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Argentina, Costa Rica CDS spreads jump in Q4

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Argentina, Costa Rica CDS spreads jump in Q4

Credit default swap prices in several Latin American countries rose in the last quarter of 2018, with Argentina and Costa Rica seeing some of the largest increases, according to data from S&P Global Market Intelligence.

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Argentina continues to have one of the highest CDS spreads in the region, with the cost of insuring exposure in the country rising 36.5% in the quarter to 800 basis points — almost at par with the indicator's peak of 837 basis points in early September. The country's GDP had fallen into a technical recession following consecutive contractions in the second and third quarters. Industry analysts said the resurgence in Argentina's country risk is also driven by fears over longer-term uncertainty due to an incoming presidential election and lingering financing issues.

The deterioration in Argentina's economic conditions, as well as its weakened fiscal prospects, prompted S&P Global Ratings to downgrade the country's sovereign ratings and Fitch Ratings to revise the country's ratings outlook to negative in 2018.

Nevertheless, S&P and Fitch are optimistic that Argentina will gradually be able to address its debt issues in 2019 with the help of the financial aid from the International Monetary Fund. Inflation and currency volatilities have also eased, with the country's central bank withdrawing in December a 60% floor on its monetary policy rate amid a better inflation outlook.

Elsewhere in the region, Costa Rica tallied the biggest rise in CDS spreads during the fourth quarter, jumping 63.2% higher to 400 basis points. The Central American country has seen a slump in its currency, the colon, due to rising U.S. interest rates and given its status of having one of the highest ratios of dollar-denominated lending in Latin America.

During the quarter, Moody's downgraded Costa Rica's ratings while Fitch placed the country under rating watch negative, with both rating agencies blaming the country's growing financing problem. According to Moody's, Costa Rica faces "significant" funding challenges as its borrowing needs balloon mainly due to rising debt.

Many other major Latin American countries also saw an uptick in CDS spreads during the final quarter of 2018, although the increases were less severe. For Chile, Panama and Peru, CDS spreads widened by fewer than 100 basis points. Panama, in particular, is considered to have the best credit in the region due to a dynamic economy boosted by the expansion of the Panama Canal as well as a shrinking budget deficit.

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Meanwhile, in Brazil, CDS spreads dropped 21.4% in the fourth quarter, bringing down the indicator's growth to 28.0% for 2018. Markets had a positive reaction to the victory of Jair Bolsonaro in the presidential election on the back of his market-friendly campaign promises, while Brazil's economy continued to expand.

Brazil was one of the only two countries in S&P Global Market Intelligence's analysis that posted a decline in CDS spreads for the quarter, the other one being Guatemala.

Guatemala was also the only country in the Latin American analysis that showed improvement in CDS spreads when compared to a year ago, falling 40.5% over that period. CDS spreads for all other countries ended the year with wider CDS spreads compared to the year-ago period, ranging from a 26.3% increase for Uruguay to a 235.7% jump in Argentina.

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Descriptions of credit ratings in this news article were not prepared by S&P Global Ratings.