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Moody's Investors Service downgraded the issuer's rating and senior unsecured debt from the Government of Chile to A1 from Aa3 and changed its outlook to stable from negative . Provisional senior unsecured debt ratings have also been lowered to (P) A1 by (P) Aa3
The deterioration reflects the gradual but increasing deterioration of Chile's credit profile. Despite clear evidence of an improved short-term economic and fiscal outlook, Moody's is not expecting the sovereign government to recover the credit strength that it has. he had in previous years. The two main factors that led to the degradation are as follows:
1. Chile's fiscal position has deteriorated steadily in recent years and the strength of the government's balance sheet, according to Moody's, is no longer robust enough to offset the weaknesses of Chile's credit profile. compared with sovereign governments with a higher Aa rating. Although debt parameters are expected to stabilize, it is unlikely that the deterioration of fiscal and debt parameters will be reversed.
2. Factors such as low levels of income relative to peers rated Aa, commodity dependence and external vulnerabilities have also become more visible for Chile's credit profile, given the growth prospects in the region. middle term. Strong GDP growth partially offset some of these factors that limit Chile's credit profile. Moody's estimates that medium-term growth will be close to 3%, below the expected 3.7% annual growth rate for 2018, and well below the growth rates recorded before the 2014 commodity shock.
The Stable Outlook reflects Moody's view that the Chilean government maintains significant credit strengths, including high scores on governance indicators and the effectiveness of public policies. . The fiscal solidity of the government remains very high, with debt ratios lower than those of several countries with a rating of A. In addition, the financial badets of the sovereign government allow government authorities to cope with negative shocks, Despite At the same time, Moody's lowered the local currency bond ceilings and Chile's deposits to Aa2 from Aa1, the ceiling of long-term foreign currency bonds to Aa2 from Aa1 and the foreign currency deposit ceiling long term at A1 from Aa3. Ceilings for bonds and deposits in short-term currencies remain at P-1
Justification of the rating
The reasons for the decline at A1. Chile's fiscal solidity has steadily deteriorated in recent years. The budget balance has gone from surpluses to deficits, which has led to a steady rise in the level of debt. The debt-to-GDP ratio stands at 23.6% at the end of 2017, which implies an increase of 15 percentage points over the period 2010-17 and of 8.6 percentage points since 2014, the rate of l & # 39; Income interest almost doubled (from 2.2% to 3.9%) over the 2010-17 period, but from very low levels. In addition, the Chilean government lost its net creditor status in 2016, with a net present debt of 4% of GDP.
A very high fiscal strength, an important feature of Chile's credit profile, is still present but has been made less obvious. Because fiscal and debt indicators have weakened, the strength of the government's balance sheet is no longer robust enough to offset the weaknesses in Chile's credit profile, compared to sovereign governments with a higher Aa rating. Examples of these weaknesses are a relatively small commodity-dependent economy, lower GDP per capita, and relatively high external vulnerabilities, given the increase in external debt at the country level, particularly in private companies. non-financial.
It is expected that the cyclical recovery of GDP growth, as well as the tax measures implemented by the administration of President Sebastián Piñera, will help to stop the adverse trends that have been reported in the measures of the public and fiscal debt. This should ultimately support the stabilization of the public debt ratio from about 25% to 28% of GDP. However, tax and debt measures will not return to the levels seen over the 2010-14 period, and it is unlikely that the sovereign government will accumulate badets at a breakneck pace, unless efforts are made to reduce the debt burden. fiscal consolidation more energetic.
Social pressures to respond firmly to certain demands in areas such as education and health through increased public spending will pose a significant challenge to the authorities' efforts to adopt less progressive sanitation.
Better short-term growth prospects – market consensus puts GDP growth at nearly 4% in 2018 – Chilean economy is unlikely to record sustained growth rates at similar levels in the years to come. Conversely, Moody's believes that growth will fall and will converge towards Chile's potential growth rate, which, according to ratings agency estimates, will be around 3%.
Strong GDP growth partially offset some of the factors limiting Chile's credit profile relative to that of other Aa-rated countries, such as declining GDP per capita, a small economy, and limited economic diversification. Although Chile's GDP per capita reached $ 24,537 in terms of purchasing power parity in 2017, compared with $ 17,400 in 2007, it remains well below Aa's median score of $ 50,081. While the Chilean economy will continue to grow at a slightly higher rate than its Aa counterparts, slower medium-term growth means that it is less likely that per capita income will converge with that of its peers. In addition, with $ 277 billion, the Chilean economy is smaller and less diversified than the economies of most Aa rated countries.
Efforts to diversify the economy are constant, but their impact has been mixed. The focus has been on the development of the energy sector (greater capacity through renewable energies), tourism, agro-industry and personal services in the mining and technological sectors, but only efforts to developing renewable energies and increasing energy capacity They have had obvious success. Chile continues to depend to a large extent on its natural resource sectors, particularly mining, with copper accounting for about 10% of Chile's GDP and 50% of total exports. Copper trends and events continue to be the most important factors that directly affect economic growth, through business expectations and long-term investment decisions, and indirectly through their impact. general market. While Moody's estimates that total factor productivity will gradually increase as government efforts stimulate investment and increase competitiveness, productivity should remain low due to factors such as copper dependence, aging of the population, gaps in the quality of education and vocational qualification, low participation of women in the labor market and the bottlenecks of infrastructure.
The productivity of the Chilean mining sector has been adversely affected by the mineral laws, which forces producers to process more ore for it has the same amount of refined copper, which increases the cost structure of the sector. However, capitalization and investment efforts have been made to maintain the level of production of Chile's Copper Corporation (Codelco) (stable A3). In addition, the price of copper has dropped significantly since its peak in early 2012 and, although it has recovered in 2017, Moody's expects it to remain below at historical levels.
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