World Economy

Chile Faces Economic Downgrade

Chile Faces Economic DowngradeChile Faces Economic Downgrade

The economic situation in Chile is not showing any signs of improvement, despite the slight increase in demand for copper in the international market.

In 2Q17, the country’s economy expanded 0.9% compared with the same period last year, sparking new fears of a downgrade by international rating agencies, news outlets reported.

About a month ago, Standard & Poor’s downgraded Chile’s sovereign debt by one notch, from ‘AA-’ to ‘A+’, making borrowing far more expensive for the country. “It would not be a surprise if the other ratings agencies followed suit,” said the country’s Finance Minister Rodrigo Valdes in an interview with Reuters last week.

The South American country relies heavily on the copper industry, which accounts for 40% of its exports. Although there is a slight uptick in copper prices, mining firms are not seeing their stock prices rise. Antofagasta, a major Chilean copper producer, seems to be among the biggest losers in the stock market.

Moreover, mining workers in many parts of the country are striking, demanding higher salaries and better working conditions.

President Michelle Bachelet has so far managed to fend off her political rivals, but with general elections scheduled for November this year she is feeling the pinch.

Analysts say corruption scandals have sapped investor confidence and that the country’s debt is soaring, which was in fact one of the key reasons for S&P’s downgrade.

Conditions are not at all inspiring for the current government, with economists expecting the economy to grow around 1.5% this year, slightly lower than last year’s 1.6%.

Although Chile is relatively better positioned structurally than many of its Latin American peers, its reliance on copper exports is likely to keep its economy subdued until another boom in the commodity market.

Meanwhile, Moody’s Investors Service has Friday changed the outlooks to negative, from stable, of the senior unsecured debt and deposit ratings of four Chilean banks—Banco de Chile, Banco del Estado de Chile, Banco Santander-Chile, and Banco de Credito e Inversiones, reported.

In addition, Moody’s affirmed all of the corresponding ratings. These actions follow the change in outlook to negative, from stable, on Chile’s Aa3 government bond rating, on August 24.

At the same time, Moody’s changed to negative, from stable, the outlook of the Aa3 long-term foreign currency deposit rating of Banco Estado, New York Branch. The affected banks’ other ratings and assessments, as well as all the ratings and assessments of the other Chilean banks rated by Moody’s, were unaffected by this action.

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