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CHILE: Scotiabank Highlights Increasing Debt Sensitivity To FX Movements

CHILE
BulletEM BulletEmerging Market News
  • Scotiabank estimates that a 10% appreciation (depreciation) of the CLP reduces (increases) the gross public debt to GDP ratio by 1.12 ppts. Given this, they estimate that around 1/4 of the 6ppts increase in public debt during the Boric administration is explained by a higher FX rate.
    • Public debt rose from 15% to 42% of GDP in the last decade, with a growing proportion denominated in USD. The evolution of public debt is one of the main concerns not only for the government, but also for multilateral organisations and credit rating agencies.
    • As part of the policies implemented to support households in the pandemic, close to $50bn was withdrawn from pension funds, reducing the depth of the local capital market and contributing to the increase in foreign currency debt issuance by the government. As a result, debt exposure to FX movements increased.
    • Considering the current public debt issuance schedule for 2025, the share of FX debt would continue to increase. Of $5bn in foreign currency debt expected to be issued this year, $3.4bn has already been issued.
    • Scotia says that if USDCLP rises above 1,200, public debt would reach the prudent threshold of 45% of GDP this year (vs. 42.1% baseline at USDCLP975). Similarly, if USDCLP falls towards 800, the debt to GDP ratio would return to below 40% of GDP.
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  • Scotiabank estimates that a 10% appreciation (depreciation) of the CLP reduces (increases) the gross public debt to GDP ratio by 1.12 ppts. Given this, they estimate that around 1/4 of the 6ppts increase in public debt during the Boric administration is explained by a higher FX rate.
    • Public debt rose from 15% to 42% of GDP in the last decade, with a growing proportion denominated in USD. The evolution of public debt is one of the main concerns not only for the government, but also for multilateral organisations and credit rating agencies.
    • As part of the policies implemented to support households in the pandemic, close to $50bn was withdrawn from pension funds, reducing the depth of the local capital market and contributing to the increase in foreign currency debt issuance by the government. As a result, debt exposure to FX movements increased.
    • Considering the current public debt issuance schedule for 2025, the share of FX debt would continue to increase. Of $5bn in foreign currency debt expected to be issued this year, $3.4bn has already been issued.
    • Scotia says that if USDCLP rises above 1,200, public debt would reach the prudent threshold of 45% of GDP this year (vs. 42.1% baseline at USDCLP975). Similarly, if USDCLP falls towards 800, the debt to GDP ratio would return to below 40% of GDP.