Chile Sees Downgrade, Outlook Stable - Emerging Market Views

Chile Sees Downgrade, Outlook Stable

Moody’s Investor Service this month downgraded the Government of Chile’s issuer and senior unsecured debt ratings to A1 from Aa3.

The global ratings agency also shifted the country’s outlook stable from negative.The action taken by Moody’s “reflects the gradual but broad-based deterioration in Chile’s credit profile,” the agency said. “Despite clear indications of near-term improvements in economic and fiscal prospects, Moody’s does not  expect the sovereign will regain the credit strength it had in previous years.”

Main factors that prompted action on the sovereign include its debt levels and weakening fiscal position. Citing persistent deterioration over the past few years within the government balance sheet, weaker aspects also emerged.

“In [Moody’s] opinion, [Chile] is no longer sufficiently robust to compensate for weak aspects of its credit profile when compared to higher-rated Aa sovereigns,” the agency said.

It should be noted that debt metrics are likely to stabilize, but a reversal in the deterioration of fiscal and debt metrics is unlikely.

Adding to this, low-income levels and dependence on commodities coupled with external vulnerabilities have become more ‘salient” the agency said. High GDP growth used to partly compensate for some of these elements that constrain Chile’s credit profile. Moody’s expects medium-term growth near 3%, below the 3.7% annual rate expected in 2018, and significantly below the growth rates reported in the years before the commodity shock of 2014.

One positive–Chile has been bumped to “stable”. The outlook reflects Moody’s view that the Chilean government retains important credit strengths, including high scores on governance and policy effectiveness indicators.

Chile’s government fiscal strength remains “very high” with government debt ratios below those of several of its A-rated peers. Adding to this, sovereign financial assets give the authorities the ability to respond to shocks, even though the government lost its net creditor status.