MEXICO CITY (Reuters) - The risks of betting on Mexico, with its staunchly leftist government, and Brazil, which is run by a hard-right administration, are more even now than they have been for six years - according to traders in credit default swaps (CDS).
Risk premia for both countries have improved in 2019, but the advantage Mexico once enjoyed over Brazil has narrowed, due to a blend of rhetoric, results and expectations about their two presidents as they approach nearly a year in power, analysts say.
On the one hand, Brazilian President Jair Bolsonaro gained market credibility after pushing through a pension reform.
On the other, his Mexican counterpart Andres Manuel Lopez Obrador’s plan to rescue state oil firm Pemex has not dispelled lingering doubts, even though he has run a tight budget and has the benefit of superior sovereign creditworthiness.
Against this backdrop, the five-year CDS - a barometer for a country’s default risk - are quoted at 115 basis points for Mexico and 136 for Brazil.
The difference was briefly as low as 4 points in August, but the gap is still slight compared with almost 300 points in 2015, when a recession and political turmoil trials rapidly ratcheted up the risk of investing in Brazilian debt.
“Mexico has a better credit rating and a lower debt to GDP ratio than Brazil, but the market sees Lopez Obrador as riskier than Bolsonaro which is why the CDS gap has closed,” said Benito Berber, chief Latin America economist of bank Natixis.
Colombia meanwhile, which also has an inferior credit rating to Mexico, is viewed as less risky than Mexico on the CDS market, trading at 95 basis points for five years. COGV5YUSA=
The CDS level, also known as the spread, means that an investor pays about $11,500 annually to insure $1 million in Mexican sovereign bonds against default, and $13,600 to cover the same amount in Brazilian debt.
Juan Carlos Alderete, an economist at Banorte, said that the sovereign credit rating is relevant to CDS levels, but that a rating agency’s outlook also play an important role.
Mexico has a negative outlook from the S&P Global rating agency, while Brazil is currently stable. At the same time, other agencies have already issued warnings to Mexico.
Similar dynamics prevail in the bond market.
Mexico’s 10-year dollar-denominated bonds were trading on Wednesday with a yield of 3.44%, while its Brazilian counterpart was paid a yield of 3.92%, a gap of 46 basis points. At the end of May, the gap was 83 points.
Bradley Krom, director of research at the WisdomTree fund, which invests in emerging markets, said not only domestic factors play a role, given that as the U.S.-China trade war have affected Mexico and Brazil in different ways.
“In our view, politics is certainly something we should keep an eye on, however, ideology hasn’t necessarily been the main factor in how these countries bonds perform,” he said.
Reporting by Abraham Gonzalez; Editing by Marguerita Choy