This week it was released that Chile's central government public debt (which does not include public companies) reached a record high: 42.3% of GDP by the third quarter of 2024.

In this sense, presidential pre-candidate Evelyn Matthei, assured that this limits the capacity of the State to finance programs. "We will not be able to carry out any type of social program if we continue to increase the debt," she said.

The evolution of Chile's public debt has been on the rise for several years now (see this related note: Evolution of the Chilean government debt | Fynsa). This corresponds mainly to fiscal deficits: in the last decade, nine years have been with fiscal deficits and one with a surplus.

Source: Budget Directorate, Dipres. 

This has led credit rating agencies to begin to see greater pressure on spending, especially when there is an upward outlook, given a society that is demanding greater services, which generates a tightening of the fiscal accounts.

Since 2017, the country's effective (minimum) risk rating fell by two grades, dropping from A+ to A-.

Source: S&P, Fitch and Moody's. 

If one looks at where spending has increased the most in Chile -as a proportion of total spending- it has been in "subsidies and grants", highlighting the period 2020-2021, where more than 25 billion dollars were transferred with the Emergency Family Income (IFE), as a result of the pandemic. On the other hand, interest payments still represent a small portion of spending; however, this may increase if debt refinancing continues to be carried out in a high interest rate environment.

Source: Budget Directorate, Dipres. 

While the rapid increase in debt and repeated fiscal deficits are worrisome, it is not something that has gone undiscussed and unaddressed in Chile. Since 2001, our country has adopted the fiscal rule that - in simple terms - allows balancing the budget by adjusting for the cycle of non-mining economic activity, the copper cycle, and lithium revenues. In addition, the administration of President Gabriel Boric set a debt limit of 45% of GDP.

Chile's public debt continues to be a topic of debate, but also an opportunity to reflect on how we prioritize spending and adjust our policies to meet the challenges and demands of an increasingly complex society.

Vincent Dourthé, CFA

Portfolio Manager Private Debt Fynsa AGF