Power Ratings: Shift In Rankings Highlight Emerging Opportunities

BMI View: We have seen a slight shift in our Latin American ratings this quarter, as Mexico moves up to the top, displacing Chile as the most attractive power market in the region - partially owing to our relatively optimistic outlook towards Mexico's energy sector reform. Venezuela has also moved one place up the table, after several consecutive quarters at the bottom. We have witnessed some marginal progress within the country's power sector over the last few months, with regards to improving existing capacity and bringing new projects online. The knock-on effects of a Chinese economic slowdown, the expansion of renewable energy across the entire region and the increasing opportunities presenting themselves in Central American power sectors are the key themes emerging in this quarter's Latin America Power Risk Rewards Ratings.

The power markets that comprise our Latin American coverage are diverse in nature and in terms of the relative risks and rewards that are on offer. This is evidenced by the 20-point differential between the top- and bottom-ranked countries in our Latin America Power Risk/Reward Ratings (RRRs).

We have identified some key trends emerging across the Latin America region, reflected in our Risk/Reward Ratings this quarter, including:

  • 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 the last year have highlighted that financing is still being committed to the region's power sectors, particularly into gas-fired facilities, hydropower, renewable energy and the transmission and distribution (T&D) networks.

Mixed Bag
Latin America Power Industry Risk/Reward Ratings, Scores Out Of 100

BMI View: We have seen a slight shift in our Latin American ratings this quarter, as Mexico moves up to the top, displacing Chile as the most attractive power market in the region - partially owing to our relatively optimistic outlook towards Mexico's energy sector reform. Venezuela has also moved one place up the table, after several consecutive quarters at the bottom. We have witnessed some marginal progress within the country's power sector over the last few months, with regards to improving existing capacity and bringing new projects online. The knock-on effects of a Chinese economic slowdown, the expansion of renewable energy across the entire region and the increasing opportunities presenting themselves in Central American power sectors are the key themes emerging in this quarter's Latin America Power Risk Rewards Ratings.

The power markets that comprise our Latin American coverage are diverse in nature and in terms of the relative risks and rewards that are on offer. This is evidenced by the 20-point differential between the top- and bottom-ranked countries in our Latin America Power Risk/Reward Ratings (RRRs).

Mixed Bag
Latin America Power Industry Risk/Reward Ratings, Scores Out Of 100

We have identified some key trends emerging across the Latin America region, reflected in our Risk/Reward Ratings this quarter, including:

  • 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 the last year have highlighted that financing is still being committed to the region's power sectors, particularly into gas-fired facilities, hydropower, renewable energy and the transmission and distribution (T&D) networks.

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

Mexico Leading The Way

Mexico has moved to the top of our ratings table this quarter, mostly thanks to President Enrique Peña Nieto's reform drive, which we have been following closely over the last six months. Although, the full impact of the reform is still a relative unknown, we believe 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, we have adopted a cautiously optimistic outlook towards the reform (see 'Forecasts Maintained; Cautiously Optimistic On Reform', January 31 2014).

Reforming CFE To Drive Down Electricity Prices
Average Price Of Electricity By Selected End-Use Sector (RHS) And Average Price Of Electricity Across The Whole Sector (LHS), (Cents of Pesos/KWh)

Chile Presenting Attractive Opportunities

Chile is ranked second in our regional ratings this quarter, a slip from leading position last quarter. That said, our outlook for the Chilean power sector is positive, and we forecast an annual average growth rate of 4.7% in power consumption between 2014 and 2023; driven by growth in the mining sector and positive macroeconomic and demographic fundamentals. The country's relatively stable operating environment and liberalised power market help to attract investors. We see particularly strong potential in Chile's renewables market, as the country's favourable geographic conditions, conducive regulatory environment and the government's commitment towards diversifying its energy mix away from hydropower are all boosting the industry's prospects ( see 'Creating A Space For Renewables Expansion', February 17). That said, we highlight that a weakening Chinese economy is likely to have an adverse effect on Chile's economic trajectory if copper exports are negatively impacted - and this is something we will be following closely, as it poses a downside risk to our forecasts.

Renewables Surging
Chile Non-Hydro Renewables Capacity and Growth, 2013-2023

Brazil's Vast Market Unrivalled But Risks Pertinent

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. However, both sector and country-specific risks keep Brazil from the top of our ratings table.

Brazil has grown increasingly vulnerable to numerous economic and political headwinds - including slowing growth and street protests. Furthermore, fears about electricity rationing and blackouts have been growing of late, after outages occurred at a time when reservoirs at dams in Brazil's southern region were running low after the driest January since 1954 ( see 'Blackouts A Threat To Rousseff In An Election Year', February 7 2014). With Brazil reliant on hydropower for over 67% of its electricity generation and the country's T&D network suffering from inefficiencies and high losses, concerns about the security of Brazil's power supply will no doubt continue to grow in the build up to the 2014 World Cup and Olympics in 2016.

Slight Progresses In Argentina and Venezuela

Argentina was the only country to move up the ratings table last quarter, from ninth to eighth place, and it has maintained this position this quarter - suggesting that progress is continuing to be made in the sector, particularly in the T&D segment. Additionally, after several consecutive quarters being at the bottom of the ranking list, Venezuela has moved up one place.

The reliability of Argentina's power network has long been a contentious issue, and this was most recently highlighted in December 2013 when an unusually severe heat wave caused power demand to rise to record highs, overwhelming the power grid, causing a blackout across the capital. However, this prompted the Minister of Federal Planning, Public Investment and Services to announce in January 2014 that the government will channel US$593mn into the power distribution system in order to combat outages and minimise disruptions. We have seen further investment being directed into the T&D network, and also progress in the wider power, renewables and infrastructure sectors ( see 'Blackout Sparking Power Grid Investment', January 22 2014). These encouraging developments align with the view outlined by our Country Risk team, which believes the country is softening its stance towards foreign investors (albeit marginally).

Although we maintain our rather bleak view of the Venezuelan power sector (owing to the country's unattractive business environment, high levels of corruption, opaque tendering process and extremely low levels of liberalisation within the power market), we have witnessed some small signs of progress. For example, Venezuela's state-owned utility, Corpoelec announced in early February 2014 that it plans to upgrade units 1 to 6 of the Guri hydropower complex in mid-2015, in a bid to increase efficiency, boost capacity by 800MW and also extend the operating life of the units by 25 years ( see 'Hurdles Ahead For Power Sector Expansion', February 6 2014).

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.

Robust Economic Growth
Central America Real GDP Growth (% y-o-y), By Selected Countries, 2013-2018
  • Our core economic outlook for most of Central America in 2014 envisages a slight acceleration in real GDP growth from 2013 levels, buoyed by an improved coffee export picture and increases in remittance inflows from the US- 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 for power consumption, generation and capacity- with strong policy continuity and short-term political stability helping to encourage investment.

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This article is tagged to:
Sector: Power, Renewables
Geography: Latin America, Africa, Global
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