Chile: Risk Assessment
Country Risk Rating
|A3||Changes in generally good but somewhat volatile political and economic environment can affect corporate payment behavior. A basically secure business environment can nonetheless give rise to occasional difficulties for companies. Corporate default probability is quite acceptable on average.|
Business Climate Rating
|A2||The business environment is good. When available, corporate financial information is reliable. Debt collection is reasonably efficient. Institutions generally perform efficiently. Intercompany transactions usually run smoothly in the relatively stable environment rated A2.|
Its dependence on the production and price of copper continues to hold back Chilean growth
Chilean economic activity in 2015 improved slightly thanks to a major budgetary stimulus. The boost to public spending helped offset the decline in investment linked with the fall in copper prices. In 2016, growth should hold steady under the impetus of foreign trade, excluding mineral exports which are continuing to feel the impact of falling commodity prices, mainly copper (the sector represents almost 19% of GDP). Agriculture and manufacturing exports should feel the benefits of increased price competitiveness thanks to the depreciation of the Chilean peso. There will also be a positive impact on these from the growth in demand in the United States (12% of exports). The non-mining sector should also benefit from a restoration of profitability thanks to lower energy costs following the fall in oil and gas prices.
Domestic demand, however, is likely to remain relatively flat. With uncertainties on how copper prices will move continuing to discourage investors, the depreciation of the local currency will also hit any recovery in investments as it makes imported capital goods more expensive. Household consumption should remain restricted as a result of the increased average level of debt (almost 60% of disposable income in 2014). Inflation is likely to ease slightly in 2016 in a context of muted demand and the limited knock-on of the earlier depreciation of the peso against the dollar. Finally, monetary policy should remain relaxed in order to support economic activity, but some tightening cannot be ruled out in the event of the raising of interest rate by the FED during the year.
Towards a more cautious management of public accounts whilst the external accounts remain dependent on demand and prices for copper
In 2015, the sharp rise in the public accounts deficit was triggered by increased public spending, most notably in the social sphere (healthcare and education) aimed at alleviating the slowing in economic activity. Despite this, consolidated public debt remains relatively low (at around 38% of GDP). The scale of foreign asset holdings has increased the government’s ability to meet its commitments. In 2016, the government is likely to implement a more restrained management of spending because of the continuing weak budget revenues (20% of GDP, with half coming from VAT), which will help reduce the public deficit. In terms of its external accounts, Chile is the world’s leading producer of copper (one third of world production) and the sector accounts for 13% of GDP, gold 19%, together with other minerals, in particular iron ore. Investments are therefore to a considerable extent dependent on the mining sector. Minerals represent 57% of exports of goods, and copper on its own accounts for 52%. China takes almost 50% of its copper output. The balance of trade is therefore extremely dependent on the demand for and price of copper. In 2016, there will probably be a worsening in the current account because of lower demand in Asia, and China in particular, whilst there is only likely to modest growth in imports given the negative impact of the depreciation of the peso and the resulting rise in the cost of imported products. The balance of services, running a structural deficit, and that of revenues should remain in the red as foreign investors, most notably in the mining sector, take their dividends which are largely in excess of Chilean investments in other countries. FDI, which tends to be largely concentrated on the mining sector, are likely to decline given the continuing trend for low mineral prices.
An economic context less propitious for reforms
Michelle Bachelet, previously President from 2006 to 2010, was re-elected at the end of 2013 for four years with 62% of the vote, but with a turnout of only 42%, as voting was made optional. Her election gave rise to high hopes even if the less favorable economic context could lead to her moderating her ambitions. The President will have to overcome several challenges. Firstly, impatience within the population relating to education and the reduction in inequalities, as well as compliance with tougher environmental regulations, in particular, under pressure from indigenous peoples (5% of the total) living near the proposed mining and hydroelectric projects. There is then the need to drive forward the construction of the road and energy infrastructures needed for the development of the mining industry, and managing the discontent within the business community at the higher duties and taxes needed to carry out these reforms. The business climate remains stable and favorable. Despite the corruption scandals involving members of the President’s close family, Chile continues to be a model of transparency in Latin America.