News List

18-05-2010

Fitch affirms Chile's IDR at 'A', Outlook Stable

Source: Fitch Ratings

Fitch Ratings has affirmed Chile's long-term foreign and local currency Issuer Default Ratings (IDRs) at 'A' and 'A+', respectively, both with a Stable Outlook. The Country Ceiling has been affirmed at 'AA' and the short-term foreign currency IDR at 'F1'.

Chile's ratings are supported by its prudent macroeconomic policy framework, comparatively stronger institutions, sizeable fiscal stabilization assets, and very low public and external debt ratios relative to 'A' category medians. These strengths continue to offset credit risks related to higher commodity dependence and lower GDP per capita than similarly rated peers.

'Chile's comparatively strong institutions and solid macroeconomic policy framework have done well to shore up the economy and support financial stability without endangering debt dynamics,' said Casey Reckman, Director, Fitch Ratings.

Despite the earthquake, Fitch expects Chile's real GDP to expand by 4.6% in 2010. Fitch revised its 2011 real GDP growth projection to 5.6% from 5.0% following the earthquake, as it expects the strongest impulse from reconstruction to carry over into 2012.

Chile maintains a strong a strong, rules-based fiscal policy framework, which prudently smoothes the impact of copper price volatility on fiscal accounts and enhances the resilience of public finances to shocks. In addition, Chile's gross and net public debt indicators, relative to GDP and revenue, are among the strongest in the 'A' category. The sovereign is also a net sovereign external creditor.

'Chile's modest government debt burden supports its scope to increase borrowing in order to finance a portion of the government's earthquake reconstruction program,' Reckman added.

Fitch views the funding mix for reconstruction as balanced and evidence of the sovereign's financing flexibility. Only modest reliance on stabilization fund assets and external borrowing should limit pressures on the Chilean peso (CLP) as well as preserve these assets to meet potential revenue shocks in the future. However, as a result of reconstruction needs, Fitch expects Chile to run overall fiscal deficits and draw down assets in its stabilization fund over Fitch's forecast horizon, albeit to a far lesser degree than in 2009.

At 71% of current external receipts (CXR), Chile's commodity dependence remains a vulnerability which impacts economic growth as well as fiscal and external accounts. Nevertheless, the countercyclical policy framework, bolstered by stabilization fund assets held abroad, softens the real economic impact of copper and molybdenum price volatility while also supporting fiscal adjustment without endangering debt dynamics.

Evidence that Chile's credit metrics are holding up well relative to peers as the global economic recovery deepens and reconstruction begins could be positive for creditworthiness. Beyond the reconstruction period, Fitch will look for growth- and competitiveness-enhancing reforms to tackle underlying structural weaknesses, such as social inequity and lower GDP per head at market exchange rates, which currently constrain Chile to the 'A' category. On the other hand, while not Fitch's base case scenario, a noteworthy deterioration of monetary or fiscal policy credibility could put downward pressure on Chile's sovereign ratings.