CROSS-SECTORSECTOR IN-DEPTH 20 MAY 2015TABLE OF CONTENTSForeign exchange volatility risks for Mexico, Brazil and Peru will persist 2 Sovereigns will face higher borrowing costs, though reliance on foreign currency debt has stabilized at lower levels than in previous years3Corporate borrowers see mixed impacts, with exporters benefitting, while firms that rely on imports and international financing face risks5Bank loan portfolios may be sensitive to swings in the dollar 8ANALYST CONTACTSGersan R Zurita 5511-3043-7343 Senior Vice President gersan.zurita@moodys.comM. Celina Vansetti 212-553-4845 MD-Banking celina.vansetti-hutchins@moodys.comMarianna Waltz, CFA 55-11-3043-7309 Associate Managing Director marianna.waltz@moodys.comMauro Leos 212-553-1947VP-Sr Credit Officer mauro.leos@moodys.comFernando Albano 54-11-5129-2624 AVP-Analyst fernando.albano@moodys.comCross-Sector - Latin AmericaCurrency Depreciations Raise Credit Risks for Sovereigns, Companies and Banks The depreciation of Latin American currencies since the second half of 2014 is unlikely to fully reverse in the coming year, and in some countries, exchange rates could weaken even further. Unlike the relatively brief sell-off of currencies in the region in 2013, when markets reacted to signals that the Federal Reserve would begin winding down its quantitative easing program, the current period of currency weakness has been triggered by a broader array of factors weighing on the economic outlook for the region and the emerging markets in general.A prolonged period of currency volatility and devaluation will be credit negative, to varying degrees, for Latin American sovereigns and firms with USD-denominated debt refinancing needs or diminished funding options for growth. This reports examines foreign exchange risks for debt issuers in Brazil and Mexico, the regions two largest economies, as well as in Peru, where financial dollarization remains high.An uncertain global outlook will preclude a viable recovery in Latin American currencies in the near term. Expectations that US monetary policy will begin to tighten at some point before year-end will continue to pose volatility risk for Latin American currencies, but additional uncertainties are also at play. Economic growth in Latin America is weaker than it was two years ago, with Brazil sliding into recession. A decline in demand from China has triggered a slump in prices for a wide range of commodities, which had fueled growth in the region for much of the past decade, supporting the regions currencies. Since September 2014, the Brazilian real has declined 33%, the Mexican peso, 16%, and the Peruvian sol, 11%.For governments, borrowing costs could rise, but access to the domestic capital markets will alleviate stress. Sovereign exposure to exchange rate fluctuations for Brazil (Baa2 negative), Mexico (A3 stable) and Peru (A3 stable) has decreased over the past decade, as governments have taken advantage of deepening loc...
