Fitch Affirms Chile's Foreign-Currency IDR at 'A+'; Outlook Stable

NEW YORK--(BUSINESS WIRE)-- Fitch Ratings has affirmed Chile's Long-term foreign- and Local-currency Issuer Default Ratings (IDRs) at 'A+/AA-'. Fitch also affirms Chile's senior unsecured foreign bonds at 'A+'. The Rating Outlook for the Long-term IDRs is Stable. In addition, the Country Ceiling has been affirmed at 'AA+' and the short-term foreign currency IDR at 'F1'.

KEY RATING DRIVERS

Chile's rating affirmation and Stable Outlook reflects the following factors:

Chile's ratings are supported by a track record of prudent fiscal management, which has resulted in a strong sovereign balance sheet, credible monetary policy anchored on an inflation-targeting regime and flexible exchange rate, and strong governance standards that support policy stability. These strengths sufficiently counterbalance Chile's low per-capita GDP and high commodity dependence relative to peers.

Chile's flexible exchange rate regime has facilitated a swift external adjustment in the face of lower copper prices. The current account deficit fell to 1.2% of GDP in 2014 from 3.7% in 2013 on import compression from weaker domestic demand, peso depreciation, and lower oil prices. Relatively resilient foreign direct investment inflows are projected to fully fund lower current account deficits. High and rising corporate external leverage poses risks in the context of peso depreciation and prospective U.S. monetary tightening, but these are mitigated by the relatively high share of inter-company debt and limited currency mismatches.

A rules-based fiscal policy and a strong sovereign balance sheet confer important scope for counter-cyclical stimulus. Chile's central government deficit rose to 1.6% of GDP in 2014 from 0.6% in 2013, as the economic slowdown and lower copper prices weighed on revenues. The structural deficit targeted by the fiscal rule was stable at 0.5%, highlighting the cyclical nature of the fiscal deterioration. The 2015 budget targets a higher structural deficit of 1.1% to accommodate fiscal stimulus, but the authorities remain committed to closing it to a balanced position by 2018 with new revenues from the tax reform. However, consolidation could be challenging should stabilisation of copper prices and lower GDP growth prompt downward revisions in these structural parameter estimates in future budgets, reflecting lower structural revenues.

Chile's general government debt is the second-lowest in the 'A' category at 15% of GDP in 2014. Fitch projects that primary deficits will lift it to around 19% by 2016, but the intended fiscal consolidation should stabilise the trajectory thereafter. Sovereign wealth funds remain an important fiscal buffer but are unlikely to grow further against a backdrop of lower copper prices.

Chile's economic growth slowed to 1.9% in 2014 from an average of 5.3% in 2010 - 2013, reflecting an ebbing mining investment cycle and a general fall in confidence. Fitch forecasts growth will recover to 2.8% in 2015, supported by accommodative fiscal and monetary policies. The authorities are moving ahead with a counter-cyclical boost to capital spending. Inflation has risen above target partly due to sustained depreciation of the peso, but expectations remain well anchored and reflect the credibility of the inflation-targeting regime. The weaker peso and decline in oil prices could provide further support to growth. Key risks include further declines in copper prices and uncertainty stemming from on-going reforms that could hinder a recovery in confidence.

Given a weaker outlook for the mining sector, Chile's medium-term growth prospects and per-capita income convergence with rating peers depend on new investments and productivity gains. The administration's reform agenda aims to improve key shortcomings in education and inequality to boost growth prospects, although the potential benefits would materialise over a long time horizon. The agenda also includes a plan to lower electricity costs and other measures to improve productivity, but their impact is not yet clear.

Chile's policy credibility and consistency are a reflection of strong governance standards relative to peers. However, a series of recent high-profile corruption investigations into campaign finance irregularities have been wide-reaching across the political spectrum and business community, adding to perceptions of structural inequities in Chilean society. At this juncture Fitch does not view these developments as materially damaging to Chile's institutional strengths, and they could provide a test for Chile's institutions to uphold public accountability.

RATING SENSITIVITIES

The Stable Outlook reflects Fitch's assessment that upside and downside risks to the rating are currently well balanced. Consequently, Fitch does not currently anticipate developments with a high likelihood of leading to a rating change.

The main factors that, individually or collectively, could lead to negative rating action are:

--Weakening in investment and growth prospects that leads to a sustained widening of the per-capita income gap with peers;

--Erosion of the public sector balance sheet and/or a weakening of fiscal policy credibility;

--Increased external vulnerability stemming from higher external indebtedness and any structural weakening of Chile's terms of trade.

The main factors that, individually or collectively, could lead to positive rating action are:

--Improvement in medium-term growth prospects that bridges the per-capita income gap with peers;

--Progress on structural reforms that enhance productivity and investment prospects;

--Significant improvements in the country's fiscal and external balance sheets.

KEY ASSUMPTIONS

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

--Fitch's base case assumes that China's economy slows in a sustainable and orderly manner, and that copper prices do not decline substantially from current levels;

--The investment plans of Codelco and other private sector companies are sufficient to maintain steady copper production;

--On-going corruption investigations will not materially damage overall governance and institutional stability in Chile.

Additional information is available on www.fitchratings.com

Applicable Criteria and Related Research:

--'Sovereign Rating Criteria' (Aug. 12, 2014);

--'Country Ceilings' (Aug. 28, 2014).

Applicable Criteria and Related Research:

Sovereign Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=754428

Country Ceilings

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=752194

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=984190

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Fitch Ratings
Primary Analyst
Todd Martinez
Associate Director
+1 212-908-0897
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
or
Secondary Analyst
Shelly Shetty
Senior Director
+1 212-908-0324
or
Chairperson
Tony Stringer
Managing Director
+44 20 3530 1219
or
Media Relations:
Elizabeth Fogerty, +1 212-908-0526
[email protected]

Source: Fitch Ratings

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