Sovereign credit default swaps, as a key indicator of credit risk, receded for most major Latin American countries in the fourth quarter, with Mexico, Peru, Uruguay and Brazil posting the strongest improvements on perceived debt risk.
The declines mark a reversal from the third quarter of 2019, when spreads mainly widened, indicating higher default risk.
CDS spreads in the region's two largest economies, Brazil and Mexico, saw quarterly drops of 28.40% and 32.95%, respectively, to end 2019 at 98.82 basis points and 78.39 basis points. On an annual basis, both countries saw marked improvements in their CDS spreads compared to year-end 2018.
In Brazil, the passage of pension overhaul through Congress in October portrayed significant — though not immediate — fiscal gains that were baked into debt prices. S&P Global Ratings on Dec. 12 changed the outlook on the sovereign long-term rating debt to positive from stable amid prospects for a stronger profile over the medium term.
At current prices, Brazilian sovereign debt is trading better than that of its BB- rating peers, signaling investors have already factored in a higher likelihood of an eventual upgrade.
In Mexico, however, the CDS downward trend comes despite financial market volatility and milder GDP growth expected ahead. Banco de México noted that the Mexican peso exchange rate and financial assets have stayed on positive ground, with inflation in check at around 3.0%.
Chile was the sole exception in the region, with its CDS spreads rising by 12.14% in the quarter and effectively losing its top spot as LatAm's safest bet. The effects of recent social unrest, which spurred senior government resignations and a revamp of the country's constitution, led to a recent uptick in its risk metrics.
In neighboring Peru, CDS prices have dropped from a peak of 96.75 basis points in late 2018 to 41.78 basis points at the end of the year; that marks to a 30.22% reduction for the three-month period and a 56.82% improvement from its prior-year peak. Despite prolonged political instability, Peru's economy has expanded largely in line with economists expectations.
In Argentina, CDS spreads receded by 10.31% in the final quarter; however, the improvement did little to reverse a massive sixfold jump in the credit risk metric earlier in the year amid a severe currency and inflationary crisis, an economic recession, and a change in government leadership that increased the prospect that the country may default on its debt. Five-year CDS spreads for the country ended the year at 4870.37 basis points, one of the region's highest.
In Colombia, the cost of insuring exposure in the CDS market fell 23.48% to 72.03 basis points and declined 54.12% in the year, supported by higher GDP forecasts for 2020. Banco de la República expects economic activity to expand 3.2% this year, the highest rate in the region's sluggish growth environment.