NEW YORK--()--Fitch Ratings affirms Chile's ratings as follows:
--Foreign and Local Currency Issuer Default Ratings (IDRs) at 'A+' and 'AA-' respectively;
--Short-term Issuer Default Rating at 'F1';
--Country Ceiling at 'AA+'.
The Rating Outlook is Stable.
Chile's ratings are supported by years of prudent fiscal management, a low government debt burden, an effective and credible monetary regime anchored by a freely floating currency, relatively strong financial system, and an economic model based on competitive markets. These strengths sufficiently counterbalance its high commodity dependence and the country's low per capita income and weaker human development indicators relative to 'A' category peers.
Chile remained resilient to sluggish global conditions with last year's growth supported by strong investment and a dynamic household consumption. Fitch estimates that GDP growth reached 5.5% in 2012, and projects a deceleration to 5% this year and next.
From a longer-term perspective, Chile's narrow economic base, low productivity and energy sector constraints could limit investment and growth prospects unless further progress is made in these areas. While the government has made some headway in microeconomic reforms, their impact is difficult to quantify and will take time to materialize. Notwithstanding Chile's improving per capita income growth in recent years, sustained high growth will be required for Chile's income level and overall development to converge faster to levels seen in the 'A' and 'AA' categories.
The main macro imbalance facing the Chilean economy is its increased current account deficit which could remain around 4% of GDP in 2013. The deficit, however, is partially driven by a positive investment cycle, thus improving external account prospects in the future. Inflows of foreign direct investment, particularly towards the mining industry, are expected to finance the current account deficit largely. Moreover, Fitch believes that Chile's flexible economic policies and higher international reserves buffer can smooth the transition in case there is a significant decline in commodity prices.
Chile's improved fiscal policy framework, low public debt, favorable debt dynamics and substantial Treasury fiscal buffers (total treasury assets including stabilization funds at 13.5% of GDP) support its fiscal flexibility and underscore the shock-absorption capacity of the economy. Chile's debt indicators would likely remain superior to the 'A' median even under less favorable economic conditions.
In 2012, to cope with increased spending pressures on education, the government passed a tax reform that is expected to provide additional annual revenues equivalent to 0.5% of GDP in 2013. The passage illustrates the commitment of the government to meet spending pressures within the framework of the fiscal rule. However, the narrow revenue base (at 22% of GDP is among the lowest in the 'A' category) may need to be expanded steadily to confront potential social spending pressures. The limited appetite to further increase consumption taxes and the need to keep a competitive tax regime for attracting investment in the copper sector could pose challenges to do so.
Political awareness about the underlying social issues increased with the 2011 student movement. Last year, the government was able to move the political discussion from students' idealist demands to more pragmatic initiatives to improve Chilean educational system. Nevertheless, the next administration could still face social mobilization and additional demands for public expenditure.
RATING OUTLOOK STABLE
The main factors that could lead to a positive rating action are:
--Greater confidence in the sustainability of high investment and economic growth, as well as further strengthening of fiscal and external balance sheets;
--Progress on micro reforms that enhance productivity, medium-term growth prospects and bridge the per capita income gap relative to peers;
--Continued successful management of the growing social demands of the Chilean society.
The main factors that could lead to a negative rating action are:
--A sustained weakening in public finances without a concrete commitment for future consolidation;
--A weakening in growth and investment prospects due to uncertainty in energy provision, resulting in unfavorable government debt dynamics.
The ratings and Outlooks are sensitive to a number of assumptions:
--Fitch anticipates fragile global growth in 2013 and assumes that the Eurozone remains intact, and that there is no materialization of severe tail risks to global financial stability. The agency assumes China will grow at about 8% in 2013 and 7.5% in 2014. Copper prices are assumed to remain close to current levels in 2013. Significant shocks to China's growth and/or commodity prices will be negative for Chile's economic, fiscal and external accounts.
--Fitch assumes that Chile continues to adhere to its fiscal rule which defines public expenditures as a function of its structural revenues. A marked departure from this policy setting could undermine creditworthiness.
--Fitch assumes that the investment plan of Codelco and other private sector companies are sufficient to maintain a steady copper production. However, Fitch highlights that there are risks to sufficient energy provision that can delay mining investments.
Additional information is available at 'www.fitchratings.com'. The ratings above were solicited by, or on behalf of, the issuer, and therefore, Fitch has been compensated for the provision of the ratings.
Applicable Criteria and Related Research:
--'Sovereign Rating Methodology', dated Aug. 13, 2012.
Applicable Criteria and Related Research:
Sovereign Rating Methodology