ECR: Why experts are right to rate Chile ahead of Spain & Italy


Andrew Mortimer
Published on:

By rating Chile higher than many struggling European sovereigns, ECR economists are sending a strong message to governments and rating agencies alike that creditworthiness must be earned rather than inherited.

Something remarkable is happening in Chile. The country’s profile reads like one of the Nordic states: yearly current account surpluses, a booming commodities sector, a $20 billion sovereign wealth fund, a funded private pension fund and virtually no government debt. Considering this picture, it's no surprise that Chile is still regarded as the most highly rated Latin American sovereign by ECR economists, and has been able to borrow at a fraction of the cost of many other emerging markets for years. The world's largest exporter of copper, with over one-third of global supply, Chile is the only Latin American country to make the second tier of ECR's risk rankings, and its score of 74.4 is comparable with the OECD countries. In fact, excluding Belgium and Cyprus, each of the countries ahead of Chile in the rankings is triple-A rated. Far-sighted reforms But Chile's story is not simply about natural resources. On the policy side, an emphasis on counter-cyclical fiscal measures and market-led reforms over the past decade
have strengthened Chile's economy and deepened its domestic capital markets. As a result, Chile has recovered strongly from last year's earthquake and is growing at almost 10% a year. "Chile's economy has proved its resilience in the face of external shocks," says Bret Rosen, an analyst at Standard Chartered. And Chile's star continues to ascend: the country has risen four places since June, to 21st in the overall table. Robust domestic demand and high copper prices have propelled growth, leading the government to increase its full-year growth estimateto 6.6% from 6.1% earlier this month. Yet Chile is still rated only A+ by S&P and Fitch. Its AA3 foreign-currency rating from Moody's is lower than Italy’s and Spain’s, both of which are ranked lower than Chile in the ECR table, and is equal with the Cayman Islands, an offshore financial centre. Can Chile make triple A? Although Chile is still far below western European countries on the development curve (almost twice Chile's at purchasing power parity), the question still arises: what more must Chile achieve before it receives a triple A rating? Take this last example: in June, while police in Athenian were dispersing anti-austerity protesters with tear gas, thousands of Chileans took to the streets of Santiago to demand more state support for higher education. Spurred by negative opinion polls, President Sebastian Pinera acquiesced, announcing the creation of a $4 billion dollar fund for education, financed from Chile's existing stability fund. The lack of reaction by the markets was telling. "Other Latin American leaders respond to negative opinion polls by boosting short-term spending," says Arthur Budaghyan, an economist at BCA Research. "Pinera has responded by making a long-term investment in education."