Chile Regains Crown as Regional Safe Haven, Largely by Default

Sebastian Boyd and Valentina Fuentes
·4 min read
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(Bloomberg) -- Chile is regaining its title as the safe-haven of Latin America — but only partially by its own merit.

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The cost of insuring against default in Chile has fallen to an eight-month low and is now significantly below that of Peru and Panama, just two months after all three were all vying for that coveted top spot.

But while Chile has improved its investment environment after rejecting a radical rewrite of its constitution in a referendum, it’s largely the fault of its regional peers that it has pulled away this year in terms of risk appraisal. Peru can’t drag itself out of a political crisis that has seen protests paralyze much of the nation, while a tax dispute in Panama threatens to halt output at a giant copper mine and sets a dangerous precedent for investors. As a result, Chile looks like a good house in a bad neighborhood once again.

For most of the second half of 2022, credit-default swaps indicated that a debt nonpayment was more likely in Chile than in Peru, or even Panama at times. Since mid-December though, Chile’s CDS gap with its regional peers has been widening, going back to more historical levels.

Read More: Latin American Market Darling Now More Risky Than Peru

Constitution Rewrite

The change partially reflects Chile’s improved investor environment. The nation’s sovereign dollar bonds have tightened 58 basis points versus Treasuries since the first draft of a new constitution was rejected in a Sept. 4 plebiscite, the best performance of any emerging-market sovereign in its rating category.

Since the constitution rewrite was defeated, established political parties have wrested back control of the process. The next draft will be written under the tutelage of a “committee of experts” named by the parties in congress, dominated by law professors. That has reassured investors that the next rewrite 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 slashing funding for the body that oversees elections, while Colombia has swung to the left, Argentina is on the brink of another crisis with elections approaching, and in Brazil supporters of the former president called for a coup and stormed the presidential palace.

“While concerns over Chile have been moderating, this is not the case for other regional economies, such as Peru with constant protests and Colombia with Petro noise,” said Juan Prada, a strategist at Barclays Plc, referring to Colombia’s new president.

Looking Up

Chile’s economic outlook is also beginning to improve as China’s reopening after the pandemic and a rally in the prices of copper — the nation’s largest export by far — are boosting the peso and helping slow inflation.

Chile also recorded a budget surplus last year for the first time in a decade.

“The orderly management of public finances during 2022, the rejection of a new, radical Constitution and a left-wing government that until now has kept more populist policies on the sidelines, have contributed to improving confidence in Chile,” said Klaus Kaempfe, portfolio solutions director at Credicorp Capital.

Confidence in Chile is also reflected in the peso, which is near its strongest level since April 2022 and is the best performer among emerging-market economies this year with a 7.7% gain.

Still, despite recent positive developments in Chile’s constitution saga, the process is yet to be concluded, while key reforms, including a tax overhaul, are currently under debate in congress, Andres Abadia, chief Latin America economist at Pantheon Macroeconomics, wrote in a note.

“These factors, coupled with the recent peso rebound, have left the currency vulnerable, particularly to strong USD movements,” he wrote.

ECONOMIC CALENDAR:

  • Chile:

    • Feb. 24: Jan. PPI

  • International:

    • US:

      • Feb. 21: S&P Global Manufacturing PMI

      • Feb. 21: Jan. Existing home sales

      • Feb. 23: 4Q GDP

      • Feb. 24: Jan. Personal income, spending

      • Feb. 24: Jan. New home sales

      • Feb. 24: Feb. U. of Michigan sentiment

    • Eurozone:

      • Feb. 21: Feb. S&P Global Manufacturing PMI

      • Feb. 23: Jan. CPI

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  • Chile Sells $1.57B in Peso Bills to Yield 11.05%

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