DBRS Confirms Chile on Stable Politics and Sound Management

DBRS has today confirmed the ratings on the Republic of Chile’s Long-Term Foreign Currency securities at A (high) and Long-Term Local Currency securities at AA (low), and maintained Stable trends on both ratings.

The Stable trends reflect DBRS’s view that Chile’s aggressive fiscal and monetary response to the economic downturn is both warranted and well designed. The global recession has translated into weak export demand and volatile copper prices, tighter credit conditions and less consumer and investor confidence in the economy. In response, the government is implementing a $4 billion stimulus plan (2.8% of GDP) to bolster domestic demand and curb rising unemployment. Chile’s Central Bank has cut interest rates by 775 basis points since December 2008 to its lowest rate on record, and announced additional measures to provide monetary easing.

“With $20 billion in fiscal savings, Chile has ample resources to provide a strong countercyclical stimulus without threatening the sustainability of public finances. Given these resources and Chile’s strong record of fiscal prudence, DBRS is not overly concerned about a higher deficit,” says Michael Heydt, DBRS Senior Financial Analyst, Sovereigns. “Provided that the global economy stabilizes, these policies, in addition to the recent rebound in copper prices and improving confidence, will likely set the stage for economic recovery.”

The ratings are underpinned by Chile’s sound macroeconomic policy framework, low public debt (25.9% of GDP) and stable political environment. Benefiting from years of high copper revenues, Chile saved surpluses in offshore sovereign wealth funds, paid down public debt and increased investment in health and education. While the outcome of the December 2009 elections could be close, there is consensus among the major candidates in favour of the country’s sound macroeconomic policy framework, one of Chile’s biggest strengths. Demonstrating superior macroeconomic management and stability in a historically volatile region, Chile compares well with many highly-industrialized countries.

Notwithstanding Chile’s strong macroeconomic management, DBRS’s biggest concerns are structural. First, labour market rigidities, skewed income distribution and the low quality of education pose impediments to higher rates of economic growth. Second, Chile is a small, open economy that is dependent on copper exports and forced to import 70% of its energy needs, exposing the economy to global commodity price fluctuations.

Chile is actively addressing these issues with additional social spending and reforms to health-care, education and pensions. Increased labour force participation and higher consumption levels appear to reflect improvements. Furthermore, the construction of two liquid natural gas terminals has reduced Chile’s dependence on Argentine natural gas, and additional investments are expected to increase electricity generation.

DBRS will monitor how the government addresses the country’s social development needs while maintaining fiscal discipline. Improvement in Chile’s credit profile depends on reforms that create productivity-driven growth, such as increased labour market flexibility. This, in addition to ongoing attention to structural concerns, including efforts to broaden the export base and reduce income inequality, could put upward pressure on the ratings in the coming years.

Notes:
All figures are in U.S dollars unless otherwise noted.

The applicable methodology is Rating Sovereign Governments, which can be found on our website under Methodologies.

This is a Public Finance (Sovereigns) rating.