NEW YORK, October 25 (Fitch) Fitch Ratings affirms Chile's ratings as follows:
--Foreign and Local Currency Issuer Default Ratings (IDRs) at 'A+'/'AA-';
--Short-term IDR at 'F1';
--Country Ceiling at 'AA+'.
The Rating Outlook is Stable.
KEY RATING DRIVERS
Chile's ratings are supported by a strong record of prudent fiscal management, a
low government debt burden, an effective and credible monetary regime anchored
by a freely floating currency, a 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's economic growth at 5.6% in 2012 outpaced peers in the 'A' rating
category. Fitch expects that domestic demand will continue to support the
economy, with an average GDP grow rate of 4.4% between 2013 and 2015. In the
medium term, Chile's still narrow economic base, low productivity, and energy
sector constraints could limit investment and growth unless further progress is
made in these areas. Sustained robust economic growth rates would be needed for
Chile's per capita income and social indicators to converge to higher rated
Strong fiscal policy framework, low projected deficits, low public debt at 11.9%
of GDP in 2012, favorable debt dynamics and adequate Treasury fiscal buffers
support Chile's fiscal flexibility and underscore the shock-absorption capacity
of the economy. A benign inflation environment and some moderation in credit
growth also give monetary authorities room to stimulate the economy if needed.
The main macro imbalance facing the Chilean economy is its increased current
account deficit which could exceed 4% of GDP in 2013 and 2014, partially
explained by moderation in copper prices and a positive investment cycle.
Chile's high commodity dependence is more evident in its external accounts than
in its fiscal accounts, with the share of mining-related public revenues
decreasing to 13% in 2012 from 27% in 2007. A sharp and abrupt correction in
copper prices could pose challenges for external accounts although the flexible
FX regime has shown to be effective in smoothing the transition. In addition,
Chile's central bank has built up its FX reserve position in recent years which
could also help to reduce FX volatility.
Presidential and legislative elections scheduled for November 2013 occur at a
time when most socioeconomic variables show large improvements for Chileans
across all income levels. Voters now have raised expectations of an even
brighter future, and feel empowered to demand better living conditions,
inclusion and social mobility. Meeting the increased social demands of the
Chilean society will represent a challenge for the next administration
The Stable Outlook reflects Fitch's assessment that upside and downside risks to
the rating are currently balanced. Fitch's sensitivity analysis does not
currently anticipate developments with a high likelihood of leading to a rating
The main factors that individually, or collectively, could trigger a positive
rating action include:
-- Greater confidence in the sustainability of high investment and economic
growth. Advances in micro reforms that enhance productivity, medium-term growth
prospects and bridge the per-capita income gap relative to peers.
--Significant improvements in the country's fiscal and external balance sheets.
The main factors that individually, or collectively, could trigger a negative
rating action include:
--A material weakening in growth and investment prospects;
--A severe and sustained deterioration in terms of trade leading to a weakening
in public and external balance sheets.
The ratings and Outlooks are sensitive to a number of assumptions:
--That China avoids a hard landing and grows at average of 7.2% during
2013-2015. Fitch assumes no sustained deep decline in commodity prices.
--That Chile continues to adhere to its fiscal rule which defines public
expenditures as a function of its structural revenues.
--That the investment plan of Codelco and other private sector companies are
sufficient to maintain steady copper production.
--That it is unlikely Chile's highly successful economic model could be
undermined following the forthcoming presidential elections.
Fitch Ratings, Inc.
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New York, NY 10004
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