The Daily Update - A Little Bit Chile...

Moody’s recently downgraded Chile’s long-term rating by one notch to A1 (stable), bringing it in line with S&P’s A+ rating, and one notch higher than Fitch’s. Moody’s stated: “The rating downgrade reflects the gradual but broad-based deterioration in Chile's credit profile. Despite clear indications of near-term improvements in economic and fiscal prospects, Moody's does not anticipate the sovereign will regain the credit strength it had in previous years.” Not wanting to be held responsible, President Sebastian Pinera, who began his term in March stated: “The reaction of the rating agency is due to things that happened in previous years,” adding, “As you well know, our government is correcting those reasons.” He also promised to stabilise debt levels, in the face of growing public debt; at just under 24% of GDP.

Having met with Finance Minister Felipe Larrain, just last month, Moody’s said it does expect Chile’s economy to improve, however, it is unclear whether it will be enough to push the rating back up: “Debt metrics are likely to stabilize, but a reversal in the deterioration of fiscal and debt metrics is unlikely,” The rating agency added: “Low income levels relative to Aa-rated peers, dependence on commodities and external vulnerabilities have also become more salient aspects of Chile’s credit profile given lower medium-term growth prospects.”

On the positive side, Moody’s did note Chile’s credit strengths include: “Comparatively low government debt ratios and ample access to funding… Significant financial flexibility due to accumulation of financial assets… Long history of prudent macroeconomic and fiscal policymaking.” According to our proprietary NFA model, Chile has a 3 star ranking and is forecast to remain in this bracket for some time, it is thus included in our investable universe. Having said that, there are few Chilean bonds which offer very attractive risk-adjusted returns; compared with the likes of AA/A rated Middle Eastern quasi-sovereigns, for example. However, state-owned copper producer, Codelco bonds do remain attractive with the A1 (best rating) 6.15% issue, maturing in 2036 offering a yield of 4.7%, an expected return around 10% and ~3.5 notches of credit cushion.

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