Dagong Maintains the Sovereign Credit Ratings of Chile at AA- with a Stable Outlook
Dagong Global Credit Rating Co., Ltd.
February 2, 2019
Dagong Global Credit Rating Co., Ltd. (hereafter referred to as “Dagong”) has decided today to maintain the local and foreign currency sovereign credit ratings of the Republic of Chile (hereafter referred to as “Chile”) at AA-, each with a stable outlook.The rebound in international copper prices has stimulated Chile's domestic demand to pick up, coupled with factors including a stable economic growth, a good fiscal buffer mechanism, low government debt burden and sufficient international reserve,have guaranteed sterngovernment solvency in local and foreign currency.
The key reasons for maintaining the sovereign credit ratings of Chile are below:
First,Chile enjoys a stable debt repayment environment. Constitutional framework and democratic union system without partisan polarizationmaintained by “the Politics of Reconciliation”guarantees a long-term stability of Chile’s political ecology.The Piñera government, which officially took up its duties in March 2018, continued to promote structural reforms led by infrastructure investment, tax and education reform, but faced challenges such as fiscal space control and corporate production impeded by rising tax rates.In terms of credit environment, the rising external financing costs of the banking system has posed a large financing pressure on Chilean banks. Nevertheless, financial operation characteristics of domestic financing and the sound financial flexibility mechanism guarantee the stability and resistance of the Chilean financial system.
Second, the internal and external demand have jointly driven the short-term economic growth, the economic fragility in the medium and long term is still significant. The Chilean economy is highly dependent on mineral exports and investment.In the short term, global commodity prices recovery, rising copperdemanddriven by China’s “Belt and Road”and the signing of the Comprehensive and Progressive Trans-Pacific Partnership Agreement (“CPTPP”) have jointly promoted the economic growth of Chile. The economic growth rate in 2018 and 2019 is expected to rise to 3.8% and 3.4% respectively.In the medium and long term, the industrial structure that relies solely on the mining development makes fragility of the Chilean economy still significant.The relatively weak domestic manufacturing base, sluggish industrial upgrading, unfair education and labor market mismatch will constrain medium and long-term productivity. The economic growth rate in medium and long term is expected to remain at around 3.0%.
Third,as the fiscal deficitnarrows, relatively sufficient financial assets provide security for the government’s debt repayment sources. The security of debt repayment sources remains stable. In the short term, although the new government’s public investment plan and education spendingwillincrease the fiscal expenditure slightly, the economic boost and the increase of the income tax rate will largely increase fiscal revenue. The primary fiscal deficit ofChile’s governments at all levelsin 2018 and 2019 is expected to narrow 1.9% and 1.6% respectively. The financing demand for the same period is 2.5% and 2.1% of GDP, which is relatively low. Although the financing costs has increased due to the Fed’s interest rate hikes, the overall financing pressure is controllable. In addition, financial assets, approximately 19.2% ofGDP, provide security for government debt repayment sources. Therefore, the security of debt repayment sources is stable.
Fourth, the government solvency in local and foreign currency remains stable. Due to the narrowing of the fiscal deficit and slowing government debt growth, the debt burden ratio of governments at all levels in 2018 and 2019 is expected to increase slightly to 28.1% and 30.8%. The relatively low debt burden, reasonable debt structure and low financing costs guarantee the stability of the government’s local currency solvency. In the short term, Chile’s current account continues to show a small deficit. However, the coverage ratio of international reserve to external financing demand is up to 185.5%, ampleoverseas financial assets could also providesufficient liquidity for the country in a timely manner. The foreign currency solvency is stable.
In the short term, Chile's orderly political ecology will help promote structural reforms. The recovery of commodity prices and the strengthening of external demand will boost economic growth. The low government debt burden, certain financial assets and relatively abundant international reserves will guarantee the stability of the government's local and foreign currency. Therefore, Dagong assigns a stable local and foreign currency sovereign credit rating outlook for Chile over the next one to two years.