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“The economic recession, combined with the impact of internal public protests last year, has worsened Chile’s GDP growth trajectory,” S&P Global Ratings noted in the report, where it decided to change the perspective of the national rating, from ” stable ”to“ negative ”, specifying that in at least one of every three scenarios that are visualized at 24 months, the country would suffer a cut in its grade.
Although the US agency values that “Chile’s floating exchange rate, fiscal and monetary flexibility, and institutional strengths should cushion the negative economic and social impact of the pandemic and the global recession,” it considers that this would not be sufficient to sustain in the medium term, the current sovereign debt ratings “A + / A-1” in foreign currency and “AA- / A-1 +” in local currency.
This is the first change in the country’s perspective that S&P has made since July 2017, when it first lowered the sovereign rating to the current one, with a stable outlook. Six months before making that decision, the outlook had dropped from stable to negative.
“The negative outlook reflects the risk of a prolonged period of low economic growth, after the recession in 2020, which could erode the government’s fiscal profile and lead to a reduction,” details the report led by Manuel Orozco, the analyst who gives monitoring of the sovereign classification of Chile.
In an analysis with a balanced tone, in which it anticipates a GDP contraction of 3.9% in 2020 and an expansion of 4.6% in 2021, S&P also delves into the consequences of the political process that the country is experiencing, the result of social outburst.
“We hope that the basic pillars of Chile’s current policies, such as political checks and balances, a transparent and cautious framework for fiscal and monetary policy, and an autonomous Central Bank, will persist after the change in the constitution,” they indicate in the report. However, they add that “the uncertainty created by this process could affect Chile’s medium and long-term economic growth prospects, as well as the government’s ability to contain potential fiscal erosion.”
In relation to the ongoing challenges due to the pandemic, Orozco told PULSO that “Chile’s response has been very important and is the consequence of well-managed wealth, which allowed maintaining levels of sovereign savings, pension funds, funds unemployment and in a lot of places, allowing them this magnitude of countercyclical policy. ”
However, it is that capacity that is in doubt for the future. “If what happens in the world ends up causing low growth, in a context of social demands in the areas of education, pensions, health, etc., that generate higher levels of spending, Chile is unable to recover the fiscal space it is using today for a countercyclical policy ”, stressed the expert.
The Ministry of Finance maintained that this situation “reaffirms the importance of recovering economic growth, while reiterating its commitment to fiscal responsibility, the gradual reduction of the structural fiscal deficit, and the maintenance of a sustainable situation for public finances” .
The above, considering that it is the second agency that makes this determination. Without having on the table a very clear ponorama regarding the impact of the coronavirus in Chile and the rest of the West, on March 12 Fitch made the same changes in its prospects for the country, so that Moody’s is the only one that maintains its projection in “stable”.
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