TEXT - S&P raises Chile's ratings, revises outlook to stable

Wed Dec 26, 2012 2:58pm EST

Overview

-- The resilience of the Chilean economy continues to strengthen, improving the government's capacity for countercyclical policies in the face of an external downturn.

-- The government was able to pass a fiscal reform through congress to finance higher spending needs in education without eroding its fiscal structure.

-- We have raised our long-term foreign and local currency ratings on Chile to 'AA-' and 'AA+', respectively.

-- The stable outlook balances the challenges of managing further demands for public spending on education and other social programs within the framework of the fiscal rules.

-- We also expect the government to continue making gradual progress on microeconomic reforms to bolster the long-term competitiveness of the economy. Rating Action On Dec. 26, 2012, Standard & Poor's Ratings Services raised its long-term foreign and local currency ratings on the Republic of Chile to 'AA-' and 'AA+' from 'A+' and 'AA', respectively. The outlook on the long-term ratings is stable. Standard & Poor's also raised its short-term foreign currency rating to 'A-1+' from 'A-1' and affirmed its 'A-1+' short-term local currency sovereign credit rating on Chile. We also revised our transfer and convertibility assessment for Chile to 'AA+' from 'AA'. Rationale The upgrade reflects the growing resilience of the Chilean economy that in turn continues to improve the government's capacity for countercyclical policies in the face of an external downturn. We expect GDP to grow about 6% in 2012 and 5.2% in 2013, supported by strong domestic demand and still high copper prices. This should bring GDP per capita in 2012 and 2013 to about $15,800 and $16,700, respectively. Whereas this is still low in comparison with some other similarly rated sovereigns, it underlines the positive economic trends that Chile has experienced in the last decade with per capita GDP more than doubling its 2005 level. This economic performance has had a positive impact on Chile's fiscal performance. The general government balance has averaged a surplus of 2.7% of GDP during the past eight years. As a result, the government was also able to build up strong external assets that are expected to close 2012 at 10% of GDP or roughly equivalent to the government's gross debt. This low government debt burden also supports the ratings. We expect the government to carry little net debt over the medium term. Political stability is another factor that supports our ratings on Chile. Despite low levels of approval, the Pinera administration was able recently to pass through congress a fiscal reform that is expected to yield 0.4% of GDP in additional revenues. This reform will allow the government to increase spending on education and other social programs without eroding its fiscal position. The rating constraints are a narrow economic base and Chile's external liquidity position, with gross external financing needs slightly greater than current account receipts plus reserves projected throughout the forecast horizon. The local currency rating on Chile is 'AA+', two notches higher than the foreign currency rating. The higher local currency rating reflects Chile's track record of an independent central bank pursuing an inflation-targeting monetary policy, with ample exchange rate flexibility. The local fixed income market is well developed, thanks to pension reform undertaken many years earlier that included setting up individual funded pension accounts managed by the private sector. Outlook The stable outlook balances the challenges of managing further demands for public spending on education and other social programs within the framework of the fiscal rules. We also expect the government to continue making gradual progress on microeconomic reforms to bolster the long-term competitiveness of the economy. Continued moderate GDP growth and a rising private sector savings rate, along with prudent fiscal and monetary policies, would strengthen Chile's economic base and further reduce its vulnerability to commodity price cycles, leading over the long term to a higher foreign currency 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 lower the rating. Related Criteria and Research

-- Sovereign Government Rating Methodology And Assumptions, June 30, 2011 Ratings List Ratings Raised

To From Chile (Republic of) Sovereign Credit Rating Foreign Currency AA-/Stable/A-1+ A+/Positive/A-1 Local Currency AA+/Stable/A-1+ AA/Positive/A-1+ Senior Unsecured Foreign Currency AA- A+ Local Currency AA+ AA

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