Fitch affirms Chile's FC IDR at 'A+'; outlook stable

Reuters

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

sovereigns.

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

RATING SENSITIVITIES

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

change.

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.

KEY ASSUMPTIONS

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.

Contact:

Primary Analyst

Santiago Mosquera

Director

+1-212-908-0271

Fitch Ratings, Inc.

One State Street Plaza

New York, NY 10004

Secondary Analyst

Shelly Shetty

Senior Director

+1-212-908-0324

Committee Chairperson

Ed Parker

Managing Director

+44 20 3530 1176

Media Relations: Elizabeth Fogerty, New York, Tel: +1 (212) 908 0526, Email:

elizabeth.fogerty@fitchratings.com.

Additional information is available at 'www.fitchratings.com'.

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