Latin America's Only Net Creditor About to Rejoin Mere Mortals

Chile's net savings approaching zero after years in the black
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Photographer: Oliver Bunic/Bloomberg via Getty Images

At times, Chile’s economy has appeared super-human. Rapid economic growth, low inflation, trade surpluses and a strong currency have all combined to make it the wealthiest nation in South America, overtaking traditionally richer economies such as Argentina and Uruguay. That was achieved even as the government amassed savings of more than $23 billion in two sovereign wealth funds. The country became the darling of credit rating agencies, which rank it one notch ahead of Japan and several notches above Italy, Ireland and its former colonizer, Spain.

But now Chile’s fame as the only country in the Americas with net savings is under threat. Falling commodity prices and increased government spending on health and education are pushing the country back into the red.

By the end of this year, the trend indicates that Chile will be a net debtor, if calculated using a fixed exchange rate. Even after cutting spending plans for this year in February, the government is forecasting a fiscal deficit of 2.9 percent of gross domestic product, up from 2.2 percent the year before.

Tax revenue from the private copper industry slumped 45 percent to $274 million in the first quarter after commodity prices tumbled last year. As prices of the metal have fallen, so have contributions to the national coffers by the state-owned copper company Codelco.

Still, the figures are not as bad as they first appear. Take into account last year’s 14 percent slump in the peso, which pushed up the value of foreign assets held by the sovereign wealth funds, and the debt situation looks brighter.

Measured at the current exchange rate, Chile’s net savings are little changed in the past four years.

There is one other factor to take into account though -- Codelco has been racking up debt as its revamps aging copper mines and tries to avoid a slump in production. When you include the debts of state-owned companies, Chile has already moved into the red.

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The dip into negative territory after a decade as a net saver has triggered concern in Chile that the country’s credit rating is heading for a cut, even as Fitch Ratings reiterated its stable outlook on the country's A+ rating in November.

“Chile’s public finances are a clear strength,” Todd Martinez, primary analyst for Chile at Fitch, said by phone from New York. He cautioned, however, that "Chile’s public debt has been rising, so the authorities’ ability to maintain a credible consolidation strategy to stabilize debt at relatively low levels is important."

Chile’s gross debt of 17.5 percent of GDP is the lowest of its credit peers after Estonia. In fact, the country’s “strong sovereign balance sheet” was the first thing Fitch mentioned in its November report.

"As long as the government keeps a cautious attitude, we don’t see a reason to change the debt rating,” S&P Global Ratings analyst Delfina Cavanagh said. “We are not worried about Chile becoming a net debtor. Chile has done its homework."

Chile’s golden age of fast growth and net savings may be over, but it remains a haven of stability in a turbulent region.

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