Bloomberg — Chile is regaining the position as the safest country in Latin America, though only partly through its own merit.
Chile’s country risk has fallen to its lowest level in eight months and is now significantly lower than Peru’s and Panama’s, just two months after the three countries vied for the coveted first place.
Although Chile has improved its investment climate with the rejection of a radical new Constitution, the internal conflicts faced by its peers make its relative stability more striking. Peru is struggling to emerge from a political crisis with protests that have paralyzed much of the country, while a tax dispute in Panama threatens to halt production at its largest copper mine and sets a dangerous precedent for investors. As a result, Chile again looks like a good house in a bad neighborhood.
For most of the second half of 2022, credit default swaps, or CDSs, indicated that a default was more likely in Chile than in Peru, or even occasionally Panama. However, since mid-December, the spread of Chile’s CDS with its regional peers has been widening, returning to more historical levels.
The change reflects, in part, a better investment climate in Chile. The spread on the nation’s dollar sovereign bonds has narrowed 58 basis points against US Treasuries since the first draft of a new Constitution was rejected in a plebiscite on September 4, the best performance of any emerging market sovereign in its rating category.
Since the idea of drafting a new constitution was rejected, the traditional political parties have regained control of the process. The next draft will be written under the aegis of a “think tank” chosen by Congress and dominated by law professors. This has reassured investors, who believe that the next reform of the Charter will be less ambitious and better thought out than the first.
At the same time, it’s not hard for Chile to look relatively good. Mexico’s government is cutting funding for the body that oversees the elections, while Colombia has swung to the left, Argentina is on the brink of another crisis as elections approach, and in Brazil supporters of the former president have called for a coup d’état and stormed the presidential palace.
“While concerns about Chile have been easing, this is not the case for other economies in the region such as Peru with constant protests and Colombia with Petro noise,” said Juan Prada, a strategist at Barclays, referring to Colombia’s new president.
Chile’s economic prospects are also beginning to improve, as China’s post-pandemic reopening and a rebound in copper prices — by far Chile’s top export — have given the peso a boost and helped curb inflation.
In addition, Chile posted a budget surplus last year for the first time in a decade.
“The orderly management of finances during 2022, the rejection of a new, more radical Constitution and a left-wing government that until now has kept very populist policies on the sidelines, have contributed to improving confidence in Chile,” said Klaus Kaempfe, regional director of portfolio solutions of Credicorp Capital.
Confidence in Chile is also reflected in the peso, which is at its strongest level since April 2022 and is the best performing emerging market currency this year, appreciating 7.5%.
However, despite recent positive developments in the saga of Chile’s Constitution, the process is not over yet, while the main reforms, including tax reforms, are currently being debated in Congress, Andrés Abadía, Chief Economist for Latin America at Pantheon Macroeconomics, wrote in a note.
“These factors, along with the recent rally in the peso, have left the currency vulnerable, particularly to strong dollar moves,” he said.
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