The Daily Update - Chile

Given Sebastien Piñera, Chile’s newly elected President, takes-up office on March 11 the OECD’s latest survey of Chile is perhaps timely in highlighting some potential areas that policy makers may wish to consider.

On a positive note, the OECD projects a recovery in Chile’s GDP growth from 1.7% in 2017 to 2.9% for 2018 and 2019 helped by a firmer copper price environment and a global economic recovery. That said, it highlights the need to deepen structural reforms to boost productivity, diversify the economy, improve global competitiveness while also advocating policy to reduce inequality. Productivity levels are significantly below the OECD average while global competitiveness and R&D expenditure as a percentage of GDP also lag. The OECD report favours reducing bureaucracy, simplifying regulations, improving adult skills and getting more people into ‘formal long term jobs that add real value’; and notes ‘Chile would also benefit from raising public support for research and development and stepping up infrastructure investment, which would spur innovation and competitiveness.’

However, Congress is fragmented and Piñera’s 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. While some recovery in investment is expected under a pro-business Piñera administration he may be forced to take a softer approach to addressing the fiscal deficit and rising debt levels. The fiscal deficit edged higher to 2.8% of GDP in 2017 up from 2.7% in 2016. Nevertheless, we think this situation is very manageable given Chile’s general government debt position of ~25% of GDP (Moody’s estimate), low interest burden and government assets. Moody’s, who rate the Chilean sovereign Aa3 (negative), note that Chile compares well against its Aa median peers which has a government debt to GDP ratio of 30%.

Codelco, the state owned copper producer, remains one of our favoured Chilean holdings: the USD denominated 6.15% Codelco 2036 issue trades at a yield of 4.5% and looks attractive on our models, trading ~3.7 credit notches cheap (best rating basis).

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