While the pace of positive rating actions may slow in the evolving global economic environment, Fitch expects Latin American countries to come under significant downward pressure in the event of "U.S. tapering," the agency said in a new report.
"Tapering" is defined as the anticipated reduction of the U.S. Federal Reserve's quantitative easing, or bond-buying program, with expected international financial consequences.
Fitch said an economic downturn in specific Latin American and Caribbean regions, combined with external factors could lead to some countries from the area drawing negative rating actions.
"In most cases, negative rating actions would follow from country-specific deterioration that may be compounded by a less accommodating external environment," Fitch Latin America Sovereign Group Director Santiago Mosquera said.
In addition to the impact of U.S. Fed monetary moves, the region could be affected by a slowing Chinese economy, he said.
"An easing of capital flows following U.S. Fed tapering could lead to higher borrowing costs for sovereign issuers, diminished access to international capital markets for the private sector, renewed financial market and currency volatility, and further easing of commodity prices, especially if China's economy underperforms," Mosquera said.
Despite moves toward economic diversification, most of Latin America still depends on earnings from raw material exports, including largely unprocessed agricultural and food products, analysts said.
The Fitch report follows several market surveys speculating on how the U.S. economy could continue to affect Latin American nations.
Bond prices in emerging markets went through fluctuations in May mainly in response to U.S. regulators reconsidering monetary stimulus at that time.
"An eventual U.S. Fed tapering could lead to a renewed increase in risk-aversion and asset price volatility, negatively affecting confidence and growth," Fitch said.
Countries with high foreign participation in local debt markets may be more vulnerable to increased risk aversion, it said.
The report points out that regional countries with lower deficits and higher international reserves are least likely to be directly affected by U.S. economic events. Weaker economies in Central America and the Caribbean are thought to be more vulnerable.
"Overall, most Latin American countries are well positioned to face U.S. tapering thanks to their moderate fiscal and external imbalances, improved debt composition and strong external buffers, which, combined with access to multilateral financing, have improved their ability to absorb external shocks," Fitch said.
Much would still depend on respective governments' policy management and ways of handling volatile markets, the report warns.
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