Latin America Power Ratings: Opportunities Aplenty But Challenges To Overcome

BMI View: After a pronounced shift at the top end of the ratings table last quarter, the rankings remain largely unchanged heading into this quarter. Chile still tops the table, with Brazil in second place, and Mexico and Peru in third and forth respectively. Argentina has moved one place higher as the country begins to move towards the implementation of more moderate economic policies, while positive developments within the market point to progress. Unsurprisingly, Venezuela has retained it position at the bottom of the table, with a recent power cut in December 2013 highlighting that a swathe of problems persist within the country's power sector.

The individual power markets that comprise our Latin American coverage are diverse in both nature and in terms of the relative risks and rewards that are on offer - as evidenced by the 22-point differential between the top- and bottom-ranked countries in our Latin America Power Risk/Reward Ratings (RRRs).

The key themes and trends identified throughout Latin America's Power RRRs can be summarised as follows:

  • Our view that industrial metals exporting economies in Latin America would be hit hard by slowing growth in China and weaker metals prices played out in 2013. Chile, Peru, and to a lesser extent Brazil have been hit hard as weaker exports have fed through to widening current account shortfalls, and in some cases have helped to make net exports a more significant drag on growth in 2013. That said, we believe that most of the downside for metals exporting economies has played out and forecast real GDP growth to remain at close to current levels in 2014.

  • Latin America has a great deal of natural potential for renewable energy and the majority of countries within the region, including Central America, have shown a keen interest in incorporating renewable energy into their power mixes. Nearly all the countries have established some sort of national target for renewable energy and adopted regulatory frameworks to help attract private investment - with Chile the top renewables pick for the Latin American region.

  • The outlook with regards to our financing indicator for the region looks increasingly promising. Developments over 2013 have highlighted that financing is still being committed to the region's power sectors, particularly into gas-fired facilities, hydropower, renewables and the transmission and distribution (T&D) networks.

  • A busy election schedule and signs of growing social tension as economic growth models across the region lose their shine, suggest that public unrest could be a key theme in the region during 2014 - giving rise to more populist politics. This could have an adverse impact on policy continuity.

Divergence In Play
Latin America Power Industry Risk/Reward Ratings, Scores Out Of 100

Latin America Power Ratings: Opportunities Aplenty But Challenges To Overcome

BMI View: After a pronounced shift at the top end of the ratings table last quarter, the rankings remain largely unchanged heading into this quarter. Chile still tops the table, with Brazil in second place, and Mexico and Peru in third and forth respectively. Argentina has moved one place higher as the country begins to move towards the implementation of more moderate economic policies, while positive developments within the market point to progress. Unsurprisingly, Venezuela has retained it position at the bottom of the table, with a recent power cut in December 2013 highlighting that a swathe of problems persist within the country's power sector.

The individual power markets that comprise our Latin American coverage are diverse in both nature and in terms of the relative risks and rewards that are on offer - as evidenced by the 22-point differential between the top- and bottom-ranked countries in our Latin America Power Risk/Reward Ratings (RRRs).

Divergence In Play
Latin America Power Industry Risk/Reward Ratings, Scores Out Of 100

The key themes and trends identified throughout Latin America's Power RRRs can be summarised as follows:

  • Our view that industrial metals exporting economies in Latin America would be hit hard by slowing growth in China and weaker metals prices played out in 2013. Chile, Peru, and to a lesser extent Brazil have been hit hard as weaker exports have fed through to widening current account shortfalls, and in some cases have helped to make net exports a more significant drag on growth in 2013. That said, we believe that most of the downside for metals exporting economies has played out and forecast real GDP growth to remain at close to current levels in 2014.

  • Latin America has a great deal of natural potential for renewable energy and the majority of countries within the region, including Central America, have shown a keen interest in incorporating renewable energy into their power mixes. Nearly all the countries have established some sort of national target for renewable energy and adopted regulatory frameworks to help attract private investment - with Chile the top renewables pick for the Latin American region.

  • The outlook with regards to our financing indicator for the region looks increasingly promising. Developments over 2013 have highlighted that financing is still being committed to the region's power sectors, particularly into gas-fired facilities, hydropower, renewables and the transmission and distribution (T&D) networks.

  • A busy election schedule and signs of growing social tension as economic growth models across the region lose their shine, suggest that public unrest could be a key theme in the region during 2014 - giving rise to more populist politics. This could have an adverse impact on policy continuity.

