(Bloomberg) -- As a deeply divisive re-write of Chile’s constitution comes to an end, interest rates fall and economic growth returns it seems that Chile’s bond market is regaining its mojo. But there may be one final sting in the tail from the last three years of social, political and economic turbulence.

All 14 analysts and traders in a Bloomberg survey expect rating firms to downgrade their outlook on Chilean bonds, or lower the rating some time next year as the debt-to-gross domestic product ratio rises.

“As things stand, downward pressure on our sovereign risk rating is likely to persist, first with adjustments to the outlook, and then, over time, negative rating actions,” said Andres Perez, chief economist for Latin America at Banco Itau. “Fitch is likely to revise our outlook in the near term.”

Any downgrade would dampen confidence in the sustainability of a rebound in Chilean bonds. The yield gap with US Treasuries has narrowed more than any other A-rated country in the world this year, dropping 38 basis points through Dec. 6, as inflation slowed and fiscal stability returned after a splurge in spending during the pandemic, according to data compiled by Bloomberg. But the continuation of that outperformance is under threat.

Fitch and Moody’s have Chile with stable outlooks, while S&P has a negative outlook. Moody’s and S&P rate the country five levels above junk while Fitch rates the country one notch lower.

Under Pressure

“A downgrade would put upward pressure on the spreads at which sovereign bonds operate at a global level,” said Sebastian Ide, head of the trading desk at Banco de Chile.

Investor concerns are focused on Chile’s debt burden, which has persistently deepened, reaching 37.2% of GDP in the second quarter of 2023, more than doubling in 10 years. Next year’s budget envisages a fiscal shortfall of 1.9% of GDP, down from a 2.3% deficit expected this year. The problem is, many investors are skeptical they will achieve that.

“The rise in spending in the 2024 fiscal budget law is at the limit of being prudent,” Perez said. “In the medium-term, stabilizing gross public debt below 45% of GDP over time will require a significant restraint on spending growth, substantially below the 5.5% annual average of the 2010-2019 period.”

The government sees gross debt and deficit figures leveling off starting in 2025, with a debt-to-GDP ratio of 41%.

Overly Optimistic

Hermann Gonzalez, macroeconomic coordinator of the Catholic University’s Latin American Center for Economic and Social Policies, sees next year’s deficit level “unlikely” as it’s based on above market-consensus growth projections. 

The deficit envisages economic expansion of 2.5%, compared with the 2% latest forecast in a Bloomberg survey.

“We are going to maintain a deficit, we are going to continue increasing the debt and economic growth projections are very weak,” Gonzalez said. “So it means less income and greater pressure on public accounts if GDP doesn’t grow as much as the government expects.”  

Chile’s GDP rose 0.6% in the third quarter from the year earlier, its first annual expansion since the same three months of last year. Still, economic activity fell 0.1% in October from the month before, signaling the country’s recovery remains uneven. 

Political risks

Political instability is also weighing on the market. Chileans go to the polls on Dec. 17 to vote on a second proposal to change the constitution. The previous rewrite was rejected in a referendum last year. 

Should people vote against the proposals, the government has said it won’t push for a third re-write of the charter. 

An end to the divisive debate over the constitution inherited from the former dictator Augusto Pinochet may pave the way for the government to redouble efforts to pass pension reforms.

“We have been discussing a pension reform over the past three administrations, yet we have not made significant progress,” Perez said. “It has become increasingly difficult to build consensus based on technical criteria, generating headwinds for our risk rating.”

Standard and Poor’s says that if the political impasse isn’t resolved, they will lower Chile’s rating, Finance Minister Mario Marcel told a seminar on Wednesday. Yet the recent accord over mining taxes in congress indicate that agreements on more fundamental reforms are possible, he added.

“We clearly have a challenge here,” Marcel said. “Is it insurmountable? I don’t think so.”


All events in Santiago local time.

  • Chile:
    • Dec. 12 8:30am: Central Bank Economist Survey
    • Dec. 12: Chile Treasury to prepay bonds or exchange bonds for 2050 peso and CPI-linked bonds
    • Dec. 14 8:30am: Central Bank Traders Survey
    • Dec. 15 12:30pm: Bloomberg Dec. Chile Economic Survey
  • International:
    • US:
      • Dec. 12: November CPI
      • Dec. 12: November Monthly Budget Statement
      • Dec. 13: MBA Mortgage Applications for the week ending in Dec. 8
      • Dec. 13: November PPI Final Demand
      • Dec. 13: FOMC Rate Decision
      • Dec. 14: November Retail Sales
      • Dec. 14: Initial Jobless Claims for the week ending in Dec. 9
      • Dec. 15: December Empire Manufacturing
      • Dec. 15: November Industrial Production
      • Dec. 15: December Preliminary S&P Global US Manufacturing PMI
    • China:
      • Dec. 9-15: November Money Supply M2
      • Dec. 14: November Industrial Production
      • Dec. 14: November Retail Sales
    • Europe
      • Dec. 14: Bank of England Bank Rate
      • Dec. 14: ECB Main Refinancing Rate
      • Dec. 15: December Preliminary HCOB Eurozone Manufacturing PMI


  • Chile Inflation Exceeds All Forecasts Ahead of Rate Decision (2)
  • Codelco Appoints New CFO, Strategy Head to Navigate Copper Woes
  • Chile Treasury Swaps $250m of Bonds for Peso, CPI-Linked Notes
  • Chile Nov. Vehicle Sales Rise to 25,630
  • Chile Agrees to Raise Public Sector Workers Wages by 4.3%
  • Chile Nominal Wages Rose 8.7% Y/y in October
  • Chile’s Central Bank Says Focus on Medium-Term Growth Is Key
  • Chile Targets One Million Ton Copper Boost in Tightening Market
  • Chilean Peso May Outperform as Traders Push Swaps Curve Higher
  • Chile Nov. Trade Surplus Widens to $1.288b; Est. +$1.100b
  • Chile Inflation Exceeds All Forecasts Ahead of Rate Decision 
  • Chile Retailer Ripley Corp Credit Rating Downgraded at Humphreys
  • Chile Inflation Surprise Leaves Central Bank in Quandary

--With assistance from Sebastian Boyd.

(Corrects information on sovereign ratings in fifth paragraph.)

©2023 Bloomberg L.P.