Fynsa
After years of political turbulence, health crises and social pressures, Chile is beginning to stabilize its macroeconomic and financial fundamentals, Chile is beginning to stabilize its macroeconomic and financial fundamentals and is once again consolidating its position as an attractive emerging market.The country is once again consolidating its position as an attractive emerging market. This gradual improvement, and the possibility of a pro-market and more fiscally and fiscally more austere after the November elections -which could act as a positive catalyst elections -which could act as a positive catalyst for local assets- added to the more favorable evolution of the financial market after the pension reform, opens a concrete opportunity in the Chilean corporate debt market in dollars. Chilean corporate debt market in dollarswith a particular emphasis on the banking segment, which combines solid fundamentals with spreads attractive spreads in both absolute and relative terms..
Chile has been recognized for its institutional framework and fiscal discipline.. Since the 2000s, the structural rule of public spending allowed mitigating economic cycles, encouraging savings and responding in times of crisis (the structural surplus rule, currently known as the cyclically adjusted balance rule). This tradition has been strengthened with the Autonomous Fiscal Council and the recent Fiscal Responsibility Law (2024), which sets deficit targets and an explicit anchor for public debt.
Even so, the country has experienced a challenging challenging fiscal decadeBetween 2007 and 2024, gross central government debt increased from 3.9% to 41.9% of GDP. 41.9% of GDPapproaching the "prudent" threshold of 45% defined by the Ministry of Finance itself. In addition to this, there is a high rigidity in spending, with 92% of the 2025 budget already committed. 92% of the 2025 budget already legally committed (according to the Budget Directorate - Dipres), which restricts the margins of maneuver for adjustment. On the revenue side, structural measures such as tax reforms or a significant rebound in growth do not seem feasible in the short term. do not seem feasible in the short term either..
Nevertheless, there are signs of improvement. The fiscal deficit began to decline -from a peak of 3.9% of GDP in 2024 to 2.7% of GDP in 2024. 2,7%- thanks to cuts in primary spending, even in an election year. Estimates point to a stabilization of the stabilization of the deficit between 1.5% and 2% of GDP, which, while above the official target of 1%, remainswhich, although above the official target of 1%, is still manageable under moderate growth and a more benign external environment.
Looking ahead, there is reason to anticipate further improvement. The November 2025 presidential elections could mark a turning point. Current polls favor opposition figures with pro-investment and fiscally responsible stances. pro-investment and fiscally responsible stances, which contrasts with a pro-investmentThis contrasts with a less economically defined ruling party. A political shift in that direction could boost spending efficiency, contain the structural deficit and revive private investment, acting as a catalyst for local assets..
This scenario has also been recognized recognized by the international markets. On January 23, 2025, Fitch Ratings ratified Chile's credit rating at "A-" with a stable outlook, highlighting the "relatively solid sovereign balance sheet" and a public debt as a percentage of GDP lower than its peers.highlighting the "relatively solid sovereign balance sheet" and a public debt as a percentage of GDP lower than that of its peers. In addition, it valued Chile's governance, macroeconomic credibility and advances such as the pension reform, considered as a factor that can contribute to the country's economic recovery.It also valued governance, macroeconomic credibility and advances such as the pension reform, considered as a factor that can contribute to a greater development of the local capital market.
Fitch projected that public debt will grow in a limited manner, from 41.9% in 2024 to 42.6% in the medium term. 42.6% in the medium termThis is well below the median for A-rated countries (55.1%). This supports the view that that Chile retains robust macroeconomic fundamentals, with room for improvement if a more stable, fiscally austere and growth-oriented political environment materializes..
In this context, Chilean corporate debt in USD emerges as a particularly attractive alternative in terms of rate, risk and return.. Companies issuing debt in Chile, particularly those classified as Investment Grade (IG), present solid financial fundamentals. solid financial fundamentalswith balance sheets, low leverage levels and adequate interest coverage..
In addition, Chilean companies have been showing good momentum in their operating and financial results, Chilean companies have been showing good "momentum" in their operating and financial results, with a sustained recovery in margins and cash generation, which helps to strengthen their payment capacity and maintain stable credit metrics.In addition, Chilean companies are showing good momentum in their operating and financial results, with a sustained recovery in margins and cash generation, which contributes to strengthening their payment capacity and maintaining stable credit metrics.
From a quantitative perspective, the spread average spread of Chilean IG corporate credit versus Latam is around one standard deviation above its 10-year average, which represents a clear sign of relative value.which represents a clear sign of relative value. This premium does not seem to be justified by fundamental deteriorations, but rather by temporary uncertainties that could dissipate. temporary uncertainties that could dissipate with a clearer political with a clearer political environment after the November presidential elections.
This is in addition to a possible spread compression cycle if a pro-market turn if a pro-market turn materializes, which would open up room for revaluations in corporate bond revaluations. Given the resilience of Chilean companies and international appetite for well-structured emerging international appetite for well-structured emerging credit, this asset class could benefitThis asset class could benefit significantly in a moderately constructive baseline scenario.
Within our positive view on Chilean corporate credit in USD, the banking sector stands out as the segment with the highest conviction. It concentrates our preference due to its solid fundamentals solid fundamentals and spreads historically attractive spreads. Dollar issues by Chilean banks under the Basel III framework combine high carry with high credit quality issuers ..
At the end of 1Q25, the country's main banks - Banco de Chile, Banco Estado and BCI - were the largest banks in the country.Banco de Chile, Banco Estado and BCI-maintain a solid financial position, with CET1 over 10.7% (Banco de Chile at 14.6%) and ROEs reaching up to 22.5% in Santander. Non-performing loans remain under control (NPLs between 1.4% and 4.2%), supported by high levels of coverage and voluntary provisions (Banco de Chile: 11.7% of equity). This combination of asset quality, profitability and solid capitalization reinforces their profile as reliable issuers within the IG and High Yield universe. High Yield universe.
In terms of spreadsIn terms of spreads, these Chilean bank bonds are above their historical average, reflecting a relevant attractiveness.which reflects a relevant attractiveness. And from a relative point of view, spreads versus Latam comparables are more than one standard deviation above their 5-year average, which does not seem justified by current credit fundamentals.which does not seem justified by current credit fundamentals. This gap offers a clear clear opportunity for compression in a more constructive environment. in a more constructive environment. In a world where global spreads have compressed significantly, finding instruments with this type of carry risk-adjusted carry is becoming increasingly difficult.
Conclusion
Chilean corporate debt in USD is now positioned as a very competitive alternative within the emerging market universe. Macroeconomic improvements, a commitment to fiscal sustainability and a potential pro-market and fiscally austere political and a potential pro-market and fiscally austere political shift open space for a revaluation in credit revaluation in credit instruments.
This scenario is reinforced by the structural structural strength of the issuing companieswith good momentum in their operating results and solid financial fundamentals, with robust balance sheets, low levels of leverage and adequate interest coverage. solid financial fundamentals, with robust balance sheets, limited leverage levels and adequate interest coverage.
In particular, the banking segment offers exceptional opportunitieswith solid issuers, attractive structures and historically high spreads, both in absolute and relative terms.in both absolute and relative terms. This is an opportune an opportune time to revisit exposure to Chilean USD assetsassets, especially in issuers well positioned to benefit from a more constructive environment.
Finally, I am enclosing a selection of Chilean corporate issues in USD that stand out for their high credit quality, attractive spreads and high absolute rates.
Felipe de Solminihac
Head of Finance and Business Strategy Corredora de Bolsa
