Chile’s Ministry of Finance recently announced their 2025 debt financing plan for a gross total of USD16 billion, in line with our forecasts, and consistent with the 2025 Budget Law’s limit. New financing accounts for roughly USD11 billion, and amortizations for USD5 billion.
The announced plan is similar to the amount issued in 2024, even though the MoF’s 2025 nominal deficit forecast (1% of GDP) is significantly lower than last year’s (2% in the 3Q24 Public Finance Report). Why? Well, this is likely a result of differences in below-the-line items (including amortizations), our expectation for a partial recovery of the MoF’s liquid cash buffers, and probably to have room in case last year’s revenue disappointment persists, among other factors. In any case, the 2025 Budget Law authorizes the MoF to incur additional debt of up to USD1.5 billion this year (on top of the USD16 billion), which are likely to be met with loans from multilateral agencies, or eventually, through greater debt-financing.
The MoF’s plan also considers the issuance of up to USD5 billion in short-term notes that mature in a year’s time. If these notes mature within this calendar year, they are not considered within the USD16 billion plan. As a result, we should not be surprised if the MoF by March issues notes that mature in the 6 to 9 month horizon (in 2025), which facilitate the Budget Office’s cash management, yet do not count as part of the 2025 financing plan. Notes issued this year that mature in 2026 should be counted in the annual plan. In our view, the issuance of short-term notes, implemented in 2020, is a favorable development in Chile’s domestic capital market.
Regarding the currency composition of the plan, 70% is expected in local currency (USD11.2 billion) and 30% in foreign currency (USD4.8 billion), similar to last year’s issuance. The foreign currency portion is slightly greater than the share we expected (20%) and considers the USD3.4 billion issued earlier this month. Of note, this year’s swift issuance in foreign currency suggests the MoF has fast-tracked the administrative processes required to issue debt… good news! A larger than expected foreign currency denominated issuance plan for this year adds an upside bias to our MoF dollar sales forecast of USD6.8 billion.
The MoF also states that it will continue to gradually hedge the foreign currency exposure of the central government’s debt, which begun in 2023. This is especially relevant considering the higher share of foreign currency debt (roughly 35% of total), combined with a persistently weak currency. We estimate that for every CLP100 depreciation, gross public debt rises by roughly 1.5% of GDP. Considering the MoF’s September exchange rate forecast of $900,5 and gross public debt ending 2024 at 41.2% of GDP, the latter seems to be approaching the prudent debt limit of 45% of GDP sooner than later.
While the local currency maturities have yet to be announced, the plan will consider key benchmarks across the curve, with 55% in nominal bonds and 45% in inflation-linked instruments (UF). Like in previous years, the MoF’s plan considers the alternative of a local currency bond issuance through a book-building process with direct participation of both foreign and domestic investors; we believe this would eventually take place in nominal bonds, leading the SOMA calendar to be tilted towards inflation-linked bonds.
The MoF will continue issuing sovereign ESG denominated bonds, consistent with its track record as a global leader in the matter. Chile became the first sovereign in the Americas to issue sovereign green bonds in 2019. In fact, the foreign currency denominated bonds issued earlier this month are social bonds. While the global context suggests that it may be difficult for the MoF to achieve better borrowing costs with these instruments – relative to plain vanilla bonds – it is a good sign that the institution doubles down on its commitment to sustainable finance, a strategy that has rendered important benefits over time.
Finally, as we expected, local currency bond buyback and exchanges will continue this year, starting in 2Q25 and focused on bonds maturing in 2026. In any case, we expect these buybacks to become a regular part of the DMO’s toolkit as it manages larger amounts of outstanding debt. Public debt issuances increased at the beginning of the 2010s, at an average weighted maturity of roughly 10 years; hence we are now meeting these obligations.
Our take: In sum, the MoF’s financing plan is adequate and in line with our expectations. We expect the MoF to announce a local currency 1Q25 calendar – including notes and bonds – in the near term, with issuances to begin in February, or earlier. Later, we expect the MoF to announce details on a pilot market-makers program. Will the announced plan be enough to cover the 2025 financing needs? We believe so. However, we’ll be able to address this question after tax season (data to be available by the end of May). Revenue shortfalls would have to be addressed by expenditure cuts, resorting to the additional USD1.5 billion of lending space, or the Stabilization Fund (USD3.7 billion by the end of November). A faster fiscal consolidation, however, would reduce financing needs, and reduce pressure on rates across the curve.