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Rating Action:

Moody's changes the outlook on Chile's ratings to negative, affirms A1 ratings

25 Aug 2020

New York, August 25, 2020 -- Moody's Investors Service, ("Moody's") has today changed the outlook to negative from stable on the Government of Chile and affirmed the A1 long-term local and foreign currency issuer and senior unsecured ratings, and the (P)A1 foreign currency senior unsecured shelf ratings.

The negative outlook reflects increasing risks to Chile's fiscal strength. Even though the country entered the coronavirus crisis with fiscal buffers and low debt relative to A-rated peers, debt to GDP had been rapidly rising in recent years, a trend that is being accelerated by the pandemic shock. Moody's expects debt to almost double relative to GDP in a five-year period, reaching 39% in 2021.

Subpar medium-term growth prospects and rising social demands suggest that it will be difficult from a political economy perspective to prioritize fiscal consolidation against other competing policy priorities, which risks leading to a continued rise in debt ratios, beyond what we already expect in our baseline scenario, let alone debt reversal.

The coronavirus outbreak, deteriorating global economic outlook and financial market turmoil are creating a severe economic and financial shock. Moody's regards the coronavirus outbreak as a social risk under its ESG framework. For Chile, the shock transmits mainly through weaker economic growth and increased demands for social programs that could translate into a larger spending base relative to government's revenue over time. Shifts in policy priorities due to social tensions may also erode policy effectiveness, a source of credit strength historically.

Chile's A1 rating is supported by the government's still relatively strong, albeit deteriorating, fiscal and debt metrics when compared to A-rated peers and the presence of important but narrowing fiscal buffers that help mitigate the impact of shocks. The A1 rating also reflects solid, although pressured, institutions and a track record of policymaking that reflects a commitment to fiscal prudence, supports macroeconomic stability and contains the country's susceptibility to event risk.

Chile's local currency bond and deposit ceilings remain at Aa2. The foreign currency deposit ceiling at A1/P-1 and the foreign-currency bond ceiling at Aa2/P-1 also remain unchanged.

RATINGS RATIONALE

RATIONALE FOR THE CHANGE IN OUTLOOK TO NEGATIVE FROM STABLE

RISING DEBT AND DECLINING FISCAL BUFFERS, A TREND BEING EXACERBATED BY THE CORONAVIRUS OUTBREAK

While the government's strong fiscal starting point relative to A-rated peers provides support to Chile's credit profile, the accumulation of government debt has been a key credit concern even prior to the pandemic. Persistent fiscal deficits have led to an uninterrupted rise in the debt to GDP ratio since 2010, with the trend accelerating since 2014. Moody's now expects debt to almost double relative to GDP in a five-year period, reaching 39% in 2021 from 21% in 2016.

Chile's structural balance rule is not geared to prevent a continued deterioration in debt indicators. Debt stabilization or reversal in the coming years is unlikely to be achieved unless the government agrees with Congress on complementary fiscal institutional arrangements or ad-hoc fiscal measures oriented towards this objective. The country's fiscal buffers, a source of credit strength historically, will also weaken given the government's plan to draw on them to fund in part fiscal deficits in the 2020-22 period.

As fiscal and debt metrics have weakened at a faster pace than that of other peers, the strength of the government's balance sheet is becoming less effective in offsetting the country's other longstanding and weaker attributes when compared to similarly rated sovereigns -- e.g., commodity-dependent economy, lower GDP per capita than A-rated peers and relatively large external debt country-wide.

RISK OF SUBPAR GROWTH AND PRESSURE TO INCREASE SOCIAL SPENDING INCREASES UNCERTAINTY REGARDING THE COUNTRY'S ABILITY TO PRIORITIZE FISCAL RESTRAINT

Subpar medium-term growth prospects, rising social demands for more inclusive growth, the upcoming constitutional referendum and presidential elections suggest that it will be difficult from a political economy perspective to prioritize fiscal consolidation and debt stabilization against other competing policy priorities.

