In its six-monthly review, Axesor confirms the rating of Chile at A- with a stable outlook and raises the growth forecast of the Chilean economy to 10.9% this year. The European rating agency highlights the fast recovery in private consumption fostered by the fiscal impulse provided by the Government of Chile. Looking towards 2022, economic growth is expected to normalize to 2.4%. In turn, the report points to the progressive decline in the unemployment rate, which, although closing by 9% in 2021, will recover pre-pandemic levels by the end of next year. The rating also values the moderate level of net public debt, which will stand at 19.8% on a net basis at the end of. However, it warns of the worsening of public deficit levels to -7.9% this year. In addition, Axesor Rating alerts about the excessive dependence of the evolution of both the price of copper and the economies of China and the United States, its main trading partners.
The European rating agency raises its estimate for the growth of the Chilean economy by 4.7 points compared to last April’s review. Thus, it will grow at a rate of 10.9% this fiscal year 2021. The improvement follows the rapid recovery in private consumption, which, compared with the same period in 2020, increased during the second quarter by 130% for durable goods and 20% for non-durable goods and services. Added to this is the satisfactory performance of the copper market, aided by the advances in the price of this commodity, which reached peaks of 4.76 USD last May.Concerning 2022, a normalization in the rate of GDP growth is expected, to 2.4%. However, Axesor Rating points out that the rating is limited by the warnings of the International Monetary Fund (IMF) in its last review, and both agree that in the medium term "the growth of the Chilean economy would be below its potential growth (around 3.2% and 3.7%) which would indicate the presence of some structural problems in the country." With regard to the labor market, the recovery forecast in the previous report is confirmed. 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 9% this year, recovering pre-pandemic levels (7.3%) in the next fiscal year 2022. However, they note both the "negative impact of a labor market that is structured based on temporary contracts, which reduces investment in training and could hamper economic growth in the future, affecting productivity and economic growth", and the increasing rate of dependency that "could jeopardize the stability of Chile’s public finances". On the negative side, and despite the strength of the foreign sector, the report warns of the Chilean economy's excessive dependence on its main trading partners, the United States and China, as well as a possible devaluation of the Chilean peso. All these factors "pose a risk to the evolution of the Chilean trade balance in the future."
Debt, fiscal balance and liquidity
The rating positively values the record of consistent fiscal policies that have minimized the impact of the crisis. Thus, despite the unprecedented increase in deficit and debt levels in 2020, motivated among other things by the introduction of fiscal incentives to maintain the income of Chileans, a stabilization of public finances in 2022 as a result of the withdrawal of these stimulus measures, is expected to be reinforced by increased consumption and levels of collection.
Although in 2020 there was an increase in operating expenditure of 17.9% which is estimated to be maintained throughout this fiscal year 2021, the accounts of the Chilean State show a cut in public expenditure of 22.5% 2022. Based on the above, Axesor Rating points out that, although the deficit will remain at 7.9% of GDP in 2021, fiscal consolidation will shift to 2022, when the deficit is estimated to be 1.6% of GDP.
It should be noted that the outcome of the presidential elections, as well as the ongoing conflicts in the Araucania region, could influence budgetary policy, especially in terms of spending cuts, affecting the stability of the fiscal balance.
On the other hand, Axesor Rating positively values the evolution of the Chilean public debt, which remains at "reduced levels". In addition, it has financial assets that reduce it on a net basis and its distribution presents favorable characteristics. However, "the projections of this variable do not reflect a future reduction but a gradual increase in the medium-term horizon, which would pose a future risk in our credit rating," the report states. In net terms, Chile's public debt is expected to stand at 19.8% and 20.7% of GDP for 2021 and 2022, respectively.
On the other hand, the European rating agency points out that although the volume of liquid assets has been reduced from 22.8% in 2020 to 14.4% in 2021, "it remains high, thus mitigating the effects of the business cycle on public accounts without having to resort to monetary policy measures.”
Monetary policy and financial system
In its rating, Axesor Rating values the resilience of the Chilean banking sector, which in August 2021 recovered almost pre-crisis positions with a ROA of 0.95%. In addition, it highlights the improvement in the ratio of assets at risk of default in the last two fiscal years. Specifically, it went from 2.1% in 2019 to 1.6% and 1.2% in 2020 and 2021, respectively. A fact that is "surprising given Chile's business structure, where MSMEs, which tend to be more likely to default, represent almost 97% of the business fabric".
Despite the above, the report notes that "Although Chile’s banking system has not shown any structural problems during the pandemic, some indicators show a different trend than in other global markets, a fact that, if prolonged, could constitute a future risk".
With regard to inflation, Chile is in line with the international scene, having soared during the second and third quarters to reach a rate of 4.78% last August. In this respect, the report sets out that the increase in prices is attributed to less volatile goods and services and the devaluation of the currency against the dollar, although it is related to mostly temporary factors, and Chilean inflation is expected to return to its target value of 3% year-on-year during 2023.
Concerning monetary policy, following the expansionary measures taken during the pandemic to provide greater liquidity to the economy, the Central Bank of Chile (BCCH) began the withdrawal of stimulus measures during the third quarter of 2021 intending to achieve a neutral monetary policy in 2022.
Institutional framework and governmental situation
Lastly, the rating positively considers the strength and quality of the institutional framework in the country of the Southern Cone of Latin America, at the forefront of the region for many decades and with a high rating on the World Bank’s global governance indicators.
However, Axesor Rating warns of the uncertainty generated both by the constituent process next November and by the new Chilean constitutional framework and its effects on the population. In this regard, in the absence of an agreement, the 2019 social protests could recur. Furthermore, in addition to the above is the conflict with the Mapuche in the Araucanía region, which forced the declaration of a "state of exception" on October 13. All of this could affect the credit rating awarded.
You can access the rating report through the following link to the Axesor Rating website: Executive Summary Sovereign Rating Republic of Chile