Moody’s outlines external, internal risks facing Chile

Last year Chilean economist and MIT professor Ricardo Caballero said Chile was a “tough bird,” referring to the country’s ability to withstand shocks.

The same general message was echoed on Wednesday during a conference hosted by Moody’s Investors Service in capital Santiago.

Delegates heard that, despite rising government debt, Chile is fiscally “very, very strong.”

Central government debt was 15.0% of GDP in 2014 and is forecast to register at 26.2% and 27.4% this year and next, respectively, before stabilizing.

Major external risks to growth blinking on the radar include a further deterioration of US-China relations, prolonged Brexit uncertainty and a weaker economy in China.

“The divergence of these countries’ [US and China] strategic, technological and political interests is such that an increase in commercial tensions is something that we cannot discard, and something that will always cloud global growth forecasts, at least for the next 2-3 years,” Moody’s assistant vice president-analyst Ariane Ortiz-Bollin (pictured) told the conference.

Internally, Chilean authorities face the issue of slower growth – expected to converge to around 3.0% - combined with increasing pressure for better public services.

GDP growth is forecast to come in at 3.6% this year and decelerate to 3.2% next.

A key indirect factor behind the forecast is the slowdown in China, which should keep copper prices from rising above US$3.00/lb. The Asian giant is expected to grow 6.0% this year and next, down from an estimated 6.6% in 2018.

Copper is Chile’s main export, accounting for roughly 10% of GDP but around 50% of exports. Chile is highly dependent on international trade, with China and US its two biggest trading partners, together absorbing around 41% of the Andean nation’s exports.

A major structural challenge for Chile is diversifying the economy - a long-standing issue for policymakers. 

Ortiz-Bollin said: “The price of copper and factors that impact the mining sector continue to be the principal factors that affect investment decisions, exchange rates and, at the end of the day, economic growth.

“Diversifying into other sectors is one of the structural challenges to strengthen Chile economically and, therefore, its credit profile.”

Other challenges are raising productivity – the pace of growth has slowed, largely due to deteriorating copper ore grades – and per capita income. Wages in Chile are low compared with that of its peers in its ‘A1’ rating group, among them China, Israel, Japan and Czech Republic.

Chile’s population is also aging, which may put pressure on government spending and impact the size of the labor force.

IMPACT OF REFORMS

Ortiz-Bollin said approval of the government’s tax, labor and pension reform bills – as they currently stand – would have a neutral impact on Chile’s credit rating.

Tax reform could dent public finances but also spur growth – but, from a ratings perspective, not to a significant degree, the conference was told.

Pension reform may have an impact of more than 1% of GDP on the deficit but the impact would be gradual, while labor reform – which amends working week rules – could be positive for the economy by swelling the size of the labor force

OUTLOOK FOR BANKS

Loan growth could accelerate to 12% in nominal terms this year from 8-9% in 2018, supported by favorable economic conditions, Moody’s financial institutions group VP Felipe Carvallo told BNamericas on the sidelines of the conference.

Chilean banks’ risk appetite has strengthened, illustrated by the likes of acquisitions in the card segment. On account of a favorable operating environment for banks, Moody’s does not expect the shift in focus will negatively impact their earnings through credit costs.

A moderate uptick in profitability is forecast, supported by factors such as reduced costs stemming from the likes of digital transformation plans and branch closures.