Fitch Notes Chile Inflation Threat

Fitch has affirmed Chile's ratings at A (positive) based on a healthy financial system, solid macroeconomic policy framework and low debt. However, inflation is a problem. “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,” says Fitch associate director Casey Reckman. The agency notes 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 3.0%. “Significant energy sector bottlenecks added to pressure on prices and could shave as much as 1% from GDP growth before supply conditions ease,” says Fitch. Government debt ratios improved to 4.1% of GDP in 2007 versus the A median of 29.5%, it adds. “The country’s strict adherence to fiscal discipline – despite very low public debt levels and low financing real interest rates – is commendable,” Goldman Sachs says in a comment on the rating action. The Chilean government continues to save a substantial part of its copper windfall, Goldman notes, in sharp contrast to countries like Ecuador and Venezuela.