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Chile
Summary
Moody’s Aa3 / S&P AA- / Fitch A+1
Economy: Agriculture 4%, Industry 33%, Services 63%
Chile’s institutions and economic policies are among the best in emerging markets. Sound economic
policies have helped Chile smooth its economic cycle despite a heavy dependence on copper. The
country’s solid fundamentals are reflected in its credit rating, which is the highest in Latin America
and among the highest in emerging markets. Chile’s policies are key factors behind the solid and stable
economic growth. Fiscal discipline has helped Chile accumulate savings of close to 20% of GDP.2
The government’s main challenge going forward will be to address the increased social demands of
a growing middle class. President Michelle Bachelet is attempting to tackle these social problems,
but progress has been slow. A series of corruption charges have affected her popularity, making it
more challenging to advance her reform agenda. Chile is scheduled to hold a presidential election in
November 2016 and two important contenders are former President Lagos (2000–2006) from the
middle left-wing party and former President Pinera (2010–2015) from the middle right-wing party.
Economic Indicators
2012
Population (Millions)
GDP per Capita (USD)
Nominal GDP (USD Billions)
2013
2014
2015
2016F
2017F
17.4
17.6
17.8
18.0
18.2
18.4
15,302
15,714
14,509
13,471
13,255
13,060
266.3
277.1
258.5
242.6
241.2
240.1
Real GDP (%)
5.5
4.2
1.8
2.1
1.7
2.0
Year-End CPI (%)
1.5
3.0
4.6
3.9
3.9
3.0
Fiscal Balance (% of GDP)
0.6
-0.6
-1.6
-2.2
-2.9
-2.9
Interest (% of Revenues)
2.7
2.8
3.0
3.1
2.9
2.9
FC Debt/Public Debt (%)
16.1
12.9
12.5
12.5
12.6
12.6
Government Debt (% of GDP)
12.0
12.8
15.1
17.5
20.5
23.5
Government Debt (% of Revenue)
54.1
61.1
73.0
82.5
99.5
113.0
Current Account (% of GDP)
-3.5
-0.9
-0.4
-0.9
-2.0
-2.1
FDI (% of GDP)
3.0
3.2
3.6
1.9
2.6
2.6
External Debt (% of GDP)
45.3
48.6
57.9
64.2
67.0
68.7
Foreign Reserves/External Debt (%)
34.6
30.5
27.0
24.8
24.6
25.9
Foreign Reserves (Mo. of imports)
5.5
5.4
5.8
6.4
7.3
7.2
15.6
14.8
15.6
15.9
16.5
17.8
Foreign Reserves (% of GDP)
As of November 2016
Forecasted or estimated results do not represent a promise or guarantee of future results and are subject
to change.
Source: Source: IMF, Central Bank, Ministry of Finance, Haver, and Lazard
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Lazard Emerging Markets Debt
Rating History
Below is a history of the country’s foreign and local currency ratings by the major agencies
dating back to 2000. We have also included a chart of the country’s hard currency external
debt spread and the JP Morgan EMBI Global Diversified Index spread for comparison.
Rating History
Hard Currency
Local Currency
AA
AAA
AA-
AAA-
A+
AA+
A
AA
A-
AA-
BBB+
A+
BBB
2000
2008
Moody’s
2016
S&P
A
2000
2008
Moody’s
Fitch
2016
S&P
Fitch
As of December 2016
Performance represents past performance. Past performance is not a reliable indicator of future results.
Source: Fitch, Moody’s, Standard and Poor’s, Bloomberg
Bond Spreads
Local Yield
1000
10
800
8
600
6
400
4
200
2
0
2008
Chile
2010
2012
EMBIGD
2014
2016
0
2008
Chile
2010
2012
2014 2016
GBI-EM Global Div
As of December 2016
Performance represents past performance. Past performance is not a reliable indicator of future results.
