Fitch raises the alarm in Chile due to the economic impact of political uncertainty

Chile’s ongoing constitutional process to address social inequalities, coupled with slowing gross domestic product (GDP), is weighing on investment and economic prospects, Fitch Ratings said in a new report.

According to the risk rating agency, the rejection of a proposal for a new charter in the referendum on September 4 “dispelled some risks regarding a radical change in Chile’s economic model,” but did not put an end to the constitutional process, “extending political uncertainty and economic” at least until a new project emerges which, according to the schedule, would be presented at the end of October 2023 by a Constitutional Council.

DOUBTS

The report indicates that although Congress has agreed to a new constitution to protect property rights, “doubts still persist, for example, about the role of indigenous groups in approving mining projects, rights to water and environmental protection”.

Fitch warns that, in the meantime, Congress is focusing on tax and pension reforms, which may prove difficult to implement in a context of high spending pressures.

“These could increase if a new Constitution enumerates social rights such as housing and health”, highlighted the report.

“SHALLOW” RECESSION

The agency expects that the absence of liquidity measures related to the Covid-19 pandemic (fiscal, monetary and pension fund withdrawals) amid political uncertainty will cause a “shallow” recession in 2023 before growth slowly recover in 2024.

The economy faces risks from a weaker global economic outlook and tighter external financing conditions.

“This may complicate Chile’s ability to attract capital flows to finance a larger current account (CAD) deficit, increasing external vulnerabilities. We expect the DAC to decrease in 2023, but remain above pre-pandemic levels. Liquidity buffers have been eroded by the Central Bank’s US$25 billion foreign exchange intervention program, although an IMF flexible credit line of US$18.5 billion provides a cushion,” it said in a comment sent to its clients.

Fitch confirmed Chile’s rating at ‘A-‘/Stable on December 8, 2022.

According to the agency, the ratings could improve through the application of a credible fiscal consolidation plan or better growth prospects.

It notes, however, that they could come under pressure from higher fiscal deficits leading to increases in debt/GDP, a depletion of sovereign assets, or weaker external metrics.

With information from Bloomberg