The Daily Update - Chile

The first round of the Chilean Presidential election is due to be held on Sunday 19 November 2017 following the July primaries where the main parties elect their candidates.  The incumbent President Bachelet will have served two terms in office so will no longer be eligible to run according to the Chilean Constitution but given how her approval rating has plummeted in her second term the voters look ready for a change.  Not only have her attempts at pension and education reform been poorly received but voter concern has been compounded by the recent wildfires that have destroyed over half a million hectares of land.

The former President Sebastian Piñera (in office 2010-2014) is the leading right-wing candidate from the opposition party ‘Chile Vamos’.  So far the other right-wing candidates, Senator Manuel José Ossandón and Felipe Kast, seem unlikely to win the right-wing nomination.  It is early days in the process but Sebastian Piñera is currently leading the overall polls with a 6 percent lead over Senator Alejandro Guillier his main left-wing rival according to a recent poll.

Alejandro Guillier, a former journalist turned senator, has accepted the nomination of the centre-left Radical Party and is expected to be selected as the candidate for the left-leaning Nueva Mayoria bloc in the July primaries (given Bachelet is unable to seek another term).  His rating, although easing a little lately, has gained since October as economic growth has slowed and public frustration has mounted that the Bachelet administration has not delivered on reforms to the pension system or reforms to improve the affordability of education.  Ricardo Lagos who was President between 2000 and 2006 and represents the centre-left Party for Democracy (PPD) represents the main rival to Guillier in securing the Nueva Mayoria nomination; he favours infrastructure investment, pension and education reform and measures to improve productivity and growth.  But he is currently trailing in the polls.

Slowing growth a rising inequality has been adding to voter discontent: the Central Bank survey of economic expectations for February shows a GDP estimate of 1.9 percent for 2017 edging down from 2 percent the previous month, although still recovering to 2.5 percent in 2018.  This is a significant deceleration given real GDP which averaged 3.6% over 2010-2015.  While the Central Bank left interest rates unchanged at 3.25% at its February meeting, following a 25 basis point cut in January, it noted that ‘in the most likely scenario, it will be necessary to boost the monetary impulse.’  High levels of income equality in Chile are exacerbating the effects of slow growth with work by OECD putting Chile at the top of its list of income inequality.

Nevertheless, while it is certainly true that Chile faces policy challenges it is rated Aa3 stable by Moody’s who acknowledge its credit strengths of low debt levels (estimated at 25% of GDP in 2017), financial flexibility and a history of stable and prudent macroeconomic policy.  Given Chile’s strong position in our NFA rankings (4 stars) we continue to favour exposure through the copper producer Codelco which is 100% owned by the Chilean government and is rated A1 on a best rating basis.  For example, Codelco 4.875% 2044 trades at a yield of 4.63% or ~3.4 credit notches cheap on our models.