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.
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
RISK OF SUBPAR GROWTH AND PRESSURE TO INCREASE SOCIAL SPENDING INCREASES
UNCERTAINTY REGARDING THE COUNTRY'S ABILITY TO PRIORITIZE FISCAL
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
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
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
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
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
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.
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.
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At least one ESG consideration was material to the credit rating action(s)
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Vice President - Senior Analyst
Sovereign Risk Group
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
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Sovereign Risk Group
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Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653