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Fitch revises Chile's outlook to negative on deteriorating fiscal position

Fitch Ratings on Dec. 13 revised the outlook of Chile to negative from stable, as continued weak growth contributes to a growing deterioration in the country's balance sheet.

Fitch expects Chile's economic growth to slow down to 1.6% in 2016 from 2.3% in 2015, citing a fall in mining output as well as in nonmining activities due to low investment confidence and weak regional trading. However, the rating agency sees growth rebounding slightly to 1.9% in 2017, as better external conditions and improved confidence offset a subdued investment pipeline.

Due to the weakened economy, the country's fiscal position has deteriorated gradually, Fitch said, noting that the central government deficit could reach 3% of GDP in 2016 and 3.3% in 2017, compared to 2.2% in 2015. The deterioration is attributed to a near-zero projection for copper royalties and taxes, which could even turn negative for private miners due to loss carry-back provisions in the tax code, Fitch noted.

Still, Fitch affirmed the country's long-term foreign and local currency issuer default ratings at A+ and AA-, respectively. It also maintained the short-term foreign and local currency issuer default ratings at F1+ and the country ceiling at AA+.

The ratings reflect Chile's credible macro policy framework which has kept the sovereign balance sheet relatively strong despite the ongoing deterioration, as well as favorable governance standards that support the stability of the policy framework. These strengths counter the country's relatively low per-capita GDP and high commodity dependence.

"A robust and flexible policy framework has helped avoid macroeconomic imbalances amid the economic slowdown," Fitch said, citing the country's lower inflation and stable external position as well as banks' maintained solid asset quality and capitalization.

However, Fitch noted that while "the policy response has helped buffer the economy and preserve credibility ... it has not prevented a substantial rise in the public debt burden from the low levels that underpinned the upgrade to 'A+' in 2011."