Last week Fitch downgraded its LT foreign currency rating for Chile to A- from A. Fitch note “The downgrade reflects the weakening of the public finances in the wake of secular pressures to increase social spending in the aftermath of wide-scale protests in October-November 2019, which have been compounded by the economic downturn precipitated by the coronavirus pandemic. Fitch forecasts the government debt burden to continue to increase over the medium term, given Chile's lower trend growth prospects and difficulties in consolidating its fiscal accounts amid a heavy political calendar and social pressures.” However, Fitch did move the outlook to stable from negative on the basis that the lower rating adjusts for the weaker fiscal position, political/social risks and lower growth prospects set against positives such as the strong macroeconomic policy framework and a low debt level versus the A peer group. Fitch’s LT foreign rating at A- is now 2 notches below Moody’s A1(negative outlook) and S&P’s A+ (negative outlook) ratings.
The protests and unrest in 2019 driven by inequality, pensions, cost of living and poor public services in conjunction with the coronavirus related fiscal expenditure and negative hit to growth means Chile faces a challenging path to consolidate its fiscal position. In response to the unrest and demands for a better social contract, a referendum to ask the public to choose whether to rewrite the constitution is due on October 25th. If the public vote in favour of this, which we expect they will, it will put in play a process that will run into 2022 while the Presidential and congressional elections are due in 2021. This will continue to add pressure for greater social spending. Fitch projects Chile’s general government debt to GDP will rise to 34% in 2020 and then to 37.4% in 2021 compared to 28% in 2019. While this is below the A peer median of 56% Chile has also been eating into its sovereign asset buffers to temper the impact. According to Fitch, Chile will have used USD8.8bn of sovereign assets by the end of 2020. Chile’s stabilisation fund is forecast at USD7.6bn at the end of 2020 and it intends to use another USD3.4bn next year.
Our Chilean holdings are focused on quasi-sovereign positions in the Chilean copper producer Codelco and the policy bank Banco Del Estado. Following on from the sovereign rating action Fitch affirmed its LT foreign rating for Codelco at A- and revised the outlook to stable from negative. Fitch have now equalised Codelco’s rating in line with the sovereign using their government related entities (GRE) criteria which reflect factors such as its stand-alone credit profile, very strong links with the government and a very strong track record of support and strong financial implications for the government in terms of its own ability to raise funding if Codelco were to default.