Country Risk Reaches 500 Basis Points: Three Causes Behind the Upsurge

The country risk, the index measured by J.P. Morgan, has returned to 500 basis points. Market analysts see at least three causes behind this rise: the deterioration of Javier Milei's image, which anticipates electoral uncertainty for next year, the slowdown in the Central Bank's (BCRA) reserve purchases, and the increase in long-term U.S. Treasury bond rates, which raised the risk-free rate.

In this regard, Gabriel Bagattini, a financial advisor representing Finanzas con Gabriel, summarized it in a conversation with Ámbito: "On one hand, there is a more adverse international context, with greater geopolitical tension and volatility in the markets. But there are also factors specific to Argentina: the proximity of elections increases uncertainty, while sovereign bonds have corrected and there are still doubts about how quickly Argentina will fully regain access to international financing."

Also speaking with this outlet, Alejandro Bianchi, CEO of AsesorDeInversiones.ar, added that the main factor that is starting to be incorporated back into prices is political-electoral risk. "The market has anticipated several months of a discussion that was probably expected only for early 2027: what will be the degree of political support that the Government will maintain and, consequently, what will be the likelihood of continuity of the current economic scheme after the presidential elections," he detailed.

"If you look at the last month, all government confidence indices played against it and the polls, although many believe they are not accurate, do not help either. So, there is a bit of distrust," added Rafael Di Giorno from Proficio. He elaborated: "The Central Bank is hardly buying dollars significantly as it was doing until a month ago, although there is a seasonal component. Today, there is no driver for the risk to continue compressing."

In this line, it is worth noting that in July, the Government Confidence Index (ICG) stood at 1.94 points on a scale of 0 to 5, according to a report from the School of Government at Torcuato Di Tella University. This represents a monthly drop of 6.5% and the lowest record of the current administration. Additionally, a report from the Applied Social Psychology Observatory of UBA, also corresponding to last month, indicated that 61% of respondents support a change of government by 2027.

But it is not only the electoral factor that is playing against it at the moment, but also the monetary policies being implemented to contain the exchange rate at $1,500 through interventions in futures, bond curves, and sales in the Free Exchange Market (MLC). In fact, during August, although reserve purchases continued, the pace slowed compared to July: the daily average for this month is around $28 million, well below the $103 million from the previous month, with a monthly total of $249 million as of Thursday.

To these local factors, we add a somewhat less favorable international context for emerging assets. "Long-term U.S. Treasury bond rates have risen again, increasing the risk-free rate against which emerging bonds are valued and marginally reducing the appetite for higher-risk assets. At the same time, there is greater volatility in some emerging currencies," Bianchi explained.

The expert also considered that Brazil deserves special attention due to its regional weight: while the real maintains good performance this year, it is starting to incorporate greater uncertainty as the electoral process approaches, where there are also questions regarding future fiscal trajectory. For Argentina, which continues to be one of the credits with the highest beta within the emerging universe, he added that "an increase in global risk aversion naturally has a proportionally greater impact".

The last factor is financial, concerning the large debt maturities in foreign currency, especially in 2027. "While Argentina has not yet fully regained normal access to the international capital market and maintains a level of reserves that, although improving, still does not constitute a particularly comfortable cushion. The market does not seem to be questioning today the immediate payment capacity, but it does demand a relevant premium for the combination of maturities, still relatively low reserves, and an election year," concluded the analyst.

For Bagattini, the 500 points do not represent a structural trend change as "Argentina has come from much higher levels and the market continues to assign it a considerably lower risk than a couple of years ago." "The key will be whether this rise is a temporary correction or if it begins to consolidate a deterioration in expectations," he expanded.

Finally, Bianchi expressed: "The movement does not respond to a substantial deterioration of fiscal fundamentals. Argentina continues to show a considerably more orderly situation in fiscal and external matters than in previous years, something that has even been recently recognized by rating agencies: both Fitch and S&P raised Argentina's sovereign rating from CCC+ to B-. The point is that, at these spread levels, the market begins to look less at the adjustment already made and more at the sustainability of that program towards 2027.