What S&P sovereign analysts are focusing on in Chile
As winds of change whip through Chile, rating agency S&P is monitoring developments on three fronts: economic growth, public finances and the constitution.
The government – to help ease social tensions – is working on reforms in various areas including health and pensions, changes that involve increased spending over the long term.
And in April, Chileans will be asked whether they want a new constitution and, if so, who should draft it.
Chile has the highest credit rating in Latin America, of ‘A+/AA-’ with a stable outlook.
S&P sovereign ratings managing director Joydeep Mukherji said: “The rating has been sustained by certain structural features which are still there, which haven’t gone away because of the protests.”
One area of focus is long-term growth, which traditionally has been heavily influenced by the price of key export copper. On account of factors such as the US-China trade spat, copper prices have weakened, but not collapsed. Copper markets have also been shaken by fears over coronavirus. Prices rose 1.5% this week, however.
Domestic demand, meanwhile, has been impacted by the protests and private investment is forecast by some to drop around 4% this year amid uncertainty, partly linked to demands for a new constitution.
“The theme, for us, is to what extent is this a very long-term issue or to what extent can growth recover towards the levels that we had seen prior to the protests. And that’s partly a political question in terms of managing expectations and creating confidence in the country,” Mukherji told an S&P webcast on emerging markets sovereign ratings.
After two months of deep contractions stemming from the social unrest that erupted in October, the economy expanded 1.1% in the last month of 2019, according to preliminary information from the central bank. Most market observers were expecting a negative reading or zero growth. Annual growth is forecast to come in at around 1% in 2020, in line with estimates for 2019. The economy grew 4% in 2018.
Another area S&P is monitoring is government finances. Chile’s structural deficit is expected to widen to 3.2% this year from 1.5% in 2019. Authorities forecast the deficit will be running at 1% in 2024 while the overall debt-GDP ratio, currently low, is expected to increase.
A tax reform bill designed to raise an additional US$2.2bn in annual revenue was recently approved by congress.
Mukherji said: “The government obviously will have to spend more money on various social programs, education, health and other things, as a result of these protests. The question is how do you pay for it.
“In the past, when Chile has increased spending, especially on education a couple of years ago, they did it very prudently.
“It doesn’t matter for our rating whether spending on social services goes up by a certain percentage or not, that’s a sovereign decision. For us, it is more important to see how that is funded, does it lead to a steady rise in debt or is it funded through revenues such that the debt is stable or not rising very much.”
The third issue is the constitution – one area of uncertainty that could hang over the country for the next few years, with some concerned it may lead to changes in future investment conditions. Those calling for change argue the constitution is illegitimate - because it was drawn up during the dictatorship - and that it contributes to income inequality and a weak social safety net.
The government will ask Chileans whether they want a new constitution. If they do, the country should have a new one in place by the end of 2021.
“This process we will be watching very carefully, because, again, if it is done in a very institutional, responsible manner I think it will sustain domestic confidence and not do any damage – at least in the short-term – to economic growth," said Mukherji.
“If it is done in a different way, it could have some impact and certainly over the long term,” he added.
Central bank chief Mario Marcel said in December that uncertainty was hard to measure and that constitutional reform was not new.
“If we look at the constitutional experience in other countries in the world in the past 25-30 years, we haven’t found many cases that generated significant economic problems on account of the fact there is a constitutional discussion,” Marcel said.
“It’s interesting to look at this experience, from Colombia in ’91 to the various European countries that have approved new constitutions recently. Let’s look at the practical experience, so we don’t remain with just speculation about what a constitutional debate means."
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