Some small countries in Latin America are stealing the spotlight, as US tariffs bring economic headwinds to the region.
Some smaller countries in Latin America are flipping the script on their larger rivals. Guatemala, Jamaica and Barbados all received improvements in their credit ratings this year, and their economies were strengthened by strong remittance growth and stable labor markets. On the other hand, traditional countries such as Brazil, Colombia and Mexico are grappling with uncertainty.
Brazil faces the dual threats of 50% tariffs, thanks to US President Donald Trump, and the ongoing trial of former President Jair Bolsonaro, which has caught the attention of his friend in Washington. This would cause further difficulties for incumbent President Luiz Inacio Lula da Silva, but at the same time could revive his faltering re-election campaign.
In Colombia, a series of reforms aimed at boosting the rural economy has drawn President Gustavo Petro into a series of fights. Attempts to impose reforms that would affect rural areas, including the redistribution of 570,000 hectares of land and the restoration of occupied areas linked to paramilitary leaders, brought Petro into conflict with the Colombian Congress, mayors, and even infighting within his own party. This was the latest to happen with the mayors during a trip to Washington to discuss the war on drugs, where Petro said the group of local officials could not represent the country.
Mexico is looking to narrowly avoid a recession in 2025 as the World Bank estimates 0.2% growth for the year. President Claudia Sheinbaum has taken a conciliatory approach in dealing with the mercurial Trump, giving her government more time to resolve domestic issues including restructuring Pemex’s debt and reforming the judicial sector.
All of this leaves some observers looking at the glass as half full, at least.
“Although we have revised our U.S. growth forecasts somewhat since the beginning of the year, our outlook for Latin America has remained stable,” says Todd Martinez, senior director and co-head of the Americas group at Fitch Ratings. “This is noteworthy and indicates that we have come a long way from the ‘when the United States sneezes, Latin America catches a cold’ assumption that was prevalent in economic analysis of the region.”
Martinez points out that Latin America is not homogeneous. The economies of Brazil and Mexico are slowing after years of good growth, and forecasts are declining for Mexico in particular. This has given a group of countries whose sovereign debt was rated as “low-beta credit with defensive qualities” by Wall Street experts, including Barbados, the Bahamas, Guatemala, Jamaica and Paraguay, a chance to shine.
The catalyst is a combination of a weak US dollar and still high commodity prices, especially metals. Remittances to the region, especially the Northern Triangle of El Salvador, Guatemala and Honduras, have shown growth of up to 20%. Combined with the methods that Latin American central banks have honed during the pandemic to keep inflation under control and labor markets flexible, sovereign debt in Latin America is viewed favorably.
Upgrades for outliers
Guatemala’s rating was affirmed at BB by Fitch in February with the outlook for the long-term issuer credit rating (IDR) improving from stable to positive and by Standard & Poor’s to BB+ in May. The ratio of state debt to GDP has traditionally been small for the region, a result of no default since the 1980s, as well as a lack of political will to take on too much debt. Debt to GDP this year reached 28%, after averaging 27% from 2014 to 2024. But Guatemala’s tax-to-GDP ratio is also one of the lowest in the region; In 2022, tax revenues amounted to only 14.4% of GDP compared to an average of 21.5% in Latin America and the Caribbean.
Guatemala, Central America’s largest economy, is currently trying to pass its largest budget ever, 163.78 billion quetzales ($21.36 billion). After the competition law was passed last November after decades of attempts, the government began implementing infrastructure projects in a major way. These projects include a planned metro for the capital, the modernization of its ports and the main La Aurora airport in Guatemala City.
In the Caribbean, Barbados remains a moderate risk for investors according to Wall Street analysts interviewed for this article, but with a significant decline in its debt-to-GDP burden – to 77% from its 2018 peak of 158% – and signs of economic recovery. These forecasts include growth of 2.7% for this year, according to the Central Bank of Barbados, with unemployment reaching its lowest levels in modern history. The recovery is due in part to innovative use of instruments such as the first debt-for-climate resilience swap, which raised $125 million last December, following the trend of swapping high-interest debt for more sustainable issues.
