Fitch Affirms Chile's IDR at 'A'; Outlook Remains Positive

Business Wire,  May 14, 2008  

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NEW YORK -- Fitch Ratings today affirmed Chile's long-term foreign and local currency sovereign Issuer Default Ratings (IDRs) at 'A' and 'A+', respectively. The short-term IDR is affirmed at 'F1' and the Country Ceiling is affirmed at 'AA'. The Rating Outlook is Positive.

Chile's low general government debt, sound macro policy framework supported by consensus, institutional integrity, and healthy financial system underpin its long-term foreign currency IDR of 'A'. Fitch revised the Outlook on Chile's ratings to Positive from Stable in May 2007 due to stronger public and external finances, in part underpinned by a favorable external environment. However, macroeconomic challenges have arisen on multiple fronts since then.

'Fitch will monitor the effectiveness of the monetary and fiscal policy response to the challenges currently facing Chile's macroeconomic framework,' said Casey Reckman, Associate Director in Fitch's Sovereign group. 'Specifically, Chile's creditworthiness could improve with evidence that the central bank can successfully execute plans to improve the country's international liquidity position, while simultaneously bringing inflation back under control.'

Domestic developments in the energy and agriculture sectors exacerbated external fuel and food price shocks in the second half of last year, propelling 2007 year-end inflation to 7.8%, well above the central bank's target level of 3%. Concurrently, real gross domestic product (GDP) growth began decelerating, due in part to slackening external demand. Significant energy sector bottlenecks added to pressure on prices and could shave as much as 1% from GDP growth before supply conditions ease towards the end of Fitch's forecast horizon.

Importantly, fiscal and external indicators have continued to strengthen since Fitch's last review. Chile's low general government debt ratios improved to 4.1% of GDP in 2007 versus the 'A' median of 29.5% and 14.1% of revenue versus the median of 104.1%, and are among the lowest in the category. Assets in the Economic and Social Stabilization Fund (FESS) should exceed US$21 billion at year-end, supporting the country's resilience in the face of external shocks. External solvency and liquidity ratios also compare favorably with peer medians, helping to counterbalance concerns regarding Chile's commodity dependence.

Evidence that inflation is reverting toward the target range of 2%-4% and that second round effects are of limited scope could support an upgrade. Over the medium- to long-term, structural reforms to improve labor market flexibility and human capital development are required to ensure that Chile remains competitive and sustains higher GDP growth, which would allow per capita income at market exchange rates to catch up with that of higher rated credits. Nonetheless, Chile's low per capita income of US$9,848 relative to the 'A' median of US$16,428 and high income inequality could constrain the sovereign's ratings to the 'A' category for some time.

Fitch's rating definitions and the terms of use of such ratings are available on the agency's public site, www.fitchratings.com. Published ratings, criteria and methodologies are available from this site, at all times. Fitch's code of conduct, confidentiality, conflicts of interest, affiliate firewall, compliance and other relevant policies and procedures are also available from the 'Code of Conduct' section of this site.

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