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S&P lowers Chile's outlook to negative

S&P Global Ratings on Jan. 26 revised its outlook on Chile to negative from stable, stating that prolonged low economic growth could mean larger fiscal deficits than previously projected.

The rating agency also affirmed Chile's foreign currency sovereign ratings of AA-/A-1+ and local currency sovereign ratings of AA/A-1+.

A subdued external environment and low confidence in domestic business weighed on the South American country's exports, investment and economic performance, resulting in low GDP growth and rising government debt in recent years, S&P said in a report.

The rating agency noted that there was an at least one-in-three chance of a downgrade in 2017 or 2018 for Chile, because of weakening of its fiscal or external profile.

"A downgrade could ensue if, contrary to our expectations, the government fails to contain fiscal deficits, resulting in higher annual increase in general government debt that we currently forecast over the next three years," S&P said. "Also, potential negative external shocks, or fiscal slippage, could lead to larger-than-expected CAD, causing Chile's external liquidity ratios to deteriorate."

Chile's GDP growth was only 1.8% in 2016, according to S&P's estimates, down from 2.3% in 2015. Low prices in copper are thought to have slowed the economy, with several companies cutting production. The rating agency expects economic growth to pick up to only 2.2% in 2017 but said it was likely to accelerate to around 3% after 2018.

The slight increase forecast is based on consumption and recovering copper prices, S&P said, but warned that economic growth could remain low because of weak external demand and low confidence and lack of investment in the private sector.

"That, in turn, could result in shortfalls in fiscal revenues that contribute to continued increases in government debt beyond our current expectations," the rating agency said.

S&P also said that Chile's fiscal policy had resulted in an increased fiscal deficit, to an estimated 2.9% in 2016. "We project that the government's fiscal deficit is likely to be around 3% of GDP in 2017 and gradually fall to 2% in 2019," S&P added.

S&P said it would revise the ratings outlook to stable if the government "is able to pursue its gradual fiscal consolidation plan while enhancing business confidence to encourage investment and accelerate economic growth."

S&P Global Ratings and S&P Global Market Intelligence are owned by S&P Global Inc.

Helgi Gudmundsson and Shane Romig contributed to this report.