Source: JP Morgan
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Chile
Strengths
Sound Institutions
Chile has some of the strongest institutions, not only in Latin America, but in emerging
markets as a whole. Strong institutions have helped attract private investment, supporting
stronger growth. The three institutional pillars of economic policy—the central bank, the
Ministry of Finance, and the Superintendency of Banks and Financial Institutions—operate
under very transparent rules that mitigate economic imbalances. The central bank operates
under an inflation-targeting mandate, which has allowed it to carry out countercyclical monetary policy measures. The Ministry of Finance operates under fiscal rules based on potential
economic growth and long-term copper prices, allowing for increased savings during times
of high copper prices and increased spending when economic conditions are challenging.
Finally, the Superintendency of Banks and Financial Institutions is among the most highly
regarded in the world. The policies of these three institutions are very easy to predict; thus,
negative policy surprises are rare. Additionally, Chile has a flexible exchange rate which
effectively serves as an adjustment valve to help avoid excessive external imbalances. Lastly,
contracts and the law are respected.
Government Balance Sheet
Chile’s fiscal position is very solid as it has successfully carried out countercyclical policies
without leading to a major deterioration of the government balance sheet. For example, the
government increased spending during difficult times, such as the global financial crisis and
the earthquake in 2010,3 and saved during times of high copper prices and high economic
growth. These measures have allowed the government to reduce economic volatility and accumulate significant savings, amounting to close to 20% of GDP in 2014, well above the public
debt stock.4 The government submitted a very tight budget in 2017 with expenditures growing only 2.7%, the smallest increase in the last 14 years. The 2017 budget targets a deficit
3.2% of GDP and a structural deficit of 1.5% of GDP, 0.25% lower than in 2016.
Stable Economic Growth
Chile’s economic growth is stable compared to other countries with similar income levels. In
the past decade, Chile has grown at an average rate of 3.4% per year, and growth has been
fairly stable with the exception of 2009.5 Sound monetary and fiscal policies have allowed
Chile to smooth the economic cycle despite a heavy dependence on copper. Growth decelerated from 2014–2016 due to the sharp drop in commodity prices, political uncertainty, and
reduced investment in the mining sector.
Policy Continuity
Chile’s sound macroeconomic policies have remained consistent over the past three decades
independent of the political party in power. All political parties have shown a commitment to
the country’s countercyclical policy measures.
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Lazard Emerging Markets Debt
Weaknesses
Corruption Scandals and Decline in Government Popularity
Chile is facing political and economic problems similar to several emerging markets countries. A series of corruption scandals (though small when compared to Brazil) and a lack of
progress in meeting social demands have negatively impacted the popularity of President
Bachelet.6, 7 In mid-2016, her approval rating fell to 19%,8 the lowest level since she took
power. Chile’s policy mix is unlikely to change, and this government will likely continue to
implement its campaign promises, including major education and further tax reform. The
government approved tax reform in early 2015 and labor reform in 2016 and is moving
forward with education and pension reforms but at a very slow pace. The recent corruption
scandals are negative in the short term but may lead to a strengthening of institutions in the
medium term. Despite these challenges, the government is likely to continue to implement
countercyclical economic policies.
Social Demands
In a sense, Chile is a victim of its own success. As the middle class has grown rapidly, so too
have their demands. A series of large protests demanding higher pensions took place in 2016.
President Bachelet has responded by introducing tax reform seeking to raise revenues by 3%
of GDP in order to fund a number of initiatives to tackle Chile’s income inequalities. Among
the initiatives are plans for free education in response to student protests seeking improved
educational services.9 While the government has increased their efforts to meet the populations growing demands, the results have disappointed thus far.
Monetary and Exchange-Rate Policy
Inflation Monetary Policy
The Central Bank of Chile (BCCh) is an autonomous entity with the mandate to preserve
the stability of the currency and maintain low and stable inflation over time. BCCh operates
under an inflation-targeting regime, with the target set at 3% (±1%).