Moody’s revised its Bahamas rating outlook upward in April from stable to positive, and in the same month, Fitch announced a BB- rating with a stable outlook, complementing the islands’ rising GDP per capita and fiscal consolidation. The government’s budget deficit fell to 1.3% of GDP in the fiscal year ending in June, from 3.7% in the 2022-23 fiscal year. The primary surplus reached 2.9% in the following fiscal year, its highest level in 25 years. The new global minimum tax could add another 1% to the country’s GDP according to Fitch Ratings, although Washington’s announcement that it will withdraw from the minimum tax agreement has cast doubt on the project.
Jamaica maintains its BB- rating with a positive outlook following Fitch’s review in February. Analysts argue that if Jamaica sells its sovereign debt, it would benefit from demonstrating fiscal discipline under multilateral programs – in contrast to the Dominican Republic, which, despite decades of strong GDP growth, has not shown the same record of controlling its finances.
Returning to Latin America, Paraguay has taken advantage of capital market reforms to attract foreign investment. In December, Paraguay’s central bank changed its rules regarding the issuance, custody and trading of public debt securities, including allowing foreign investors to purchase bonds through global custodian banks. Combined with the expansion of foreign exchange and hedging transactions for foreign investors, this change pushed the country’s sovereign debt to investment grade. Foreign funds had already increased their investment in Guarani-denominated government bonds from 1.7% in 2023 to 5% in 2024 due to central bank reforms approved with the help of the World Bank.
Due diligence is a must
But what is the reason for this discrepancy between the classifications of the region’s larger and smaller frontier economies?
“It’s hard to pinpoint a single reason, but broadly speaking, these frontier markets appear to be either exhibiting stronger growth rates or tighter financial positions than their larger neighbors are able to do,” Martinez says.
He warns that if this trend continues, Latin America will show less inclination to push through ambitious reforms than emerging markets in Asia and Europe. However, investors are increasingly interested in local currency debt in Latin America, indicating growing confidence in the region at the expense of the US dollar.
If some countries perform beyond expectations, there are always some losers. The U.S. Treasury Department’s ongoing investigation into Mexican financial institutions CIBanco, Intercam, and Vector has refocused the regional banking system on compliance with the Foreign Corrupt Practices Act (FCPA). After a brief state intervention, Banco Multiva acquired CIBanco’s assets in August; In the same month, Capital Bank bought Intercam Banco, pledging to invest $100 million in it. This comes at a sensitive time for Capital, which is looking for investors at a proposed valuation of $1.4 billion.
“Compliance is an afterthought most of the time,” says Rich Fogarty, head of the Latin America disputes and investigations practice at consulting firm S-RM. “There will be all kinds of risks related to digital assets and digital banking, especially around cartel and transnational criminal organization issues.”
Digital banking is of particular concern for Mexico, which has seen a boom in foreign fintech companies trying to break into its market in the past five years. Brazil’s Nubank now boasts more than 12 million customers in Mexico alone, and will soon be joined by Argentina’s Mercado Pago. The combination of lax oversight, the volume of arrivals, ongoing investigations and diverse financial backgrounds worries Fogarty.
However, both established economies in the region and those with significant room for development face a common challenge, Fogarty points out: US policy highlighted by potentially explosive anti-drug measures, a remittance tax, and tariffs that will impact commodity prices.
“There are huge opportunities independent of any political headwinds or regulatory issues,” he says. “Argentina, Panama, Brazil and Mexico represent real opportunities.” But “given the increased scrutiny this US administration is conducting in the region, which may be more transactional in nature, CEOs not only need to do their due diligence, they need to do their best. If they don’t, there will be some potentially serious repercussions.”
