NEW YORK--(BUSINESS WIRE)--Chile's reform package, which centers on efforts to improve social equity and productivity by enhancing public education, is well-targeted in addressing the country's structural shortcomings, though most benefits would materialize over a longer horizon, says Fitch Ratings in a new special report published today.
While Chile's free-market model has delivered strong real GDP growth over the past decades and brought unemployment and poverty to low levels, measures of inequality remain relatively high. The Bachelet administration's reform package aims to improve social equity via some expansion of the state's role in terms of taxation, spending and regulation. An approved electoral reform and possible changes to the constitution are geared towards enhancing the democratic underpinnings of the political system.
'Human capital deficiencies stand out as a key competitiveness shortcoming relative to peers,' said Todd Martinez, Associate Director in Fitch's Latin American Sovereign Group and author of the report. Thus, better-quality and lower-cost public education is the cornerstone of the administration's agenda. Its success will depend on implementation, and its benefits would largely materialize over a long horizon. The government has also announced measures to boost productivity, including a revamped energy strategy, to support businesses in a nearer timeframe.
Nonetheless, business confidence dropped sharply in 2014, partly reflecting concerns that key reforms, including an already approved tax reform and a labor reform under consideration, could affect corporate profitability and investment in coming years. Popular support has also waned amidst the economic slowdown and recent high-profile corruption investigations.
The reform agenda includes elements to preserve the credit strengths underpinning Chile's 'A+' rating. Additional revenues will contribute towards fiscal consolidation in addition to higher social spending, reflecting a continued commitment to fiscal prudence. Moreover, the social and political reforms could further build upon Chile's existing institutional strengths reflected in strong governance and policy stability.
'Progress on social and political reforms highlights the response of policymakers to concerns over social inequality and political accountability,' said Shelly Shetty, Head of Fitch's Latin American Sovereign Group.
The report 'Chile: Taking Stock of the Reform Agenda - Neutral Implications for Near-Term Creditworthiness' is available at 'www.fitchratings.com'.
Additional information is available at www.fitchratings.com.
Applicable Criteria and Related Research:
--Sovereign Rating Criteria (August 2014)
Applicable Criteria and Related Research: Chile: Taking Stock of the Reform Agenda
Sovereign Rating Criteria