November 20, 2017 / 2:44 PM / a month ago

Fitch: Rising Lat Am, Carib Catastrophe Costs Pose Fiscal Risks

(The following statement was released by the rating agency) NEW YORK, November 20 (Fitch) The fiscal risk of natural disasters to sovereign credits in Latin America and the Caribbean (LAC) is rising, Fitch Ratings says. While credit ratings already incorporate a significant degree of catastrophe risk, sovereigns remain exposed to large-tail risk events. As these are expected to become more frequent and more devastating going forward, we believe that catastrophe risk management strategies could become more widespread. Economic losses from natural catastrophes in the region have gradually increased over the last 50 years due to climate changes and greater economic development and urbanization, which have increased the value of property at risk. As climate change and economic development continue, these events are likely to become more powerful and frequent. Economies exposed to windstorms and earthquakes are especially vulnerable, as are those that rely on drought-prone agribusinesses, including Argentina, Brazil Paraguay and Uruguay, or that have high economic risk concentrations, such as the Panama Canal Zone, tourism facilities in the Caribbean, etc. <iframe src="https://e.infogram.com/2de090e8-d34c-4870-9008-38a8c2179fe3?src=embed " title="Natural Perils in LAC" width="550" height="500" scrolling="no" frameborder="0" allowfullscreen="allowfullscreen"> Ratings have been partially insulated from natural disasters because the period of impact is typically shorter than the ratings' forecast horizon. In addition, the rating level already incorporates a degree of catastrophe risk via variables that capture fiscal resilience to shocks generally, as well as through the legacy costs of past events. Therefore, the incidence of disaster-driven ratings actions is low. Nevertheless, the fiscal costs of catastrophes can be substantial and more difficult to manage for lower rated credits. For large and diversified economies, the increase in general government spending attributable to recovery and reconstruction has ranged from 0.1% to 0.6%. The hurricanes that hit Jamaica and several Central American countries in recent years led to disaster-related increases of 5%-20% of general governmental expenditures. Governments have tended to rely on contingency reserves, credit lines and bond issuance to finance repair- and reconstruction-related outlays. However, these options depend on market access and favorable concessions. Raising taxes has been necessary in some cases. If natural catastrophes become more common and costly, other loss mitigation techniques may be prudent, including sovereign catastrophe insurance, contingency reserves and fostering private sector insurance. While these create recurring budget expenditures for premiums, capital contributions to funds, and premium subsidies for private-sector insurance, the costs of such programs are often only a small share of current spending and a fraction of disaster-related recovery costs. Contact: Arend Kulenkampff Director, Sovereigns +1 646 582-4678 Fitch Ratings, Inc. 33 Whitehall Street, New York, NY Robert Rowan Senior Analyst, Fitch Wire +1 212 908-9159 Media Relations: Benjamin Rippey, New York, Tel: +1 646 582 4588, Email: benjamin.rippey@fitchratings.com. Additional information is available on www.fitchratings.com. The above article originally appeared as a post on the Fitch Wire credit market commentary page. The original article can be accessed at www.fitchratings.com. All opinions expressed are those of Fitch Ratings. ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. 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