Monetary policy implementation: BCCh is committed to clear the interbank market on a
daily basis in order to assure that the interbank overnight rate fluctuates within a 50 basispoint band around the policy rate (Tasa de politica monetaria or TPM). The clearing is done
through a deposit and a lending overnight facility that provides limited supply and absorption capacity on a daily basis. In addition, when the interbank rate is consistently near one of
the boundaries, the BCCh may use discretion to manage the system liquidity. For these, the
BCCh uses open-market operations via repos. Finally, if there is need to change the system
liquidity structurally, the BCCh can utilize central bank paper (such as PDBC—Treasury
bills—or BCP and BCU).
The 12-month headline inflation was above the upper bound of the BCCh’s tolerance range in
2014 and 2015. The inflation spike was broad, caused by a sharp Chilean peso (CLP) depreciation, higher food prices, and a fairly indexed economy. Lower and stable oil prices amid a
mild appreciation of the CLP over the past 12 months (3.3%) have driven headline and core
inflation back into the tolerance range (3.1% and 3.4% by September 2016). Service inflation
is slowly moving lower, while goods inflation printed at 2.1% in September. With inflation
expectations well anchored at 3% and a soft domestic absorption, inflation should be stable
around the target in 2017, with risks to undershooting the mid-point of the target.
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Chile
BCCh has kept its policy rate unchanged at 3.5% since December 2015. In real terms
(defined as the policy rate deflated by the 12-month CPI) the policy rate is 0.4%, in line with
the 10-year average. If our target for December 2017 CPI is on the mark, BCCh should stay
put throughout next year but with risks leaning toward some easing as the economy slows
driven by lower investment in the mining sector.
Exchange-Rate Policy and Outlook
The CLP is a free-floating nonconvertible exchange rate. The BCCh is averse to currency
intervention but retains the discretion to do so if needed. The last intervention took place in
January 2011 when the central bank introduced a rule-based purchase plan (US$50 million
daily) aimed at building reserves.
The deterioration of Chile’s current account has shown some signals of stabilization. The
12-month current account deficit through July 2016 was 2.2% of GDP, in line with the average deficit since Chinese growth began slowing (for reference, the 10-year average is a surplus
of 0.1% of GDP). Goods trade surplus is 1% lower than the average for that period, which
has been offset by a lower primary income deficit (remittances of profits and dividends).
Mining exports are down 5% of GDP versus the average of this period. On the import side,
lower investments have brought down the intermediate and capital goods import bill.
Given the presence of these automatic stabilizers—lower exports are somewhat offset by
lower remittances—the basic balance has narrowed but remained in surplus. The 12-month
basic balance, defined as Foreign Direct Investment (FDI) minus the current account,
through June 2016 is down to 1% of GDP from 3% for the 10-year period between June
2005 and June 2015. The sole driver behind the compression was the shift in the current
account from balance into a deficit. FDI has remained stable around US$7 billion. Chilean
foreign reserves stand at US$40 billion as of September 2016.
China represents 28% of Chilean trade; the US 17%; the EU 16%; and Japan 4%.
Following the global financial crisis of 2008, USD/CLP reached a high at 731 in January
2016. Over the past 12 months it has traded in a wide 643–731 range. The CLP real effective
exchange rate (REER) is currently 3.3% cheap versus its 15-year average. Adjusted by volatility, that gap represents a -0.5 standard deviation from the average (chart). The CLP is likely
to continue to be highly correlated with copper prices.
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Lazard Emerging Markets Debt
Inflation
USD/CLP
6
800
5
700
4
3
600
2
500
1
0
2000
2008
Inflation
2016
Reference Rate
As of December 2016
Source: Bloomberg
REER
120
112
104
96
88
80
2000
2008
2016
REER
Median since Dec 2000
Median last 5 yrs
Median last 10 yrs
As of December 2016
Source: JP Morgan, Lazard
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400
2000
2008
2016
Chile
Country Background
Size
756,102 KM2 (38th)
Capital
Santiago
Population
17.7 Million
Ethnic Groups
White 89%, Mapuche 9.1%
Religion
Roman Catholic 67%, Evangelist 16%
Median Age
34 Years
Literacy Rate
97.5%
Independence
September 18, 1810
Political System
Republic
Presidents
Michelle Bachelet
Presidential Election
November 2017
Economy
Agriculture 3.9%, Industry 32.9%, Service 63.2%
Labor Force
Agriculture 13.2%, Industry 23%, Service 63.9%
Merchandise Exports
Copper, Fruit, Fish
Export Partners
China 23.4%, US 18.8%, Brazil 7.8%, Argentina 4%
Currency
Peso (CLP)
As of November 2016
Source: CIA
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Lazard Emerging Markets Debt
Country Timeline
Pinochet’s aftermath
1998
Gen Pinochet retires from the army and is made senator for life but is arrested in the UK at
the request of Spain on murder charges.
