Country risk in Latin America: which governments have the most dangerous bonds

Sovereign bonds in Latin America improved their performance in the last quarter and, as a result, the country risk of some of the governments most committed to this began to decrease, although some very negative figures are still observed in some cases.

The worst of all is Venezuela, which, according to the Emerging Markets Bonds Index (EMBI) of the JP Morgan bank, has a country risk of 43,309 units.

However, the government headed by Nicolás Maduro is not the only one facing prohibitive figures if it wants to go out and finance itself in international markets: Argentina and El Salvador also have a risk premium that seems to indicate that investors expect a restructuring in the medium long term.

It should be noted that JP Morgan calculates its EMBI in relation to the price of countries’ sovereign bonds.

VENEZUELA’S COUNTRY RISK

The Venezuelan country risk is so high that it is even difficult to graph it and compare it with that of the rest of the countries, since it breaks any scale.

The country governed by Nicolás Maduro entered its last default in 2017 and has not left yet.

ARGENTINA’S COUNTRY RISK

Argentina restructured its debt in August 2020, but from there its bonds began to slide, reaching values of less than US$20.

But in October of last year, fueled by a more favorable financial climate for emerging markets, they began to rebound, to the point that the Global 2030 of Argentina (the most emblematic of all) is already above US$31 per sheet.

Even with this rise, Argentina’s country risk is just below 2,000 points, which places it as the country with the second highest sovereign risk after Venezuela. The positive fact is that it is already very far from the highs of 2022, when it reached close to 3,000 points.

EL SALVADOR’S COUNTRY RISK

In 2022 there were moments in which El Salvador came to have more country risk than Argentina, but then it consolidated in third place, a place that it still maintains with a country risk of around 1,600 points.

A 2027 El Salvador bond, with a coupon of 6.375%, is trading below US$52 per sheet.

As with Argentina, El Salvador’s debt is rated CCC+ by S&P Global, which implies substantial risk.

ECUADOR’S COUNTRY RISK

The fourth and last whose country risk measured by JP Morgan exceeds 1,000 points is Ecuador, which is at 1,056 units.

Ecuador restructured its debt almost in parallel to Argentina, but the course of its bonds has been very different.

In this regard, a report by the Argentine broker Aurum Valores assigns this difference to the divergence that was generated between both debts once a more pro-market option was imposed in Ecuador in the presidential elections, such as the one offered by the current president Guillermo Lasso.

This is how Aurum Values ​​explains it:

“In Ecuador, when Lasso triumphed in the ballot, the Ecuadorian bond to 2030, which had been behaving similarly to the Argentine one (to compare it we used base 100 at the beginning of 2021 because they operate with different parities as a result of the coupon structure of each bond), fired creating a gap between the two that never closed”.

“If that gap were to close (assuming, for example, the market’s response to an election between candidates oriented towards the center and focused on resolving the imbalances generated), the pending upward adjustment would be 45%”.

HOW IS THE COUNTRY RISK IN THE REST OF LATIN AMERICA?

According to data published by the Central Bank of the Dominican Republic, based on information from JP Morgan, the Latin American average EMBI is practically at the same levels as the global EMBI (413 one and 390 the other).

The region’s sovereign debt benefited from a change of winds for this type of bond, something that can be clearly observed in the falls in the yields of Argentina and El Salvador which, as mentioned, there were times last year that flirted with the 3,000 points.

This is how the country risk of the rest of the Latin American governments is found:

• Bolivia: 664 points
• Honduras: 582
• Dominican Republic: 390
• Colombia: 377
• Mexico: 373
• Costa Rica: 369
• Brazil: 262
• Guatemala: 255
• Paraguay: 233
• Peru: 225
• Panama: 205
• Chile: 160
• Uruguay: 111

With information from Bloomberg