Bloomberg Línea — Latin American sovereign bonds improved their performance in the last quarter of 2022 and, as a result, the country risk of some of the most committed governments in this regard began to decrease, although some very negative figures are still being observed in some cases.
The worst of all is Venezuela which, according to JP Morgan’s Emerging Markets Bonds Index (EMBI), has a country risk of 43,309 units.
However, the government headed by Nicolás Maduro is not the only one facing prohibitive figures if it wants to seek financing in international markets: Argentina and El Salvador also have a risk premium that seems to indicate that investors expect a restructuring in the medium and long term.
It should be noted that JP Morgan calculates its EMBI in relation to the price of the countries’ sovereign bonds.
Venezuela’s country risk
Venezuelan country risk is so high that it is even difficult to plot it and compare it with that of the rest of the countries in the region, since it goes off the scale. The country last went into default in 2017 and has not yet emerged from it.
Argentina’s country risk
Argentina restructured its debt with the IMF in August 2020, but since then its bonds began to slide, to a value below $20. But in October last year, driven by a more favorable financial climate for emerging markets, they began to rebound, to the point that Argentina’s Global 2030 (the most emblematic of all) is already above $31.
Even with this rise, Argentina’s country risk is just below 2,000 points, which makes it the second Latin American country with the highest sovereign risk after Venezuela. On a positive note, that is far from the highs of 2022, when it reached 3,000 points.
El Salvador’s country risk
In 2022 there were moments in which El Salvador had a higher country risk than Argentina, but then it consolidated in third place, a position it still holds with a country risk of around 1,600 points.
A 2027 El Salvador bond, with a coupon of 6.375%, trades below $52.
As with Argentina, El Salvador’s debt has an S&P Global rating of CCC+, which implies substantial risk.
Ecuador’s country risk
The fourth and last country whose risk, as measured by JP Morgan, exceeds 1,000 points, is Ecuador, which is at 1,056 units.
Ecuador restructured its debt almost in parallel to Argentina, but the course of its bonds has been very different. A report by the Argentine broker Aurum Valores assigns this difference to the divergence generated between both debts once a more pro-market option, such as the one offered by current President Guillermo Lasso.
This is how Aurum Valores explains Ecuador’s position:
“In Ecuador, when Lasso triumphs in the ballot, the Ecuadorian 2030 bond, which had been behaving similarly to the Argentine bond (to compare it we use base 100 at the beginning of 2021 because they operate with different parities product of the coupon structure of each bond), shot up, generating a gap between both that was never closed. If that gap were to close (assuming, for example, the market response to an election between candidates oriented towards the center and focused on resolving the imbalances generated) the pending upward adjustment would be 45%”.
Country risk in the rest of Latin America
According to data published by the Central Bank of the Dominican Republic, based on information from JP Morgan, the average Latin American EMBI is practically at the same levels as the global EMBI (413 and 390).
The region’s sovereign debt benefited from a change of winds for this type of bonds, something that can be seen notoriously in the drops in yields of Argentina and El Salvador, which, as mentioned, flirted around 3,000 points at times last year.
This is the country risk for the rest of the nations in Latin America:
- Bolivia: 664 points
- Honduras: 582
- Dominican Republic: 390
- Colombia: 377
- Mexico: 373
- Costa Rica: 369
- Brazil: 262
- Guatemala: 255
- Paraguay: 233
- Peru: 225
- Panama: 205
- Chile: 160
- Uruguay: 111