Last updated: 15:57 / Monday, 20 July 2015
Economy Continues to Recover

Moody's: Chile's Resilient Economy Will Weather Slowdown in Investment and Consumption

Moody's: Chile's Resilient Economy Will Weather Slowdown in Investment and Consumption

Despite the Chile's strong credit profile, slowing growth will strain profitability and demand for companies that rely on consumption, while weak commodities prices and rising production costs will weigh on Chile's mining sector, says Moody's Investors Service.

"A series of fiscal reforms in 2014 strengthened Chile's fiscal policy and commitment to debt reduction, but in the process also led to a temporary reduction in investment and consumer spending," says Moody's Vice President and Senior Credit Officer, Barbara Mattos.

"Weaker investment has had a particularly negative effect on Chile's economic growth. Commodities producers, especially copper, which represents over half of Chile's exports and about 12% of its GDP, have delayed some investments in a time of narrow profits," says Mattos in the report "Corporate Credit Quality in Chile: Investment, Consumption Will Slow Briefly in Otherwise Resilient Economy."

The weakness of Chile's peso against the US dollar further strains companies that derive most of their revenue from domestic consumption and have significant dollar-denominated debt on their balance sheets coming due in 2015.

However, the weak peso benefits producers of chemicals, metals, and paper and forest products, which are export-dependent.

Moody's also notes that sectors that already have global exposure or can expand globally will be better able to weather this period of slower economic growth and lower consumer spending.

Five of the 11 rated Chilean companies had negative outlooks at the end of June 2015, which reflect company-specific conditions, such as tight liquidity, debt-financed expansions or weaker demand for commodities, rather than Chile's macroeconomic environment.

"Chile's economy is recovering from a growth rate of 1.9% in 2014, its weakest growth rate in five years," says Mattos. "As the economy continues to recover in 2015 and 2016, companies will continue to benefit from Chile's solid financial system."