Chile's Ministry of Finance announced its intention to sell $5.2 billion in bonds in international markets later this year. This move follows the Senate's approval of a bill last week authorizing the government to borrow an additional $6.2 billion, primarily for external markets. The government's decision to seek additional funds, totaling $6.2 billion on top of the $17.4 billion previously allowed, came after President Jose Antonio Kast's administration stated that the previous government had overestimated revenues and underestimated expenditures, leading to a projected deficit of 2.4% of GDP this year, higher than the 1.5% in the initial budget law.
The timing is opportune for Chile, as investor demand for its sovereign debt is high, with spreads on its dollar bonds against U.S. Treasuries narrowing to 82 basis points, near two-decade lows. The cost of insuring against a default has also decreased. Analysts like Roque Montero from UBS noted that Chile is well-positioned given its strong credit profile and history of prudent debt management, and recent successful issuances by countries with weaker credit profiles indicate continued market interest in sovereign debt.
The need for funds is also practical, as Chile faces approximately $500 million in debt payments due this year and another $4.3 billion in 2027. Liquid Treasury assets were $4.2 billion in May. The additional $6.2 billion borrowing authorization is also intended to cover $4.7 billion for financing needs due to budget miscalculations and an additional $1.5 billion to regularize unavoidable payment obligations, including payments to unpaid suppliers. The government has also abandoned its goal of balancing the structural budget by 2030, now targeting a deficit of 1.5% of GDP.
Despite the additional borrowing and a projected increase in outstanding debt towards 45% of GDP, which some fear could trigger a credit rating downgrade, markets are largely overlooking these concerns. Chile's overall deficit, estimated at 2.2% of GDP this year, is modest compared to the 6.3% projected for the U.S. and 8.7% for Brazil. The government also plans to implement tax cuts that will reduce revenue over the next four years but are expected to boost growth.
