's economic performance will continue to be relatively healthy with regional growth forecast to reach over 4% in 2008, driven by still robust growth in domestic demand, continued fiscal impulse in some countries, and broadly stable terms of trade, which will offset to some extent weakness in external demand emanating from the slowdown in U.S. and world growth. However, Fitch believes that the decoupling of the region from the U.S. has its limits due to the growing trade and financial links between them," said Shelly Shetty, Senior Director in Fitch's Sovereign Group. In addition, higher inflationary pressures in the region are preventing the countries from implementing counter-cyclical monetary policies to boost domestic demand, which would limit the extent of 'real economy' decoupling of regional economies.

The report also details Fitch's views on sovereign credit trends in the region and includes country commentary as well as updated economic projections through 2009. The report highlights that in 2008 economic growth is expected to decelerate along with some worsening of external accounts as a regional current account deficit is likely to emerge after five years of surpluses. Moreover, the rapid improvement in government debt burdens is not likely to continue as growth moderates and the pace of further fiscal consolidation slows. Finally, with the international environment likely to be less robust this year and with the pace of economic reforms still stalling in most countries, Fitch expects the potential for future upgrades to slow in 2008 following the upgrade of four sovereigns and the Rating Outlook revision to Positive for two sovereigns in 2007.

In a separate special report also published today, 'Diverging Credit Profiles: A Tale of Two Americas,' Fitch examines the diverging economic policy trends observed in Latin America, whereby countries like Peru, Brazil, Colombia and Panama are consolidating macroeconomic stability and making progress towards reaching investment grade, while Argentina, Bolivia, Ecuador and Venezuela are implementing heterodox policies, which increases medium-term risks in their economic outlook. In Fitch's view, this could result in greater divergence in sovereign creditworthiness in the medium term, especially in the absence of improvement in the policy frameworks of the latter set of countries.

Fitch today published its 'Latin American Sovereign Outlook' and will hold a teleconference on Jan. 14 at 11:00 a.m. EDT with Fitch sovereign analysts who will discuss the agency's findings in detail (separate release to follow). Fitch's 'Latin American Sovereign Outlook,' along with 'Diverging Credit Profiles: A Tale of Two Americas,' are both available on the Fitch Ratings web site at www.fitchratings.com.

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