Bloomberg analysis: “Chile seeks to emerge from its crisis but is paying a very high price”
“It is at stake not only for social peace but also for the reputation of Chile’s fiscal prudence that has earned it the highest sovereign debt rating in Latin America,” the agency says.
Chile bets on its status as a model example in favor of the market as the government rules out plans to reduce debt in favor of at least $1.5 billion per year in additional social expenses to appease the protesters.
In the midst of violent demonstrations that reach a second month, officials are now planning a broader fiscal deficit target by 2020 that could rise further in the coming years, while the citizenship demands more generous pensions and salaries, as well as a new Constitution. Such a measure could drive further increases in debt which have already increased to 26% of the GDP compared to 5.2% in 2008.
At stake is not only social peace but also the reputation of Chile’s fiscal prudence that has earned it an excellent debt rating in the past. The highest sovereign ranking in Latin America, on a par with China and Israel.
Even though the government has some scope to increase spending in order to to avoid further riots, President Sebastián Piñera has tried to resist the pressure to implement populist solutions and affirmed journalists last week who will not fall “into the temptation of demagoguery and populism” and that will ensure that the economy has “foundations solids.”
However, the government has had few options besides an increase in public spending. In one of his first post-announcement as finance minister last month, Ignacio Briones increased this year’s fiscal deficit target to 2.9% of domestic gross output gross, compared to the previous 2%.
Just on Tuesday, officials said they will present an economic reconstruction plan to address the destruction caused after weeks of looting and riots.
“What the government has announced as new spending is just the point of departure,” said Felipe Alarcón, an economist at the services firm Euro-American financial services. “We don’t have one last word yet about how much the measures will cost.”
Some economists point to Chile’s savings reserves as evidence that it can weather the storm. Its two sovereign wealth funds Economic and Social Stabilization Fund (FEES) and the Reserve Facilities (FRP), have more than US$20 billion in government has said it plans to use $2.4 billion from the world FEES to finance social spending.
There is also evidence that taxes have scope for Climb. Chile raised 20% of the GDP in tax revenue in 2017 compared to an average of 34% for the countries of the Organization for Economic Cooperation and Development, OECD. Only Mexico raises less, 16%. France is the country with the most revenue, with 46%.
“Any increase in spending will have to be compensated,” he said Sebastián Díaz, an economist at Pacifico Research. “That implies more taxes.”
Credit rating companies are not concerned, For now. For Fitch Ratings Inc., the government has been pragmatic in their announcement of new taxes and the use of sovereign wealth funds.
“We expect the debt of the Chilean government to gradually increase from the current levels, but remain far below ‘48%’ GDP,” said Richard Francis, Director of Fitch’s sovereign ratings.
Meanwhile, last year’s decision by Moody’s Investors Service Chile’s rating was based, in part, on the pressure expenses. “One of our arguments was that the lawsuits higher-spending social services and public services would put pressure on finances would make it difficult for the government to implement fiscal consolidation as they had announced,” said analyst Ariane Ortiz-Bollin.
Neither Fitch nor Moody’s specified a fiscal deficit figure that could lead to further rebates, arguing that changes in grades take into account a number of factors. For example, China has the same credit rating as Chile, but it’s between debt and GDP is 37%, compared to 61% in Israel said Moody’s Ortiz-Bollin.
As long as the protests continue and Piñera faces an opposition emboldened policy, higher spending could be the only solution, said Alejandro Fernández, an economist at Gemines Consultores. He said that Chile has room to expand its fiscal deficit to 3.5% of GDP, as long as a plan is drawn up to re-align that number to medium and long term.
“People can get the idea that Chile is losing its fiscal responsibilities and becoming the next Argentina,” he said. “But I think that’s the only way to avoid a collapse.”