Average annual GDP growth has been declining over the past two decades. After a strong growth rate of 4% in 2018 on the back of less than 2% on average in the previous four years, social unrest in late 2019 contributed to a sharp slowdown that year, with GDP advancing 1.1%. This year, the coronavirus outbreak is having a severe impact on the country's economic performance. Moody's is now expecting the economy to contract in real terms by 7.4% in 2020, reflecting the magnitude and severity of the combined supply and demand shock and the prolonged lockdowns. While Moody's baseline scenario assumes growth above trend in 2021, with 4.4%, this will reflect to a large extent favorable carry-over effects. Beyond that year however, the rating agency expects growth below historical trends, with risks tilted to the downside, given uncertainties arising from social tensions, upcoming presidential elections, the constitutional reform and slow total factor productivity growth.

Social unrest in 2019 reflected broad, underlying social discontent with high living costs, the quality and coverage of public services and income inequality. The coronavirus outbreak has only exacerbated this dissatisfaction and has made the demands more urgent, driven in part by the many structural inequalities, a feature Chile shares with many other emerging markets.

While the government's fiscal policy response to the pandemic was one of the largest in terms of GDP among emerging markets, providing resources for the public health sector and injecting liquidity into the economy, social pressure to expand support, particularly to household's incomes, remains. Moody's believe that political pressure will continue to be exerted on the government beyond this year's crisis, which could ultimately lead to increased spending aimed at easing social tensions and addressing concerns about inequality.

These pressures, in addition to the process of drafting a new constitution and presidential elections scheduled for November 2021 raises uncertainty about the ability of government authorities to offset new spending initiatives with revenue-enhancement ones. Moody's believes there is a risk that fiscal consolidation post-pandemic will be insufficient to stabilize the debt ratio in the 2022-24 period, and that stabilization, if achieved, could be at a much higher level than our current forecast of 39% of debt to GDP for 2021.

Changes in government policy priorities and fiscal stance resulting from a shift in the socio-political consensus could lead Moody's to reassess its favorable views on the country's institutions and governance strength, if it becomes evident that Chile's way of designing and approving fiscal policies has weakened.

RATIONALE FOR THE RATING AFFIRMATION AT A1

The affirmation of Chile's A1 rating reflects Moody's view that the sovereign's credit profile retains important credit features, including still high although somewhat pressured institutions and governance strength, which Moody's scores at "aa3," reflected in a track record of policymaking that reflects a commitment to fiscal prudence, governance and overall policy effectiveness scores that are in line with, or above those of, similarly rated peers. While institutions are being pressured and will undergo a significant test to demonstrate their ability to effectively deal with the multiple challenges ahead, Moody's does not have enough evidence at this time to conclude that they will fall short.

In addition, despite the expected deterioration and erosion of fiscal metrics, Moody's notes that Chile's debt to GDP ratio remains lower than the 'A' median. And although declining rapidly, financial buffers of around 12.9% of GDP as of March 2020 are allowing the government to manage the deterioration of its debt metrics and the impact on its debt affordability.

The A1 rating also considers contained external risks. Susceptibility to event risk at "baa", driven by external vulnerability risk, reflects significant growth in private external debt. At around 70% of GDP, the country's external exposure is mitigated by the fact that a significant amount of the debt is related to foreign direct investment and intercompany lending. Moody's assessment of the country's susceptibility to event risk is also informed by limited exposure to banking sector risk and its favorable assessment of government liquidity risk.

ENVIRONMENTAL, SOCIAL, GOVERNANCE CONSIDERATIONS

Chile is exposed to environmental risks because of its low-lying coastal areas, susceptibility to natural disasters, and large swathes of land prone to drought and desertification. This means that extreme weather events can affect Chile's credit metrics, such as leading to volatility in GDP growth. Chile's adaptation and mitigation efforts for climate shocks are important mitigating factors to this exposure. Efforts are concentrated in areas such as clean transportation, energy efficiency, renewable energy, land use and the climate-resilient management of water resources.

