Investors in Chile are showing a renewed appetite for local currency bonds, particularly those with higher risk, driven by expectations of future economic growth. This shift comes as Chile's long-term swap rates recently hit an 18-month high of 5.64% for the 10-year tenor, a significant jump of 52 basis points from its June 30 low. Despite this, the two-year swap rate, at 4.89%, remains below its yearly high of 5.04%. This indicates a market belief that borrowing costs will remain elevated for years, fueled by optimism around government plans for corporate tax cuts and reduced bureaucracy aimed at boosting growth, with the government projecting growth up to 3.7% in 2027.
This market optimism contrasts with Chile's current economic performance, which is close to a recession, with GDP flat in the second quarter after a 0.3% contraction in the first. However, foreign demand for Chilean sovereign debt has surged, with sovereign spreads over US Treasuries tightening by 24 basis points to 82 points since the end of March, nearing levels last seen in 2007. This demand provides a window for the government to sell additional debt, with plans to issue $5.2 billion in international markets for the rest of the year, despite increased borrowing authorizations.
Fitch Ratings, however, has expressed caution, stating that Chile's 2027 budget will be a crucial test for stabilizing debt, which could reach 45% of GDP by 2029 if spending is not curtailed. The rating agency doubts the tax-cut package will generate sufficient growth to be self-financing, emphasizing the need for spending restraint. While Chile's budget deficit of 2.2% of GDP this year is modest compared to peers like the US (6.3%) and Brazil (8.7%), the rising debt level and the gap between market optimism and economic reality are key concerns. About half of the recent surge in swap rates is attributed to rising US Treasury yields, but strategists like Sebastian Boyd note that Chile's rates might be overshooting compared to other emerging markets.