2000
March–British Home Secretary Jack Straw decides that Gen Pinochet is not fit to be extradited. Gen Pinochet returns to Chile. Socialist Ricardo Lagos is elected president.
2000
onwards–Chilean courts strip Gen Pinochet of his immunity from prosecution several times,
but attempts to make him stand trial for alleged human rights offences fail, with judges usually citing concerns over the general's health.
2002
July—Gen Pinochet resigns from his post as a lifelong senator.
2004
May—President Lagos signs a law giving Chileans the right to divorce, despite opposition
from the Roman Catholic Church. Manuel Contreras, former head of secret police, is jailed for
15 years over the disappearance and death of a journalist in 1974.
2005
May—45 young soldiers perish in a blizzard, prompting calls for an end to compulsory military
service.
2005
July—Senate approves changes to the Pinochet-era constitution, including one which
restores the president's right to dismiss military commanders.
2005
December—Presidential elections. Socialist Michelle Bachelet gains the most votes but fails
to win more than 50% support, forcing a second-round vote against conservative billionaire
and former senator Sebastian Pinera.
Bachelet
2006
January—Michelle Bachelet wins the second round of presidential elections to become
Chile's first woman president and the fourth consecutive head of state from the centre-left
Concertacion coalition. She takes office in March.
2006
August—Chile and China sign a free-trade deal, Beijing's first in South America.
2006
December–Pinochet dies.
2007
January—President Bachelet signs a decree allowing the morning-after contraceptive pill to
be given to girls as young as 14 without their parents' consent.
2007
March—Ongoing protests in the capital Santiago over chaos following the introduction of a
new transport system.
2007
June—Government agrees to pay compensation to the families of 12 victims of Pinochet.
Tensions with Peru
2008
January—Peru files a lawsuit at the International Court of Justice in a bid to settle a longstanding dispute over maritime territory with neighbouring Chile.
2008
May—Unexpected eruption of Chaiten volcano which has been dormant for 9,000 years.
Authorities order complete evacuation of two towns in Patagonian region.
2008
Septembe—Emergency declared in parts of southern Chile where eight people were killed in
torrential rain and widespread flooding.
2008
October—Local elections signal that the political right, long out of office in Chile, may be gaining ground ahead of next year's presidential poll.
2009
February—President Bachelet makes the first visit to Cuba by a Chilean leader in almost four
decades.
2009
October—Relations with Peru are strained further after Chile stages a military exercise in the
north, close to the disputed border.
2009
November—A new diplomatic row erupts after a Peruvian air force officer is accused of spying for the Chilean military.
2010
January—Right-wing candidate Sebastian Pinera defeats former President Eduardo Frei in
presidential election, ending 20 years of rule by the left-wing Concentracion coalition.
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Chile
Earthquake
2010
February—Hundreds die and widespread damage is caused as massive earthquake strikes
central Chile. The 8.8 magnitude quake is the biggest to hit the country in 50 years.
2010
March—President Pinera is inaugurated, and pledges to tackle the consequences of the
earthquake.
2010
October—33 miners trapped deep underground for 69 days are winched to safety, watched
by TV audiences around the world.
2010
December—President Pinera promises penal reform after a fire at an overcrowded Santiago
jail claims the lives of 81 prisoners.
2011
May—Trades unions organise demonstration in Valparaiso in protest at government's environmental, education and labour policies.
2011
July—Thousands of high school and university students take to the streets to demand a
more equal education system. Copper miners strike over government plans to restructure
the industry.
