In Swaps Market, Peru Gains Ground on Chile After Kuczynski Win

  • Peru’s bond risk has fallen by half relative to Chile
  • Peru to post fastest growth among region’s major economies

In the eyes of derivatives traders, Peru is closing the gap fast with Chile -- Latin America’s most-creditworthy country.

It costs just 0.44 percentage points more to insure Peru’s bonds against-non payment with credit-default swaps than notes from Chile, which is rated four levels higher by S&P Global Ratings. As recently as April 7, the gap was 0.81 percentage points.

Peru is gaining favor as it’s poised to post the fastest growth among major Latin American economies over the next two years and it prepares to swear in Pedro Pablo Kuczynski, a former finance minister and Wall Street veteran, as president. By contrast, Chile will suffer its weakest expansion since 2009 as the low price of copper -- its main export -- increases pressure on the government to slash spending further.

“Peru is having a very positive political change with Kuczynski and that is boosting sentiment,” said Mario Castro, a strategist at Nomura Holdings Inc. “Chile, meanwhile, remains locked in political discussions about its reforms program and we won’t see anything really new until the 2017 elections.”

In the last three months the Peruvian sol has also outperformed the Chilean peso, with a 3 percent gain versus the U.S. dollar, compared to 1.1 percent, respectively. Peruvian local currency government bonds have returned 8.7 percent in the same period, the most in emerging markets, compared to a 0.1 percent loss for Chile.

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