Social risks also affect Chile's credit profile. Managing rising social demands for more inclusive growth while simultaneously dealing with lower medium-term growth prospects remains a key credit challenge. Recent social unrest demonstrates the presence of underlying social discontent and the pressures that the government faces in designing public policies that will effectively address the demand for, among other things, higher quality and wider coverage of health and education services, more affordable transportation, housing, and higher pension payouts. Moody's regards the coronavirus outbreak as a social risk under its ESG framework, given the substantial implications for public health and safety. The health-related fiscal pressures emanating from dealing with the coronavirus pandemic will affect government finances.

Chile's sound framework of governance and record of prudent macroeconomic and fiscal policies are key factors underpinning the assessment of its institutional and governance strength.

GDP per capita (PPP basis, US$): 26,317 (2019 Actual) (also known as Per Capita Income)

Real GDP growth (% change): 1.1% (2019 Actual) (also known as GDP Growth)

Inflation Rate (CPI, % change Dec/Dec): 3% (2019 Actual)

Gen. Gov. Financial Balance/GDP: -2.8% (2019 Actual) (also known as Fiscal Balance)

Current Account Balance/GDP: -3.9% (2019 Actual) (also known as External Balance)

External debt/GDP: 70.2%

Economic resiliency: a2

Default history: No default events (on bonds or loans) have been recorded since 1983.

On 20 August 2020, a rating committee was called to discuss the rating of the Chile, Government of. The main points raised during the discussion were: The issuer's economic fundamentals, including its economic strength, have not materially changed. The issuer's institutions and governance strength, have not materially changed. The issuer's fiscal or financial strength, including its debt profile, has materially decreased. Other views raised included: The issuer's susceptibility to event risks has not materially changed.

FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS

The negative outlook indicates that an upgrade is unlikely in the near term. That said, factors that could lead to an upgrade include fiscal consolidation that proves effective in reversing the build-up in debt registered in the last five years. A sustained increase in Chile's medium-term growth prospects, supported by government policies that increase total factor productivity and promote economic diversification, could also exert positive pressure on the rating.

A continued increase in government debt metrics, beyond what we already expect in our baseline scenario, and with no indication of debt stabilization in the next two to three years, or with stabilization at much higher levels than our current forecasts, could result in a negative rating action. A shift in the sociopolitical consensus, driven by social pressures, changes in the constitution or other political dynamics, that shifts policy priorities and modifies the way Chile designs and approves fiscal policies, ultimately leading to a less effective policy setting, could also lead to a ratings downgrade. In addition, signs that Chile's GDP growth is materially deteriorating in the medium term and is difficult for the country to sustain rates near 3% could also lead to a rating downgrade. A period of 12 to 18 months may be needed to assess the credit consequences of the multiple factors exerting negative pressure on the credit rating.

The principal methodology used in these ratings was Sovereign Ratings Methodology published in November 2019 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1158631. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

The weighting of all rating factors is described in the methodology used in this credit rating action, if applicable.

REGULATORY DISCLOSURES

For further specification of Moody's key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. Moody's Rating Symbols and Definitions can be found at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.

For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

The ratings have been disclosed to the rated entity or its designated agent(s) and issued with no amendment resulting from that disclosure.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Moody's general principles for assessing environmental, social and governance (ESG) risks in our credit analysis can be found at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1133569.

At least one ESG consideration was material to the credit rating action(s) announced and described above.

The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the EU and is endorsed by Moody's Deutschland GmbH, An der Welle 5, Frankfurt am Main 60322, Germany, in accordance with Art.4 paragraph 3 of the Regulation (EC) No 1060/2009 on Credit Rating Agencies. Further information on the EU endorsement status and on the Moody's office that issued the credit rating is available on www.moodys.com.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

Ariane Ortiz-Bollin
Vice President - Senior Analyst
Sovereign Risk Group
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

Yves Lemay
MD-Sovereign/Sub Sovereign
Sovereign Risk Group
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454

Releasing Office:
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

No Related Data.
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