Chile Set to Lose Crown as Only Net Creditor in the Americas

Updated on
  • Most austere budget in 14 years won’t narrow fiscal deficit
  • Chile to post second-biggst budget gap in 37 years in 2017

Chile’s most austere budget in 14 years won’t prevent the country losing its bragging rights as the only net creditor in the Americas in 2017.

The budget gap will widen to 3.3 percent of gross domestic product in 2017 from about 3.1 percent this year, Finance Minister Rodrigo Valdes told lawmakers in Santiago on Monday. That is the second biggest shortfall since the country returned to democracy 36 years ago and enough to push the government’s debts above its savings, according to the Finance Ministry.

Slumping copper prices and increased spending on education and health services are pushing up debt at a time when the economy is enduring its third year of sluggish growth. Valdes’ response is to crimp spending as a precautionary step to maintain the country’s credit rating, the highest in Latin America at AA-. He’ll need to continue that effort for more than one year if he wants to safeguard Chile’s reputation for fiscal prudence, said economist Felipe Alarcon.

"The scenario is worrying because next year will require new debt similar to this year," said Alarcon, an analyst at Euroamerica in Santiago. "Credit agencies might not lower Chile’s rating, but we can’t rule out a change of outlook."

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Fiscal spending will rise 2.7 percent in 2017, pushing the national debt to about 25.3 percent of GDP by the end of next year from 20.6 percent in June, Valdes said. The government had $26.7 billion sitting in sovereign wealth funds as of May.

Latin America’s wealthiest economy will expand 2.25 percent next year after growing about 1.75 percent in 2016, the Finance Ministry forecast.

Valdes stressed the 2017 budget would respect the fiscal rule to narrow the so-called structural deficit by a quarter-point of GDP every year. The structural deficit, calculated assuming copper prices hit the government’s medium-term forecast and the economy grows in line with trend, will narrow to 1.5 percent of GDP next year from 1.7 percent in 2016.

"The scenario is neutral, not good, but not horrible,” Alarcon said.

(Updates with growth forecasts in the sixth paragraph.)
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