-- 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
-- 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.
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
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'.
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
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
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.
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
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
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+
Foreign Currency AA- A+
Local Currency AA+ AA