The Daily Update - Chile

Sebastian Piñera won the Chilean Presidential election with a convincing majority in the second round vote in December 2017 and will take up office in March 2018. He has already served as Chile’s President between 2010 and 2014 and is viewed as having a pro-business and pro-growth policy bias. Given that economic growth in Chile has been languishing (the Central Bank projects that the economy will grow just 1.4% in 2017) his policies had obvious voter appeal.

However, Congress is fragmented and the centre-right Chile Vamos coalition will not have a legislative majority in either the Senate or the Lower Chamber of Congress so enacting policy changes may not prove straightforward. For example, improving the fiscal rule to address the fiscal deficit and rising debt levels (due to overly optimistic growth and copper prices) may require a softer approach. Nevertheless, his election should boost business confidence and encourage investment, along with the recovery in copper prices.

Economic forecasters are looking for a rebound in growth this year to 3.2% (Central Bank survey): factors include a recovery in the copper price and a pick-up in investment. Investment has been extremely weak in Chile: copper is a key driver comprising close to 50% of Chile’s exports. Supply disruption was an issue last year as large mines such as Escondida experienced a 44 day strike in Q1 severely disrupting Chile’s copper exports. That said, there are still a significant number of wage negotiations to take place this year.

Codelco, the state owned copper producer, remains one of our favoured Chilean holdings: it performed well in 2017 and managed to get through the 2017 wage negotiations without the disruptions that beset some of its peers. The USD denominated 6.15% Codelco 2036 issue trades at a yield of 4.2% and looks attractive on our models, trading ~3.7 credit notches cheap (best rating basis).

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