2012
January—Government sparks row by changing desigation of Gen Pinochet's government
from "dictatorship" to "regime" in school textbooks.
2012
April—Congress passes much-debated anti-discrimination law, which names discrimination
because of sexual orientation as an offence.
2012
December—A judge orders the arrest of eight former army officers over 1973 murder of wellknown left-wing singer Victor Jara, who was killed only days after the coup that brought Gen
Pinochet to power.
2013
April—Bolivia files a lawsuit against Chile at the International Court of Justice in The Hague to
reclaim access to the Pacific Ocean. Bolivia lost access to the coastline in a 19th century war
with Chile, leaving it landlocked ever since.
2013
May—Chile, Colombia, Mexico and Peru agree to scrap most of the tariffs on trade between
their countries, hailing the move as an historic step towards regional integration.
2013
Septembe—Body representing Chilean judges makes unprecedented apology for actions
of its members under military rule in the 1970s and 1980s, saying judges failed to protect
victims of state abuse.
2013
December—Left-wing candidate Michelle Bachelet wins second round of voting in presidential election
2014
September—A blast in a packed Santiago metro station injures 14 people, in what the government terms an act of terrorism.
2014
October—Tens of thousands of parents march in protest against plans to phase out subsidised schools as part of President Michelle Bachelet's flagship education reform.
2014
November—Two retired Chilean colonels are sentenced to jail for torturing the father of
President Michelle Bachelet in the months that followed the military coup led by General
Augusto Pinochet in 1973. A Chilean court orders the state to pay million of dollars of compensation to 30 former political prisoners who were held on a remote island in the extreme
south of the country during the military rule of Augusto Pinochet.
2015
February—President Bachelet announces plans to end Chile's total ban on abortions.
2016
October—President Bachelet announces the creation of two new marine reserves in the
South Pacific. One will be around Easter Island. Commercial fishing will be banned there.
Source: BBC
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Lazard Emerging Markets Debt
Notes
1 As of December 2016.
2 “Report on Public Debt Statistics,” Ministry of Finance, June 2013, http://www.hacienda.cl/english/publicdebt-office/statistics.html.
3 As of December 2013, Source: Lazard.
4 “Informe de Estadísticas de la Deuda Pública,” Direccion de Presupuetsos, 2015, accessed on December
21, 2015, http://www.dipres.gob.cl/594/w3-propertyvalue-15501.html.
5 “World Economic Outlook Database,” International Monetary Fund, accessed on December 8, 2013, http://
www.imf.org/external/pubs/ft/weo/2013/02/weodata/index.aspx.
6 “Democracy to the rescue?,” The Economist, March 14, 2015, accessed on December 21, 2015, http://
www.economist.com/news/americas/21646272-despite-epidemic-scandal-region-making-progress-againstplague-democracy.
7 “Chilean president appoints new cabinet,” BBC News, May 11, 2015, accessed on December 21, 2015,
http://www.bbc.com/news/world-latin-america-32695913.
8 “Respaldo a Bachelet cae a 22%, su nivel más bajo de popularidad,” ElEcnomistaAmerica.com, September
9, 2015, accessed on December 21, 2015, http://www.eleconomistaamerica.cl/politica-eAm-cl/noticias/6996680/09/15/Chile-Bachelet-cae-hasta-el-22-por-ciento-su-nivel-mas-bajo-de-popularidad.html.
9 “Progress and discontents” The Economist, April 14, 2012, accessed on December 12, 2013, http://
www.economist.com/node/21552566; “Chile students resume protests for free education,” BBC, May 8,
2013, accessed on December 12, 2013, http://www.bbc.co.uk/news/world-latin-america-22459229, and
Barrionuevo, Alexei, “With Kiss-Ins and Dances, Young Chileans Push for Reform,” New York Times, August
4, 2011. http://www.nytimes.com/2011/08/05/world/americas/05chile.html?_r=0, and “Chile police clash
with activists as thousands protest for free education,” Rueters May 9, 2014, http://rt.com/news/157880chile-student-protest-violence/.
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Important Information
Published on 1 March 2017.
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