In what started as a modest 30 peso increase to metro fares, Chile’s government declared a state of emergency across a number of cities which surround the country’s capital, Santiago, following a wave of protests and civil unrest. The announcement of the fare increase to 830 pesos (~$1.15), which followed a 20 peso rise in January was the straw that broke the camel's back; it has since been retracted.
Chile's GDP per capita stands at one of the highest within the region, however, privatisation across the healthcare and education sectors coupled with a spike in costs of basic goods and services has led to a rise in inequality. According to the OECD, Chile has the highest rate of inequality amongst OECD members, with the latest Gini Index score at 0.46. To give this some perspective, Turkey’s score is 0.40 and Costa Rica’s is 0.48, while us in the UK stand at 0.36. Although the government has made attempts to close the inequality gap, change has not happened fast enough.
On a positive note, the country's poverty rate has fallen this past decade, and wages have been on the up. And in an effort to stop the deadly protests and the broad strike planned for today, Chilean President Sebastián Piñera yesterday announced a welfare package. Piñera vowed to increase the basic pension by 20%, freeze electricity tariffs and proposed the introduction of a law where the state would cover the cost of expensive medical treatment. He also said he would look to increase minimum wage and introduce a tax bracket for higher earners.
The only exposure we have to NFA 3 star rated Chile is via state-owned copper mining company, Codelco, the largest red metal miner globally. Although the company issued a $1.2bn two-tranche, 10- and 15-year deal, a month ago, we retained our positioning in our current holdings. The company’s A+/A rated bonds were very much in demand at 4x oversubscribed. We like the Codelco 6.15% 2036 issue which trades at a spread around 150bps over US Treasuries, and looks very attractive against its peers, which are priced around 73bps over. Although the bond has rallied around 19 points so far this year, we calculate that it still has the potential to gain another 13 points in capital appreciation terms, to reach fair value. Its yield of 3.4%, and ~2.7 notch cushion are also favourable factors.
We will continue to hold these bonds until such a time that we feel the country’s economic fundamentals do not support such valuations, or the paper effectively becomes “expensive”. Chile’s 5-year CDS has spiked back up to roughly 40bps since the protests began over the weekend, however, it is still trading much lower than the ~65bps recorded at the start of the year.