LatAm CDS declines in Q4, signaling improved credit risk

Sovereign credit default swaps, a key gauge of credit risk, improved further for the majority of Latin American countries during the fourth quarter, with Mexico, Colombia, Brazil and Panama posting the strongest reductions in perceived risk.

The improvement comes amid a broader recovery for emerging markets overall during the fourth quarter. In Latin America specifically, several major economies finished with a somewhat smaller deterioration in their perceived ability to repay sovereign debt, even as they face weaker fiscal prospects in the medium term.

Brazil's 5-year CDS price fell to 142.1 basis points by the end of December 2020, a 42.0% drop from the previous quarter. Due to substantial economic stimulus during the crisis, GDP contraction forecasts have improved markedly. The country's most recent central bank market survey now puts the expected economic decline at 4.4% for 2020; that compares to an expected double-digit decline at the start of the pandemic.

However, fiscal concerns still weigh on the perceived risk of default for the Latin American country. The country still has among the highest CDS prices among the region's major economies, reflecting lingering concerns over its debt trajectory going forward.

Mexico, the region's second-largest economy, saw the sharpest fall in its CDS prices during the quarter, with a 45.3% decline 81.8 basis points at year-end. The result leaves Mexico's CDS just slightly above the level it was at the start of 2020. Similarly, Uruguay, where CDS fell 27.2% during the fourth quarter, is also near its year-ago level.

In Colombia, CDS fell 40.9% to 88.2 basis points; though that's still up 22.5% on the year as the country faces high unemployment and economic deterioration. Chile's CDS price fell to 45.3 basis points by the end of 2020, marking a 33.6% drop from the previous quarter, even as the country works through political uncertainty partially tied to a difficult constitutional rewriting process.

Peru, meanwhile, saw its CDS fall 27.2% to 56.4 basis points in the quarter, one of the lowest pricing levels in the region. Panamanian CDS also now sits at a regional low, at 48.5 basis points, following a 44.3% improvement during the quarter.

Argentina, meanwhile, continues to have among Latin America's highest levels of perceived credit risk, with 5-year CDS at 1,075.3 basis points, little changed over the course of the quarter. However, the figure is still down 77.9% from the start of 2020.