Axesor affirms the rating of Chile at A- with stable outlook due to the prospects of economic recovery in 2021 and 2022

23th April of 2021

Axesor Rating anticipates a noteworthy increase in private consumption and exports, which will drive the Chilean economy to grow at a rate of 6.2% this year and 3.8% in 2022. These rates will place the country in the second position of the ranking of the region, trailing only Peru. It also highlights the moderate level of public debt, which will be around 33.6% in 2021, and the stability and strength of Chile’s institutions.

In its April Review, Axesor Rating confirms the credit rating of the Republic of Chile at A- with stable outlook.

The European rating agency estimates that the Chilean economy will grow at a rate of 6.2% this year 2021 and 3.8% in 2022. Figures that occur after the -5.8% year-on-year contraction due to the impact of COVID-19. This growth will be driven by the significant improvement in private consumption and will place the country in the second position of the ranking of the region, trailing only Peru. Even so, pre-crisis levels will not recover until 2023.

In fact, as noted in the report, these growth expectations are conditioned by compliance with the vaccination schedule and by the country’s high dependence on China and the United States as a result of its copper export activity.

In relation to the labor market, Axesor Rating forecasts a gradual recovery. Thus, after the increase of the unemployment rate by three points in 2020 (to 10.8), it is expected that the rate will fall to levels of 9% and 8.2% in 2021 and 2022, respectively. However, they point out the negative impact of the "high percentage of temporary jobs which increases the rate of employee turnover as well as the underinvestment in education resulting in lower productivity and lower structural growth".

Also, on the downside, it warns of high levels of private debt in Chile, above that of its peers.

Debt, fiscal balance, and liquidity

The European rating agency positively assesses the record of consistent fiscal policies that have minimized the impact of the crisis -caused by both the COVID-19 and the lower revenue due to the low price of copper- on Chile’s public accounts, with a fiscal deficit that reached 8% of GDP in 2020 (five percentage points above that of the previous year).

Looking ahead to the next two years, the economic recovery is expected to bring the public deficit under control again, with corrections of between three and five percentage points in 2021 and 2022. That is, up to -5% and -2.8%, respectively.

As in the previous rating report, Axesor Rating positively assesses the “moderate” levels of public debt, which is expected to close 2021 at 33.6% GDP, slightly more than one point above that of 2020 (32.5% GDP). However, Axesor Rating remarks that “the figure remains at significantly lower levels compared to other developed and emerging countries. This good position is strengthened considering the net debt to GDP which closed last year by 8.6% benefiting from the financial assets held by both the Economic and Social Stabilization Fund (FEES) and the Pension Reserve Fund (FRP) which serve as buffers in the event of unforeseen events".

At this point, it should be noted that according to the country risk index EMBI – which measures the differential between US Treasury bonds and dollar-denominated bonds of emerging countries – the price to be paid for Chilean emissions is low and is about half that of their Latin American and rest of the world counterparts. In this sense, despite the volatility experienced during March, "the current situation is one of stability, with easy access to markets and with similar costs to those prior to the health crisis," the report specifies.

Moreover, the European rating agency highlights Chile’s “excellent liquid positions,” around 23.9% of GDP at the end of 2020.

Monetary policy and financial system

In its rating, Axesor Rating considers the soundness of the Chilean banking sector, which is highly concentrated. However, the report warns of the reduction of the profitability compared to 2019 (16.5%).

Although non-performing loans stood at remarkably low levels of 1.8% at the end of 2020, Axesor Rating warns of the “foreseeable increase as a result of the economic downturn and its effect on enterprises in a country where the presence of small enterprises is significant".

With regard to inflation and the strength of the national currency, the floating exchange system established in 1999 and the inflation target of 2%-4% set by the Chilean Central Bank have contributed to the fact that the Chilean peso has the lowest average volatility in the main Latin American currencies.

Institutional framework and governmental situation

Finally, the rating positively considers the strength of the Chilean institutional framework, at the forefront of the region for many decades and with a high rating on the World Bank’s global governance indicators.

Nevertheless, the weakening of economic growth, high inequality, or cases of corruption make Chile face a demanding period with many challenges in a complex context, in which, in addition, legislative and institutional reform is being carried out that "we hope will strengthen the quality of its democracy without weakening the institutional strengths and consensus that have allowed the country to achieve good results over the last few decades”.