Country risk in Latin American nations increases significantly

Global uncertainty affects international markets’ view of Latin America and perceptions of the country risk of this region’s nations.

For example, Chile’s five-year dollar-denominated credit default swap (CDS, a financial instrument used to measure default risk) reached its highest level since Apr. 3, 2020.

After the rejection victory in the Sept. 4 referendum on a new constitution, the country’s risk did fall from 145 to a low of 116 on Sept. 12.

But then began a rapid rise and closed Tuesday at 165 points, an increase of almost 40%.

Experts in Chile agree that this further increase is mainly due to external factors.

This is also reflected in the region’s leading countries have seen a sustained increase in the indicator.

Between Sept. 12 and yesterday’s close, the country risks of

Colombia’s increased by 43.6% to 340.91 points, that of
Brazil’s by almost 34% to 312.39 points, that of
Mexico by 48.4% to 204.70 points, that of
Panama by 44.5% to 177.60 points and that of
Peru’s by 58.3% to 165.58 points

Natalia Aránguiz, partner and research manager at Aurea Group, explains that “the increase is due to external factors, as developed economies have not yet shown stagnation in their inflation processes, which increases the risk of prolonged periods of recession, an issue that Powell specifically addressed in a press conference.”

Aránguiz points out that in the international context, “France and Germany also saw an increase in their 5-year CDS this week.”

This argument is reinforced by Fintual’s chief economist, Priscila Robledo: “The increase in sovereign risk is mainly due to a more difficult external scenario for emerging markets.”

“So we’re seeing rising global interest rates and geopolitical conflict reducing the availability of capital in emerging markets.”

“So the cause and consequence of this situation is a higher sovereign risk, which requires higher compensation.”

In the case of Chile, experts also see some internal factors that increase the risk for the country.

One of them is politics.

“The local scenario has also played a role in how we got to the high levels we see today.”

“Chile’s country risk has increased more than most emerging markets in the last quarter, which sets us apart from other countries with similar credit ratings,” Robledo says.

The economist argues, “Chile’s country risk has virtually stopped deteriorating in the last month, unlike other emerging markets.”

This could be because investors considered the likelihood of extreme scenarios lower following the referendum on leaving the EU.

For Flores, “the dizzying discussion about a new constitutional process has revived fears of adverse changes in the regulation of the economy.”

In his view, in Chile, “it is essential that the constitutional discussion defines reasonable limits that reduce uncertainty.

Also, the 2023 budget, which will be launched in a few days, must contain fiscal pressure and public debt.”

And for Aránguiz, “distinctive factors can accelerate or slow down the relative increase of our CDS with comparable countries.

For example, the pension reform, the approval of the TPP-11, the 2023 budget, and the changes parliamentarians will make to the tax reform.”

Experts say that while the evolution of country risk will largely depend on external factors, it will also be influenced by domestic factors.

“Although the external scenario has become more complex, the reversal of risk perception depends more on the local level and the political signals that become known about macroeconomic balances,” Ruiz says.

For Robledo, international developments are critical to this evolution.

Going forward, emerging market country risk will mainly depend on how much global interest rates continue to rise, especially in the United States, depending on how fast inflation in that country declines.