What is country risk and why is it important for the Government and companies?

After six years, the country’s risk returned to below 600 points this Monday, after having accumulated a drop of more than 66% during 2024.

This indicator is carried out daily by the global investment bank JP Morgan, taking into account the price of the bonds and the distance between the rate they pay with respect to that of the United States Treasury.

A year ago, The country risk was at 1,998 basis points and today it fell to 571. This means that, if Argentina goes out to place new debt on the market, investors will ask for a rate close to approximately 10% today. This is calculated according to the equivalent of the risk-free rate of the United States (4.5) and the difference in Argentina. It remains a high interest rate and well above the long-term growth possibilities of the local economy.

Country risk is an indicator that measures the probability that a country will not pay its debt. It varies every day, through an interest rate differential, comparing each country’s bonds with US Treasury bonds.

The greater the country risk, The higher the interest that investors ask for to accept a nation’s bonds will be in which there is a high probability that it will default or fail to comply with its obligations.

Thus, country risk has a concrete value, the number itself, and a symbolic issue, because It works as a thermometer of the trust or distrust that investors have.

The drop in country risk reflects greater confidence and greater investor interest in Argentina. This manifests itself in greater demand for Argentine bonds, which improves the performance of these securities and reduces the country risk.

It is also decisive for lower the cost of financing for Argentine companies who need credit to grow or take on debt to cover previous maturities.

While in other countries the political situation has little impact on country risk, In Argentina it is a key point. In fact, the indicator shoots up in the run-up to the elections. Before the 2019 PASO it was around 800 points and took a jump as the return of Kirchnerism to power was consolidated.

For Argentina to be able to take on debt again and refinance its maturities, as all countries in the world do, in the City they believe that the country risk should once again touch 450 points to match the region.

In a context where the Argentine economy has faced years of volatility, high inflation and debt problems, a reduction in this indicator can be interpreted as a sign of renewed confidence on the part of investors.

The decline that is occurring these days It is a consequence of the adjustment policies that the government of Javier Milei has been implementing. For creditors, the fiscal surplus is a sign that the country will have the foreign currency it needs to pay its debts. And it “rewards” the adjustment with this drop.

For the reduction in country risk to impact the real economy, there is also a long way to go. With a lower country risk, the cost of issuing new bonds or refinancing debts is reduced, which can allow the government to allocate resources to investments in infrastructure, health, education and other sectors vital to economic growth.

Furthermore, the reduction in country risk can have positive effects on foreign direct investment (FDI). Investors tend to be more likely to invest in economies where they perceive lower risk. Increased FDI can help stimulate the local economy, generate employment and encourage technology transfer.

Thus, lower country risk can help the economy reactivate in the medium term, but It is not a sufficient condition to guarantee that the country recovers and poverty goes down.