Chile Debt Sale Window Opens as Investors Ignore Mounting Risks

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(Bloomberg) — Chile’s government has a window of opportunity to sell debt abroad as sovereign spreads hover near two-decade lows, with investors shrugging off an escalation in the Middle East conflict, domestic debt woes and a stagnating economy.

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The extra yield investors demand to hold Chile’s dollar bonds over US Treasuries has tightened 24 basis points to 82 points since the end of March, nearing levels last seen in 2007. At the same time, the cost of insuring against a default has fallen below where it stood before the US launched airstrikes on Iran. 

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A surge in demand from abroad for the country’s sovereign debt couldn’t have come at a better time. The Senate cleared a bill last week authorizing the government to borrow an additional $6.2 billion this year, most of which will be issued abroad. And while the request for additional funds was a blow to President José Antonio Kast’s reputation for fiscal austerity, Chilean fixed-income assets have continued to rally.

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“Spreads and risk appetite remain positive,” said William Snead, a strategist at BBVA in New York. “New issuance would not be a surprise. Most likely investors have made some room to take on new debt in the primary market.”

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The Finance Ministry announced Friday that it plans to sell $5.2 billion of bonds on international markets in the rest of year, without giving details on the precise timetable. Some of these issuances could be done in currencies other than the dollar and the euro, the ministry said. 

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Market Favorite

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The government asked congress in early June for the right to sell 36% more debt than initially planned, blaming the previous administration for overestimating revenue and failing to account for some expenditures. The Finance Ministry also abandoned its goal of balancing the so-called structural budget by 2030 and now targets a deficit equal to 1.5% of gross domestic product.

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It’s not just the budget that is providing bad news though. Economic activity has contracted on an annual basis in each of the last five months, the longest losing streak since the pandemic in 2020.

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What’s more, congress is expected to approve a series of tax cuts this month that the government admits will reduce fiscal revenue over the next four years, even if they boost growth as planned. That will push outstanding debt towards the 45% of GDP threshold that many suspect could trigger a rating downgrade.

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Yet markets are turning a blind eye to any backsliding on Kast’s pledges to balance the budget. Afterall, it’s all relative.

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Chile is currently rated A by S&P Global Ratings and A- by Fitch Ratings, the best in Latin America and on a par with both Israel and Latvia. 

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The country’s overall deficit, seen at 2.2% of GDP this year, is modest compared with the 6.3% shortfall forecast for the US and the 8.7% deficit expected in regional peer Brazil, according to analysts surveyed by Bloomberg. Meanwhile, Mexico’s deficit is projected at 4.3% of GDP.

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“Chile should be well positioned in that context given its strong credit profile and history of prudent debt management,” said Roque Montero, a Latin America strategist at UBS. “Recent successful issuance by countries with weaker credit profiles suggests that market appetite for sovereign debt remains healthy.”