TEXT-Fitch affirms Chile's IDR at 'A+', outlook is stable

Thu Jan 24, 2013 3:59pm EST

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Jan 24 - Fitch Ratings affirms Chile's ratings as follows:

--Foreign and Local Currency Issuer Default Ratings (IDRs) at 'A+' and 'AA-'
respectively;
--Short-term Issuer Default Rating at 'F1';
--Country Ceiling at 'AA+'.

The Rating Outlook is Stable.

Rating Rationale

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

Chile remained resilient to sluggish global conditions with last year's growth
supported by strong investment and a dynamic household consumption. Fitch
estimates that GDP growth reached 5.5% in 2012, and projects a deceleration to
5% this year and next.

From a longer-term perspective, Chile's narrow economic base, low productivity
and energy sector constraints could limit investment and growth prospects unless
further progress is made in these areas. While the government has made some
headway in microeconomic reforms, their impact is difficult to quantify and will
take time to materialize. Notwithstanding Chile's improving per capita income
growth in recent years, sustained high growth will be required for Chile's
income level and overall development to converge faster to levels seen in the
'A' and 'AA' categories.

The main macro imbalance facing the Chilean economy is its increased current
account deficit which could remain around 4% of GDP in 2013. The deficit,
however, is partially driven by a positive investment cycle, thus improving
external account prospects in the future. Inflows of foreign direct investment,
particularly towards the mining industry, are expected to finance the current
account deficit largely. Moreover, Fitch believes that Chile's flexible economic
policies and higher international reserves buffer can smooth the transition in
case there is a significant decline in commodity prices.

Chile's improved fiscal policy framework, low public debt, favorable debt
dynamics and substantial Treasury fiscal buffers (total treasury assets
including stabilization funds at 13.5% of GDP) support its fiscal flexibility
and underscore the shock-absorption capacity of the economy. Chile's debt
indicators would likely remain superior to the 'A' median even under less
favorable economic conditions.

In 2012, to cope with increased spending pressures on education, the government
passed a tax reform that is expected to provide additional annual revenues
equivalent to 0.5% of GDP in 2013. The passage illustrates the commitment of the
government to meet spending pressures within the framework of the fiscal rule.
However, the narrow revenue base (at 22% of GDP is among the lowest in the 'A'
category) may need to be expanded steadily to confront potential social spending
pressures. The limited appetite to further increase consumption taxes and the
need to keep a competitive tax regime for attracting investment in the copper
sector could pose challenges to do so.

Political awareness about the underlying social issues increased with the 2011
student movement. Last year, the government was able to move the political
discussion from students' idealist demands to more pragmatic initiatives to
improve Chilean educational system. Nevertheless, the next administration could
still face social mobilization and additional demands for public expenditure.

RATING OUTLOOK STABLE

The main factors that could lead to a positive rating action are:
--Greater confidence in the sustainability of high investment and economic
growth, as well as further strengthening of fiscal and external balance sheets;
--Progress on micro reforms that enhance productivity, medium-term growth
prospects and bridge the per capita income gap relative to peers;
--Continued successful management of the growing social demands of the Chilean
society.

The main factors that could lead to a negative rating action are:

--A sustained weakening in public finances without a concrete commitment for
future consolidation;
--A weakening in growth and investment prospects due to uncertainty in energy
provision, resulting in unfavorable government debt dynamics.

SENSITIVITY/RATING DRIVERS

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

--Fitch anticipates fragile global growth in 2013 and assumes that the Eurozone
remains intact, and that there is no materialization of severe tail risks to
global financial stability. The agency assumes China will grow at about 8% in
2013 and 7.5% in 2014. Copper prices are assumed to remain close to current
levels in 2013. Significant shocks to China's growth and/or commodity prices
will be negative for Chile's economic, fiscal and external accounts.

--Fitch assumes that Chile continues to adhere to its fiscal rule which defines
public expenditures as a function of its structural revenues. A marked departure
from this policy setting could undermine creditworthiness.

--Fitch assumes that the investment plan of Codelco and other private sector
companies are sufficient to maintain a steady copper production. However, Fitch
highlights that there are risks to sufficient energy provision that can delay
mining investments.


Additional information is available at 'www.fitchratings.com'. The ratings above
were solicited by, or on behalf of, the issuer, and therefore, Fitch has been
compensated for the provision of the ratings.

Applicable Criteria and Related Research:
--'Sovereign Rating Methodology', dated Aug. 13, 2012.

Applicable Criteria and Related Research:
Sovereign Rating Methodology
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