Sovereign credit default swap spreads in most of Latin America's major economies expanded significantly as fears of defaults grew during the second year of the pandemic, though some countries eked out marginal improvements in the last quarter.
New coronavirus variants posed a threat to economic recovery in 2021, on top of political risk that put global investors on edge. Economies are expected to slow this year amid inflation, higher interest rates and weak job market recovery. However, Perú, Mexico and Chile saw double-digit decreases in five-year credit default prices for the last quarter of the year.
El Salvador saw the largest quarterly and yearly increase in its 5-year CDS prices, which rose by 66% in the three-month period and up 153% in 2021. The Central American country, which holds the highest level of perceived default risk in the sample, saw its five-year CDS prices spike to 1,733 basis points as of Dec. 31 from 1,080.77 by the end of the third quarter.
Implementation of El Salvador's Bitcoin law in September, which establishes the cryptocurrency as legal tender, has raised concerns from credit rating agencies and multilateral bodies such as the International Monetary Fund.
In Chile, political uncertainty has taken a toll on debt prices, which have increased by 58% on a one-year basis despite a recovery in the last three-month period of 2021. The country saw apprehension mount on the eve of the presidential election in December, which leftist politician Gabriel Boric won.
Efforts from Boric to appease investor concerns since his triumph contributed to a marginal reduction in perceived credit risk by the end of the year. At 71 basis points, the Andean nation reclaimed its spot as Latin American safest bet in the eyes of investors, followed by Perú and Panama, with 76 basis points and 78 basis points, respectively.
Insurance against default prices in Chile fell 19% in the last quarter from the previous period. Perú dropped 29% and México fell 11%. Brazil saw little quarterly change at -0.1%.
Colombia was the only country among the top five economies in the sample that saw its CDS spreads expand during the last three months of the year. Five-year CDS prices grew by 21% in the quarter to 203 basis points. It has more than doubled for the full year, with a 130% increase, according to data compiled by S&P Global Market Intelligence.
Colombian sovereign debt lost its investment-grade status in 2021 as credit rating agencies S&P Global Ratings and Fitch Ratings downgraded its debt on the grounds of a weakening fiscal picture. Early last year, the country faced acute social protests and violence following a proposal from the Colombian government to raise taxes. The bill was withdrawn and replaced later with a new tax reform focused on the corporate sector rather than individuals.
In the fourth quarter, Uruguay saw a 17% increase in its CDS spreads, taking its perceived debt risk level to 87 basis points by the end of 2021.
