Moody's Investors Service, (“Moody's”) has changed the outlook to negative from stable on the Government of Chile and affirmed the A1 long-term local and foreign currency issuer and senior unsecured ratings, and the (P)A1 foreign currency senior unsecured shelf ratings.
The negative outlook reflects increasing risks to Chile's fiscal strength. Even though the country entered the coronavirus crisis with fiscal buffers and low debt relative to A-rated peers, debt to GDP had been rapidly rising in recent years, a trend that is being accelerated by the pandemic shock. Moody's expects debt to almost double relative to GDP in a five-year period, reaching 39% in 2021.
Subpar medium-term growth prospects and rising social demands suggest that it will be difficult from a political economy perspective to prioritize fiscal consolidation against other competing policy priorities, which risks leading to a continued rise in debt ratios, beyond what we already expect in our baseline scenario, let alone debt reversal.
The coronavirus outbreak, deteriorating global economic outlook and financial market turmoil are creating a severe economic and financial shock. Moody's regards the coronavirus outbreak as a social risk under its ESG framework.
For Chile, the shock transmits mainly through weaker economic growth and increased demands for social programs that could translate into a larger spending base relative to government's revenue over time. Shifts in policy priorities due to social tensions may also erode policy effectiveness, a source of credit strength historically.
Chile's A1 rating is supported by the government's still relatively strong, albeit deteriorating, fiscal and debt metrics when compared to A-rated peers and the presence of important but narrowing fiscal buffers that help mitigate the impact of shocks.
The A1 rating also reflects solid, although pressured, institutions and a track record of policymaking that reflects a commitment to fiscal prudence, supports macroeconomic stability and contains the country's susceptibility to event risk.
Chile's local currency bond and deposit ceilings remain at Aa2. The foreign currency deposit ceiling at A1/P-1 and the foreign-currency bond ceiling at Aa2/P-1 also remain unchanged.