Chile’s risk score is higher than its ratings suggest

The rating agencies seem overzealous downgrading Chile, as commodity prices have rebounded from their lows and its financing problems are a temporary blip.

  • By Jeremy Weltman
  • 14 Aug 2017
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The decision by Standard & Poor’s to downgrade Chile’s sovereign credit rating in July from AA- to A+ was unsurprising, perhaps, not least because Fitch downgraded its A+ rating from stable to negative in December.

The commodity price shock and weakened growth rate have produced rising unemployment, widening the fiscal deficit to cause debt accumulation and increasing the risk of investing.

There is political risk due to the presidential elections in November, and the finance ministry’s GDP growth forecast for 2017 is downgraded to 1.5%.

However, although the rationale for a lower credit rating seems clear-cut, Chile’s present travails must be analysed in context.

Its country risk score has declined in Euromoney’s survey, but relatively modestly, by a solitary point overall, and remains more than six points better off since 2010.

On 74.6 points out of a possible 100, Chile is a high-ranking tier-two sovereign commensurate with an AA or AA- rating, on a par with the US and Belgium, which are both rated higher:

Chile_ECR_2017

Only one of Chile’s political indicators – institutional risk – has been downgraded this year, and only one economic indicator concerning the unemployment/employment situation.

More risk indicators are marked down on a year-on-year comparison, but the stabilizing situation in recent months factors in the revival in copper prices, which have come off their lows as demand from China outpaces supply.

Inflation is lower too, enabling the central bank to lower the cost of borrowing, which should soon see business and consumer confidence revive.

Balancing these various risk factors means Chile’s position in the global risk rankings is stable at 16th out of 186 sovereign borrowers.

Yet its S&P rating is worse than many countries that are lower in the rankings. They include Belgium, Taiwan, Macau, South Korea, the UK, France and Qatar.

Indeed, it is not until the Czech Republic is reached, ranking 24th, eight places below Chile, on a score of 69.4, there is another country with a similar A+ rating from S&P.

BBVA’s latest economic outlook notes the present risks affecting the economy, but also foresees GDP growth improving in 2018 with private consumption and investment growing at their fastest pace in five years.

The fiscal situation will require a determined effort to correct, but note the monthly index of economic activity improved in June.

Longer-term prospects are moreover underpinned by $65 billion-worth of inward foreign direct investments expected over the next 10 years, which is around one-third more than previously.

The lion’s share is going into copper mining, with demand expected to rise in Latin America as investments in renewable energy production and technology take off. Plus, there is increasing demand to exploit lithium resources for use in electric car batteries.

Chile is in difficulty for sure, but the economy is not in a deep recession. It still has the highest GDP per capita of any country in the region, as well as low corruption – scoring way more than Brazil or Mexico on that factor. It has also put away surplus commodity wealth in a fund to repay debt.

The case for Chile is still secure.

This article was originally published by ECR. To find out more, register for a free trial at Euromoney Country Risk.

  • By Jeremy Weltman
  • 14 Aug 2017

All International Bonds

Rank Lead Manager Amount $m No of issues Share %
  • Last updated
  • Today
1 Citi 317,691.74 1201 8.90%
2 JPMorgan 291,227.96 1326 8.16%
3 Bank of America Merrill Lynch 285,088.11 991 7.99%
4 Goldman Sachs 217,749.25 714 6.10%
5 Barclays 209,291.80 811 5.87%

Bookrunners of All Syndicated Loans EMEA

Rank Lead Manager Amount $m No of issues Share %
  • Last updated
  • Today
1 HSBC 32,320.82 147 6.67%
2 Deutsche Bank 32,259.50 104 6.66%
3 Bank of America Merrill Lynch 28,890.43 85 5.96%
4 BNP Paribas 25,663.29 144 5.30%
5 Credit Agricole CIB 22,617.86 130 4.67%

Bookrunners of all EMEA ECM Issuance

Rank Lead Manager Amount $m No of issues Share %
  • Last updated
  • Today
1 JPMorgan 18,160.85 71 9.15%
2 Morgan Stanley 15,215.44 76 7.67%
3 UBS 14,195.29 55 7.15%
4 Citi 14,014.57 86 7.06%
5 Goldman Sachs 12,113.98 67 6.10%