Fitch Affirms Chile's FC IDR at 'A+'; Outlook Stable

NEW YORK--()--Fitch Ratings has affirmed Chile's long-term foreign- and local-currency Issuer Default Ratings (IDRs) at 'A+'/'AA-'. The issue ratings on Chile's senior unsecured foreign bonds are also affirmed at 'A+'. The Rating Outlook on the long-term IDRs is Stable. The Country Ceiling is affirmed at 'AA+' and the short-term foreign currency IDR at 'F1'.

KEY RATING DRIVERS

Chile's ratings are supported by a strong record of prudent fiscal management, a low government debt burden, an effective and credible monetary regime anchored by a freely floating currency, a 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.

The Chilean economy is expected to grow 1.8% in 2014, down from a 5.3% average rate in the previous four years. The slowdown was caused by a combination of domestic and external factors affecting business confidence and investment prospects. Lower copper prices are undermining the short-term profitability of mining, a key economic sector, while in the long term the industry continues to face challenges from aging deposits, along with high energy and labor costs. In addition, business confidence across industries suffered a reversal from the approval and upcoming implementation of tax reforms, which considerably changed the existing tax framework.

Fiscal and monetary stimulus, together with a weaker currency, could result in an average expansion of 2.7% over 2015-2016 although downside risks persist. The central bank has cut interest rates by 200 basis points (bps) with the monetary policy rate currently standing at 3%. Future rate cuts will depend on the evolution of internal and external conditions, although inflation expectations remain anchored. The budget for 2015 also shows a strong countercyclical component, with a 9.8% increase in expenditures and a 27.5% jump in investment, resulting in an accrued and structural deficits of -1.9% of GDP and -1.1% of GDP for 2015, respectively. The government, however, renewed its campaign commitment to eliminate the cyclically adjusted deficit by 2018.

Strong fiscal policy framework, low projected deficits, low public debt at 15% of GDP in 2014, favorable debt dynamics, and adequate Treasury fiscal buffers support Chile's fiscal flexibility and underscore the shock-absorption capacity of the economy. Macro imbalances related to the previously increasing current account deficit have been reversed in 2014 through lower imports, some recovery in non-mining exports and lower profit repatriation. The flexible FX regime has been effective in smoothing the transition for the overall economy.

President Bachelet has begun her second term with progress on an ambitious reform agenda, aided by the congressional majority of her Nueva Mayoria coalition. The reforms aim to tackle inequality and boost economic growth in the long run, but signal a potential increase in state involvement in the economy through additional regulation. Although the government has announced measures to address issues hampering the economy, such as high energy costs and low productivity, it is unclear how effective these will be in showing concrete results. Fitch expects support for Chile's prudent, business-friendly policy framework to remain firm.

RATING SENSITIVITIES

The Stable Outlook reflects Fitch's assessment that upside and downside risks to the rating are currently balanced. Fitch's sensitivity analysis does not currently anticipate developments with a high likelihood of leading to a rating change.

The main factors that individually, or collectively, could trigger a negative rating action include:

-- A material and persistent weakening in growth and investment prospects;

-- A severe and sustained deterioration in terms of trade leading to a weakening in public and external balance sheets.

The main factors that individually, or collectively, could trigger a positive rating action include:

-- Sustained growth and advances on micro reforms that enhance productivity and growth prospects, and bridge the per capita income gap relative to peers;

-- Significant improvements in the country's fiscal and external balance sheets would also be positive for creditworthiness.

KEY ASSUMPTIONS

The ratings and Outlooks are sensitive to a number of assumptions:

--That China avoids a hard landing. Fitch assumes no substantial decline in copper prices from current levels.

--That Chile continues to adhere to its fiscal rule which defines public expenditures as a function of its structural revenues.

Additional information is available at 'www.fitchratings.com'.

Applicable Criteria and Related Research:

--'Sovereign Rating Criteria' dated Aug. 12, 2014;

--'Country Ceilings' dated Aug. 28, 2014.

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=903375

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Contacts

Fitch Ratings
Primary Analyst
Santiago Mosquera
Director
+1-212-908-0271
Fitch Ratings, Inc.
33 Whitehall
New York, NY 10004
or
Secondary Analyst
Shelly Shetty
Senior Director
+1-212-908-0324
or
Committee Chairperson
Paul Rawkins
Senior Director
+44 20 3530 1046
or
Media Relations:
Elizabeth Fogerty, +1-212-908-0526 (New York)
elizabeth.fogerty@fitchratings.com

Contacts

Fitch Ratings
Primary Analyst
Santiago Mosquera
Director
+1-212-908-0271
Fitch Ratings, Inc.
33 Whitehall
New York, NY 10004
or
Secondary Analyst
Shelly Shetty
Senior Director
+1-212-908-0324
or
Committee Chairperson
Paul Rawkins
Senior Director
+44 20 3530 1046
or
Media Relations:
Elizabeth Fogerty, +1-212-908-0526 (New York)
elizabeth.fogerty@fitchratings.com