TEXT-S&P affirms Chile's ratings

-- We believe that the growing resilience of the Chilean economy, as the government's capacity for countercyclical policies in the face of an external downturn demonstrates, should sustain Chile's per capita trend growth of about 2.5%.

-- We have affirmed the 'A+/A-1' foreign-currency and 'AA/A-1+' local-currency sovereign credit ratings on Chile.

-- The outlook remains positive, indicating the likelihood of an upgrade if further microeconomic reforms and prudent macroeconomic policies during a period of heightened global uncertainty further strengthen Chile's long-term growth prospects.

Feb 8 - Standard & Poor's Ratings Services said today that it affirmed its 'A+' long- and 'A-1' short-term foreign-currency sovereign credit ratings on the Republic of Chile. Standard & Poor's also said that it affirmed its 'AA' long- and 'A-1+' short-term local-currency sovereign credit ratings on Chile. The outlook on the long-term ratings remains positive. The 'AA' transfer and convertibility assessment for Chile is unchanged.

"Chile's low fiscal debt burden, political stability, and very flexible and resilient economy support the ratings," noted Standard & Poor's credit analyst Joydeep Mukherji. "Indeed, the government's debt profile and fiscal performance in recent years have been more favorable than those of many higher-rated sovereigns." However, the country's comparatively low level of per capita income and narrow economic base constrain the ratings. The global price of copper, Chile's largest export, heavily influences the pace of GDP growth, injecting volatility into the country's growth performance. Per capita GDP growth could decelerate toward 3.6% this year from about 4.8% in 2011 because of the slowdown in global growth.

For many years, Chile has based its fiscal policy on a framework of rules that take into account cyclical changes in copper prices and estimations of the country's long-term trend GDP growth rate. The discipline of this rules-based fiscal policy has allowed the government to save money in a stabilization fund during years of buoyant growth and high copper prices. As a result, the government has ample flexibility during an economic downturn to sustain domestic demand by running moderate fiscal deficits without eroding its financial health. It can fund these deficits either by issuing debt or by drawing on its fiscal reserves. A floating exchange rate--combined with a track record of low inflation--also provides Chile with some insulation against adverse external shocks. A low government debt burden, along with growing local financial markets, should sustain stability and GDP growth in Chile, despite growing external uncertainty and potentially slow global growth over the next few years. We project Chile's net general government debt, including pension recognition bonds, at 3% of GDP in 2012. Total general government debt is projected to decline toward 11% of GDP in 2012 from 13% last year. The local-currency rating on Chile is 'AA', two notches higher than the foreign-currency rating, reflecting a track record of an independent central bank pursuing an inflation-targeting monetary policy, with ample exchange rate flexibility.

The local fixed-income market is moderately well developed because of the pension reform Chile implemented many years ago, setting up individual funded pension accounts that the private sector manages. Our transfer and convertibility assessment on Chile is 'AA', reflecting our opinion that the likelihood of the sovereign restricting access to the foreign exchange Chile-based non-sovereign issuers need for debt service is moderately lower than the likelihood of the sovereign defaulting on its own debt obligations. The positive outlook reflects the likelihood of an upgrade if the Pinera administration continues to meet the challenge of growing demands for public spending on education and other social programs within the framework of the fiscal rules. We also expect the administration to make gradual progress with its agenda of microeconomic reforms to bolster the long-term competitiveness of the economy. Continued moderate GDP growth, along with prudent fiscal and monetary policies, would strengthen Chile's economic base, and further reduce its vulnerability to commodity price cycles, leading to a higher credit rating. A prolonged global downturn or an unexpectedly sharp drop in growth in China could result in a severe fall in copper-related revenues, leading to fiscal and external pressures.

Failure to respond in a timely and adequate manner to such developments could weaken investor confidence. That, along with potential changes that unexpectedly weaken the framework of fiscal policy or stall the recent improvement in the country's resilience against shocks, could lead us to revise the outlook to stable.