Risks vs. Rewards
Latin America Power Industry Risk/Reward Ratings, Scores Out Of 100

Constructive Outlook For Chile

Chile retains its leading position in our regional ratings this quarter. Overall, our outlook for the Chilean power sector is positive, and we forecast an annual average growth rate of 4.5% in power consumption between 2014 and 2022; driven by growth in the mining sector and positive macroeconomic and demographic fundamentals. The country's relatively stable operating environment, political stability and a liberalised power market help to attract investors. Furthermore, Chile's position as a key emerging renewables market, in both Latin America and the wider global arena is appealing to foreign renewable energy developers.

Chile's Power Expansion Underway
Chile Electricity Generation and Consumption, 2013-2022

That said, we continue to stress that regulatory risks, manifesting as environmental disputes, do pose a real downside risk to Chile's capacity expansion plans - despite the country's many appealing characteristics. Most recently, in October 2013, the development of the 640MW Rio Cuervo hydropower plant in Chile's southern region of Aysen was blocked by a Chilean appeals court over environmental concerns.

Mexico's Drive To Reform

We have been following President Enrique Peña Nieto's reform drive closely over the last six months, and we maintain the view that breaking state-owned Comisión Federal de Electricidad (CFE)'s monopolistic position in the power sector and opening up the industry to private players will help secure investment in much-needed electricity generation capacity; while gradual deregulation should drive down prices and bring both social and economic benefits. As such, our outlook for the Mexican market is fairly buoyant; however, the full impact the reform is still a relative unknown, and there is therefore scope for upward movement in Mexico's RRR scores over the coming quarters.

Brazil's Vast Market Unrivalled But Economic Headwinds

Brazil's vast market size is incomparable to any other country in the region, and this is without doubt a key factor which continues to attract investors into the Brazilian power market. That said, Brazil slipped to second place in our ratings table in mid-2013, and has remained in that position since. The economy remains in a rough patch following a significant slowdown and we forecast muted 2.4% growth in real GDP in 2014 - which is likely to have a knock-on effect on power demand.

Venezuela Trailing

Despite a small number of power projects coming online over the previous year, resulting in relatively robust growth in net capacity for 2012, Venezuela is still significantly underperforming its regional peers. The country's business environment is notably unattractive, with high levels of corruption, an opaque tendering process and extremely low levels of liberalisation within the power market. Furthermore, electricity output from successfully commissioned plants is at the mercy of Venezuela's ageing and inefficient T&D infrastructure - with power outages still a pressing concern for the majority of the population. Widespread power cuts in Caracas in December 2013 served to highlight this point.

Progress In Argentina

Argentina was the only country to move up the ratings table this quarter, from ninth to eighth place, and we mostly attribute this upward movement to the country's softening stance towards foreign investors. Argentina faced a near perfect storm of economic conditions in 2013, but shrewd policymaking and some legal wrangling have enabled the economy to emerge mostly unscathed. Additionally, we started to see promising developments in the Argentine power sector towards the end of 2013, with Argentine federal planning and public investment ministry signing an agreement to tender the 640MW Chihuido I hydroelectric project, and also awarding a US$64.7mn construction contract to local utility IMPSA for the 25MW small-scale Carem nuclear plant's reactor vessel (both in December 2013). Additionally, China Gezhouba Group announced in November 2013 that it plans to build two hydroelectric dams worth US$4.7bn in the Patagonia region. Despite these positive announcements, Argentina's Power R/R score continues to underperform the regional average.

Central America Making Positive Headway

Although situated towards the middle and lower end of the regional ratings table, we are witnessing a wave of positive announcements across the Central American power markets, primarily with regard to capacity expansion plans and renewable energy ambitions, regulatory developments and multilateral funding.

Panama Leading The Pack
Real GDP Growth, By Country (2013-2022)

Our core economic outlook for most of Central America in 2014 envisages a slight acceleration in real GDP growth from 2013 levels, as signs of a stronger US economy point to more robust external demand for the region's manufactured exports, as well as an increase in remittance inflows - boosting private consumption. Panama in particular is set to remain above trend compared to the rest of Central America and features highly in the ratings table, outperforming the regional average. This reflects relatively strong growth prospects - with strong policy continuity and short-term political stability helping to encourage investment.

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