Chile loses regional leadership as the least risky country to Uruguay, which becomes the new star

RIO DE JANEIRO, BRAZIL – A new country is the safest in Latin America from the point of view of country risk: Uruguay, which has displaced Chile in the region thanks to its latest financial policies that partly follow the Chilean example.

Chile’s five-year dollar-denominated credit default swap (CDS, a financial instrument that measures default risk) reached 77.57 points on Wednesday in Uruguay, continuing the downward trend it had shown since the beginning of the month (when it was at 106 points), catapulting the country to the first place among the most critical countries in the region.

Meanwhile, Chile reached 79.43 points, its lowest level since February 4, but nine points higher than at the beginning of the year.

In the EMBI, the country risk indicator compiled by JP Morgan, which corresponds to the difference between the interest rates of emerging market dollar-denominated bonds and U.S. government bonds considered risk-free, Uruguay is also in the lead with 136 points last week, 33 points lower than Chile (169 points), which also ranks second in this index.

However, both countries are significantly better than the regional average of 406 points.

This change in the Uruguayan scenario comes amid a process of fiscal consolidation and improvement in the overall institutional framework of fiscal policy being implemented by the government of President Luis Lacalle.

This new institutional framework is the same as the Chilean case and includes a new structural budget rule, an expenditure ceiling, and a debt ceiling.

It also established a new Fiscal Advisory Council (CFA), created in Chile in 2013 and then institutionalized in 2019 through the law that created the current Autonomous Fiscal Council in our country.

This framework has led to a significant improvement in the country’s outlook. For example, at the end of last year, the rating agency Fitch, which classified the country as “Investor Grade” (in the previous tier below Chile), improved its negative outlook.

Luis Flores, managing director of STF Capital, points out that it is not a punishment for Chile but that the world market has rewarded Uruguay very well, even more in the 10-year CDS.

Chilean CDS are moving in line with the movements of other countries in the region, such as Brazil. Uruguay is the Chile of a few years ago.”

Marco Correa, Chief Economist of BICE Inversiones, adds that “recent experience shows that CDS are generally more responsive to international factors than local ones. So as risk factors like the conflict in Europe or the pandemic dissipate, CDS tend to fall.

At the local level, their behavior could be influenced by things like the debt path imposed by the new government, about which we will have more information in the coming months.

For his part, Alejandro Fernández, an economist at Geminis, points out that Chile is following the same trend as Peru and Panama, although to a lesser extent. “This suggests that the higher Latin American risk has global rather than idiosyncratic causes.”

But country risk – measured in CDS or EMBI – is not the only one where Chile has lost its lead.

According to Bloomberg’s Risk Assessment Index, Chile has lost its scepter as its most stable country after ranking first for four consecutive quarters. Peru is now the leading country in this indicator.

The Bloomberg index measures a country’s overall economic, financial and political risk relative to the performance of other developed and emerging markets.

Each risk score is calculated using an equally weighted quarterly percentage ranking model and measured on a scale of 0 to 100, with higher scores representing more stability and less risk.

In the fourth quarter of 2021, Chile scored 52.79, improving in all parameters from the 50.5 it achieved in the previous quarter.

Peru, however, moved faster, displacing Chile with 56.28 points, a substantial increase from the 35.3 points it scored in the third quarter.

And politics was not the decisive factor. Despite the five elections that the country went through in 2021, with all the associated impact on local markets, it did not affect its position.

According to Bloomberg, Chile leads the political parameter in the fourth quarter of 2021 with 73.96 points, well ahead of Jamaica (39.10 points), the second country in the region. Peru scores only 17.71 points in this area.

It should be remembered that the neighboring country is going through a political crisis, and President Pedro Castillo, who narrowly won the elections, has already had four different cabinets in six months.

Chile performs worst in the financial ranking. The country scores only 13.86 points in this area, placing it seventh among neighboring countries. Peru heads this series with 80.72 units.

It should be recalled that the Chilean economy faced four projects of withdrawal of the AFP in Congress. Each time citizens had access to 10% of these funds, arguing about responding to the economic impact of the pandemic.

Of these four processes, three withdrawals were approved for an estimated $50 billion, which substantially impacted the local financial market and served to reactivate the economy.

And it is in this respect that Chile ranks second in the region. According to the indicator, the country’s economic performance climbed to 73.92 points in the fourth quarter of last year, surpassed only by Argentina, which reached 74.15 points.

Beyond the region, Chile ranks 39th globally, according to Bloomberg’s Country Risk Rating Index, outperforming some European economies such as Greece, Croatia, Lithuania, and Poland.

The global list is topped by Switzerland (96.87), Denmark (95.66), Singapore (93.73), Norway (93.55), and Australia (93.45).