DBRS: Chile's Sovereign Ratings Unaffected by Earthquake

Chile has suffered severe damage from an earthquake and subsequent tsunami that struck the country on February 27, 2010. However, the earthquake caused only limited damage to Chile's mining sector, and the government's strong fiscal position and history of exemplary fiscal management suggest that Chile has the means and institutional capacity to begin to rebuild the country's infrastructure and avoid an interruption of debt service. As a result, DBRS's sovereign ratings are unaffected by the earthquake.

DBRS has yet to estimate the reconstruction costs of the disaster, but one preliminary estimate by catastrophe risk assessor EQECAT is as high as $30 billion, or 17.8% of 2009 GDP. President-elect Sebastián Piñera estimates that $20 billion may be needed to repair damaged housing. The official death toll is currently 723 and the National Office of Emergency estimates that two million people have been displaced. Some of Chile's major industries were also affected. Damaged highways and ports are delaying forestry exports, and the fruit and wine sectors, located near the epicenter of the quake, suffered inventory and production losses that are likely to slow economic growth over the coming months.

Despite this damage, DBRS believes the crisis will not derail economic stability or present a long-term disruption to economic growth. This is because the largest copper mines, which are mainly located in the north of the country, suffered little structural damage that could impair operations for an extended period of time. In 2009, copper exports totaled $26.9 billion (16% of GDP), accounting for 54% of total exports and an estimated 12% of government revenues, and are therefore critical to restarting growth.

Chile's sovereign wealth funds, which saved windfall copper revenues prior to the financial crisis, hold liquid assets valued at $14.7 billion. This provides the government with accessible resources to provide relief and repair damaged infrastructure without putting severe strain on its public finances. Multilateral loans are also readily available should Chile request them.

Damaged infrastructure and production losses are likely to slow economic growth in the coming months. However, Chile's sound fiscal position and a largely undamaged copper sector will likely cushion the short-term economic impact, and reconstruction efforts could provide an impetus to growth as soon as the second half of 2010.