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Friday, December 21, 2007

S&P Raises Chile's Sovereign Rating

Chile's investment-grade credit rating was raised one level by Standard & Poor's Ratings as a rally in copper, the country's biggest export, boosts the government's budget surplus.

S&P raised Chile's foreign debt rating to A+ from A, saying the government strengthened its finances by setting aside this year more than $10 billion of windfall revenue to cover social program and pension costs when copper prices decline. The rating, the highest in South America, is above rankings on South Korea and China and is on par with Italy and Iceland.

``Chile has consistently followed very disciplined policies,'' said Alonso Cervera, an economist at Credit Suisse Group in New York. ``Chile's treatment of excess revenues is an example other countries should follow. The upgrade is well deserved.''

Moody's Investors Service may follow S&P in raising Chile's rating. On Dec. 13, Mauro Leos, a sovereign debt analyst at Moody's, said the company may boost Chile's rating outlook to ``positive'' from ``stable'' early next year. Moody's rates Chile A2, the fifth-lowest investment-grade rating and one level below S&P's rating for the country.

Chile's peso gained, breaking through the 500-per-dollar level, after the S&P announcement. It rose 0.2 percent to 499.55 per dollar at 3:14 p.m. New York time, extending its advance to 6.8 percent this year and to 39 percent over the past five years.

Record Surplus

Stocks rose, driving the benchmark IPSA index up 0.1 percent. Government peso bonds declined, pushing the yield on the benchmark note due in 2015 up 2 basis points, or 0.02 percentage point, to 6.42 percent, according to HSBC Bank USA Chile.

Chile will have a record budget surplus equal to 8.1 percent of gross domestic product this year, Budget Director Albert Arenas said Oct. 30. The surplus was 6.5 trillion-peso ($13.1 billion) in the first nine months of the year, Arenas said.

``Chile is in the most solid situation of its history, the fruit of good fiscal policy, good monetary policies and the construction of institutions,'' Finance Minister Andres Velasco said at a news conference in Santiago.

Copper prices have more than doubled in the past three years, buoying government revenue from state-run Codelco, the world's biggest producer of the metal. Copper exports increased 21 percent in November to $2.99 billion, bolstered by growing demand from China.

``Chile has been able to manage the upward part of the cycle by significantly strengthening its credit profile, creating the conditions to muddle through a period of higher instability better than in the past,'' S&P said in a statement. ``Its economy is more resilient than ever before.''

Inflation Surge

The economy, South America's fourth largest, expanded 4.1 percent in the third quarter after growing 6.2 percent in the second quarter. Growth may keep slowing as the central bank raises interest rates in a bid to stem a surge in inflation.

In Jose de Gregorio's first meeting as president of the central bank last week, policy makers raised the benchmark lending rate a quarter-percentage point to a five-year high of 6 percent. Annual inflation soared to 7.4 percent in November, the fastest pace since 1996, as fuel and food costs jumped. The central bank targets inflation of between 2 percent to 4 percent.

The inflation pickup will provide ``additional tests to the reputation already gained by Chile's central bank in the implementation of monetary policy,'' S&P said in the statement.

S&P also affirmed Chile's AA local currency debt rating.

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