BMI View: The overall picture that emerges from our new Latin America Power Risk/Reward Ratings (RRRs) is quite strong, in line with the region's long-standing liberalisation and opening up of the electricity market, relatively positive macro fundamentals (albeit with exceptions) and very high existing electrification rates. Once again, Brazil has retained its first place, owing to its vast industry size. However we note that Chile has dropped down the list, with both Mexico and Peru offering a more attractive business environment to investors. Despite the addition of six countries to our Latin American portfolio, most of which have limited market size, Venezuela still remains at the bottom of the heap.
An overhaul of our methodology behind the power RRRs, coupled with the addition of six countries to the Latin America regional portfolio (Honduras, Costa Rica, Nicaragua, Panama, Guatemala and El Salvador) has resulted in some changes in the regional table. BMI has introduced new RRRs for the Power service, strengthening this analytical tool by integrating aspects of our new Renewables RRRs and Infrastructure Project Finance ratings. The methodology behind the Power RRRs has also been enhanced by revising the individual weighting of various industry-specific factors to provide a more accurate picture of the power markets.
|Industry Rewards||Country Rewards||Rewards||Industry Risks*||Country Risks*||Risks*||Power R/R Ratings||Rank|
|*Higher score = Lower risks. Source: BMI|
The overall power market business environment picture that emerges across the Latin American region is quite strong, in line with the region's long-standing liberalisation and opening up of the electricity market, relatively positive macro fundamentals (albeit with exceptions) and very high existing electrification rates. In fact, the regional average scores for Ratings, Risks and overall Power R/R Rating have all increased between Q312 and Q412.
|Business Environment Becoming More Attractive|
|Latin America Power Risk/Reward Ratings, Scores Out Of 100|
BMI's macroeconomic outlook for Latin America sees growth moderating across the majority of the region in 2012, which underpins our moderate growth outlook for electricity capacity and generation. These factors help to maintain the Rewards side of our ratings equation, and we have observed only a small increase in the regional average score for Rewards between Q312 and Q412.
The most pronounced change between Q312 and Q412 is within the Risks indicators. We note that the regional average score for Risks has increased noticeably- up from 51.57 in Q312 to 53.79 in Q412. This has been largely driven by the considerable change that has taken place in the Industry Risk part of the matrix, where we have seen a broad increase across the majority of countries in the region. The establishment of renewable energy policies has played a key role in boosting scores. Similarly, the incorporation of a project finance indicator in our ratings has provided a thorough quantification of the risks to both raising financing and repayment of project loans over the course of a power project's life.
Despite the increase in Industry Risks, the regional average score for Country Risks remain low, and has in fact decreased during the quarter. We attribute this primarily to the addition of new countries to our portfolio, which are bringing down the regional average - specifically Honduras and Nicaragua. These countries are dampening the regional Country Risk outlook, with high levels of corruption and a weak institutional framework prompting low scores.
However, overall the regional average power rating has increased by one point between Q312 and Q412, taking the value to 49. This reinforce our view that overall power markets in the Latin American region are generally more attractive than some of their peers in Central and Eastern Europe (CEE) and in Middle East and Africa, with strong potential in the renewables sector.
|Nuanced Picture Of Risk And Rewards|
|Latin America Industry Risk/Reward Ratings and Country Risk/Reward Ratings, Scores Out Of 100|
The key themes and trends we have identified in our Latin America Power Risk/Reward Ratings are:
Brazil leads in the regional rankings on account of its industry value and the rewards potentially on offer. However, we note that whilst power generation growth is moderating, consumption is likely to remain strong, therefore possibly increasing Brazil's electricity import requirements in the short term.
Venezuela remains the clear underperformer in the region owing to chronic and deteriorating power shortages, poor outlook for financing and liberalisation, in addition to wider business environment risks.
Despite boasting the highest Risk scores across the region, both in terms of Country Risk and Industry Risk, Chile has dropped from second position this quarter, falling behind both Mexico and Peru in the Power RRRs. This is due to the country's disappointing Rewards score, particularly in terms of capacity and generation growth.
Conversely, Mexico and Peru score well for Country Rewards, with relatively good prospects for growth in their power sectors.
The countries added to the Latin America portfolio appear towards the bottom end of the table, with relatively low Power RRR scores, primarily on account of their restricted market size.