The reasons for rising country risk - Sectors

The country risk perception of Colombia, an indicator that measures the probability of default on a nation’s financial obligations, has been rising in recent weeks.

Market agents measure this risk through the Credit Default Swaps (CDS)), which function as insurance against the risk of default. For example, an investor who buys a public debt title like the Colombian one can acquire this instrument to protect himself in the event of a bankruptcy or suspension of payments. Because of this, the more risk there is in the country, the higher this premium will be.

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For the case of 5 year bonds, the risk premium or CDS reached 295 points last week, that is, the highest level so far this year. However, it does not reach those reached between October and November of last year, when it reached 380 points. In the case of the 10-year CDS, they are over 361 points.

Germán Cristancho, head of research and strategy at Davivienda Corredores, says that so far this year the risk premiums of Latin American countries have remained relatively stable or have even fallen; However, Colombia’s has warned, which shows that there are idiosyncratic factors that are impacting the risk perception that investors have of the country. “To a large extent, it is possible that the presentation of the reforms and the broad agenda of legislative initiatives are increasing uncertainty,” he says.

Gregorio Gandini, a financial market analyst, also pointed out that the higher risk premium is due to greater uncertainty derived from the health reform and the additional cost it could have for fiscal sustainability.

In line with this, Cristancho says that despite the high international oil prices and the good behavior of Latin American currencies against the dollar, the Colombian peso has weakened and has returned to levels close to 4,900 pesos, when starting the year reached a descender up to 4,500 pesos.

“Hence the enormous importance of achieving a correct communication of the reforms, their economic impacts and ratifying the country’s fiscal discipline, as well as the macroeconomic responsibility that characterizes us and that has contributed to making Colombia one of the most stable economies in the region in the last 100 years,” he said.

Country risk at maximum levels

In October and November of last year, when the risk premium was at maximum levels, what happened is that the greatest probability of a possible international recession came together as a result of the interest rate increases that were taking place in United States and other developed countries in general, plus uncertainty at the local level due to the approval of the tax reform led by the Minister of Finance, José Antonio Ocampo.

“We are experiencing a time of uncertainty and high volatility in the financial markets and, in general, this leads to an increase in risk premiums. However, there is also something that is more local due to the current account deficit and because there is still a lot of uncertainty about the fiscal adjustment process, including not only the amount of tax collection, but pressures for greater public spending,” he said in that moment José Ignacio López, director of Corficolombiana Economic Research.

Evolution of the 5-year CDS in 2023 (Figures in points)

02/01/2023 271
03/01/2023 266
04/01/2023 262
05/01/2023 269
06/01/2023 267
09/1/2023 264
10/1/2023 267
11/1/2023 267
12/1/2023 264
1/13/2023 263
1/16/2023 263
1/17/2023 266
1/18/2023 262
1/19/2023 266
1/20/2023 264
1/23/2023 261
1/24/2023 261
1/25/2023 260
1/26/2023 256
1/27/2023 258
1/30/2023 266
1/31/2023 262
2/01/2023 257
02/02/2023 247
2/03/2023 251
2/06/2023 258
2/07/2023 255
2/08/2023 260
2/09/2023 262
2/10/2023 270
2/13/2023 268
2/14/2023 265
2/15/2023 268
2/16/2023 274
2/17/2023 287
2/20/2023 287
2/21/2023 295
2/22/2023 292