In October 2022, the 10-year Country Risk Premium of Colombia, measured by Credit Default Swaps, or better known as CDS, has been increasing, in dollars at 10 years, reaching 429 basis points, its highest level since March 2009.
This risk premium, country risk or sovereign risk, is the extra price that a country pays to finance itself in the markets, compared to another country.
In the case of Colombia, the comparison is made with the United States, which is the reference country for the area and therefore, The risk premium is the difference between the country’s 10-year bond and the US 10-year bond (T-Bond).
In the case of the Eurozone, the reference country is Germany and the risk premium of a country is the difference between its 10-year bond and the 10-year German bond (bund).
As the risk of a country increases, the more it will have to remunerate investors more to acquire its debt. It is, therefore, the premium (or return) offered by a country’s public debt for investors to buy and measures investor confidence in the strength of its economy.
The other way to measure this risk of a country’s investment is through the spread of credit default swaps (CDS), which are insurance contracts in which certain financial instruments are insured in the event of default by the issuer.
The idea is to cover the credit risk and when the reference entity is a country, the amount of the CDS premium provides information on the credit quality of that country, that is, it measures the country risk.
In the case of an increase in the spread, the greatest increase in risk is indicated and in the case of a decrease, it indicates a decrease in risk.
What happens in Colombia?
In the Colombian case, the risk premium is quoted at 1,029 points. Its value has fallen 12 points since the previous session.
In the last twelve months the risk premium in Colombia has registered 122 points and so far this year it has not changed.
From the year 2012 till now, 9,946 has been the highest price at which the risk premium has traded, on November 24, 2016while on March 7, 2013, it was listed at 320, which was its minimum price in this period.
What affects this indicator are the determinations about the investments that the country will or will not make and how the stability of the economy will be maintained.
For example, the highest point of the Colombian risk premium in 2022 was in October at 1,097 points. At the beginning of the year, the lowest point was 861 points and the last was 895 points with a drop of 7.40 percent over the last day and a loss of 50 in the first month of the year.
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