Chile - economic policy - evolution not revolution
Published 18 December 2014
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This article is no longer current. Please refer to Overseas Business Risk – Chile
Summary
2014 did not turn out as hoped for the Chilean economy. Growth rate forecasts for 2014 have been halved over the course of the year to 2%. Next year is looking better. Chile remains a very good regional safe base for companies accessing the region.
Detail
2014 has been a tough year for the Chilean economy. After getting used to growth rates of 5% per annum, growth for 2014 will barely reach 2%. Less auspicious conditions in the international economy, the waning of a long mining and earthquake reconstruction investment cycle and the uncertainty generated by a new government coming to power with a commitment to reduce inequality have all played their part.
The main driver of the weaker performance of the economy has been a decline in investment. Analysts are predicting a drop of 6% this year. The private sector put investment plans on hold for much of the year, awaiting the new tax ‘rules of the game’ as the government’s flagship tax reform spent six long months being discussed and tweaked in Congress. Approved in September, the tax reform will raise $8bn including through higher corporate taxes. But analysts judge investment will pick up in the months to come now that there is clarity over tax treatment.
Consumption growth has now also started to fall as households rein in their spending following increased unemployment and decreased real wages. The economy has also been hit by the price of copper, of which Chile is the world’s largest producer, and which has fallen 12% this year. But a 20% depreciation of the peso has begun an external balance adjustment and so exports are beginning to pick up.
The government of Michelle Bachelet, which came to power in March, has kept the Chilean economic model intact. Chile remains a well managed macroeconomy, with low government debt, an inflation targeting central bank, a freely floating exchange rate and a small public sector of around 20% of GDP. It maintains a commitment to free trade (and still has the largest network of free trade agreements in the world) and is an easy place to do business, with the lowest corruption rates in Latin America.
However, the new government has shaken up the political and business establishment with its emphasis on reducing inequality, the number of its reforms and its willingness to challenge orthodoxy. Reform projects in education, pensions, health and other sectors have sought to improve social provision for the poorest, often by reducing the role of the market and enhancing the role of the state, in an economy that is currently highly privatised.
Comment
Chile remains an economy with sound economic fundamentals and a good macroeconomic framework, even if its economic performance has been weaker this year. The government is seeking to reduce inequality, the highest in the OECD. Foreign businesses, including Boots and Bupa, are still investing in hundred million or billion dollar deals here.
Looking forward to next year, the Chilean economy is likely to do better. More benign global economic conditions (including lower oil prices), expansionary fiscal and monetary policy and a depreciated peso to boost exports are all likely to help. Analysts suggest that growth should be in the region of 3%.
Disclaimer
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