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Latin American sovereign CDS spreads continue steady downward trend


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Latin American sovereign CDS spreads continue steady downward trend

Latin American sovereign credit default swaps continued an overall downward trend in early 2017, a period characterized by optimism for a return to economic growth, SNL Financial data shows.

As initial fears of volatility following the election of Donald Trump as U.S. president have subsided, the region is showing a positive but slow recovery after the commodity crisis of previous years, but with many countries battling fiscal problems and low growth.

In some countries, such as Argentina, the signals are mixed. The country's CDS spreads closed 2016 at 417.66 basis points and stood at 367.77 basis points at the end of March, a solid improvement in line with Argentina's exit from recession in late 2016.

Nevertheless, President Mauricio Macri's market-friendly government is still struggling to jump-start an economy mired with inflation and high interest rates.

In early March 2016, Brazil's CDS stood at 424.01 basis points and reached 274.7 basis points by the end of that year. At the end of the first quarter of 2017, the CDS spreads had fallen further to 222.49 basis points.

The drop comes at a time when a general opinion seems to be emerging on an economic recovery after two years of recession. Banks and research firms estimate that the country's GDP grew between 0.1% and 0.3% in the first quarter of 2017, according to a Reuters report.

In March, Moody's revised its outlook on the Brazilian banking system to stable, describing economic conditions as more benign and predicting a significant decrease in inflation.

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Mexico's spreads showed an improvement similar to Argentina, starting at 154.79 basis points at the beginning of 2017 and ending March at 129.12 basis points. This drop and Banco de México's latest monetary policy decision both reflect diminishing concerns over U.S. policy. The central bank raised its benchmark interest rate by 25 basis points to 6.50%, compared to a hike of 50 basis points at its previous meeting, citing significant improvement in the country's financial markets and a continued global economic expansion.

During the quarter, BBVA Bancomer said it wants to expand its footprint in Mexico, while Banorte Chief Economist Gabriel Casillas said now is an ideal time to invest in Mexico as Trump's threats to reduce trade between the two countries have begun to fade.

Despite the optimism, Fitch Ratings has raised concerns over Trump-related credit risks for Mexico and Brazil, as they are among the countries with the highest stock of U.S. investment in manufacturing and could be threatened with "being singled out for punitive trade measures," the rating agency said.

Costa Rica's CDS spreads fell by an impressive 27.6% during the quarter, from 304.0 basis points at the end of 2016 to 220.0 basis points as of March 31. The country's growing debt burden and high fiscal deficits have hampered its economy, but conditions seem to have improved with a lower deficit in 2016 than the prior year and still-strong GDP growth.

Chile, meanwhile, continues to have the lowest CDS spreads among sovereigns in Latin America, ending last year at 82.5 basis points and at 71.04 basis points at the close of the first quarter of 2017.

SNL Image

SNL Image