CHICAGO--(BUSINESS WIRE)--The victory of center-left candidate Michelle Bachelet in Sunday's Chilean presidential election sets the stage for the introduction of social and economic reforms that could pose significant fiscal challenges for the incoming government. However, Fitch expects the essential foundations of Chile's successful economic model, as well as its solid sovereign credit profile, to remain in place following the elections.
Key reform initiatives that Ms. Bachelet's government will likely pursue include an overhaul of the education system, a new tax framework, and an amendment to the binomial electoral system. The new administration may also seek important changes in Chile's constitution or the drafting of a new one. In order to succeed, the president-elect's coalition will need different levels of support from independent and opposition legislators in Congress. We expect the biggest reform bills (including tax reform) will require a long period to pass and implement.
The proposed tax reform plan includes a hike in the corporate tax rate to 25% from 20% and a reduction in the maximum personal income tax rate to 35% from 40% over a four-year period. The tax reform proposal also includes a crucial change in the way taxes are calculated for business shareholders, moving toward a system whereby corporate earnings, rather than dividends, are taxed. The success of the tax plan will depend upon the new government's ability to work out a compromise with business interests and the opposition. On the downside, there is a risk that these changes could reduce Chile's high rates of capital formation.
The incoming administration's focus on the need for new revenue to support increased spending is broadly reflective of Chile's continuing commitment to fiscal responsibility. We view the country's disciplined approach to fiscal policy, supplemented by tax revenues from the country's copper industry, as a key source of support for Chile's 'A+' Issuer Default Rating, which we affirmed in October.
In addition to prudent fiscal policy, Chile's sovereign credit profile is supported by very low public debt levels and an effective monetary regime, anchored by a free-floating currency. We expect the new administration to support key elements of the Chilean economic model, including a commitment to competitive markets, that counterbalance the country's commodity dependence and somewhat weaker human development indicators than those sovereign peers in the 'A' category.
The above article originally appeared as a post on the Fitch Wire credit market commentary page. The original article can be accessed at www.fitchratings.com. All opinions expressed are those of Fitch Ratings.