BofA: Chile’s Boric must reduce magnitude of tax reform

Chile’s president-elect Gabriel Boric will be forced to moderate his plans, reduce the size of his tax reform and gradually advance on some spending problems, Bank of America analysts, including Sebastián Rondeau, Christian González, said in a note. and Gabriel Tenorio.

Boric has shown some signs of restraint. Congressional restrictions and lower risk of pension withdrawals reduce the likelihood of a worst-case scenario for Chile, including credit rating downgrades, analysts said.

As a baseline scenario, public debt is expected to increase to 50% of GDP by 2025 and up to two credit rating downgrades.

The peso exchange rate shows the highest risk premium, and there could be some appreciation if there are signs of moderation.

Without moderation, yields could continue to rise, especially at the long-term end of the curve.

Regarding external debt, the recommendation of ‘underweight’ is maintained, since Chile it would underperform in the medium term as its fiscal metrics deteriorate relative to its peers.

Analysts project that the monetary policy rate will peak as high as 5.75% in the first half of 2022, to begin to decline in 2023.

In turn, great uncertainty persists about the timing and scope of the pension reform and the existence of the Pension Fund Administrators.

Boric it will face substantial governance challenges amid a divided Congress and a dispersed political spectrum, and it will inherit difficult economic conditions.