Recent economic data for Chile has been encouraging. In Q1 the economy grew 4.2% yoy, its fastest rate in the past 4 years, although this is coming off a low base in Q1’17. The domestic sector was robust expanding 3.8% yoy and fixed investment continued to recover growing 3.6% yoy. Exports gained 7.2% yoy adding to growth: the mining sector expanded 19.3% yoy helped by a recovery in the copper price. The OECD also recently raised its 2018 GDP growth forecasts for Chile to 3.6%.
President Sebastien Piñera has been in office since March of this year and his administration’s policy initiatives are starting to take shape. Last week, he stated the corporate tax rate would be held at current levels given ‘the fiscal difficulties we inherited and the breadth and urgency of the social reforms and public works projects still to be done’. Instead, he said the focus would be on simplifying the tax system and encouraging companies to invest. The government has also talked of improvements to education, healthcare, the pension system and infrastructure. Congress is fragmented and Piñera’s centre-right Chile Vamos coalition does not have a legislative majority so policy changes need to be chosen wisely.
Chile’s fiscal deficit edged higher to 2.8% of GDP in 2017 and addressing this is an important goal of the current administration as Chile’s government debt levels have been rising from ~12% in 2012 to 24% at the end of 2017. In a recent interview, Felipe Larraín, the Finance Minister, stated that the government will work to eliminate the structural deficit over 6 to 8 years. In May the government announced an intention to reduce the deficit targeting USD 5bn budget cuts over 4 years, starting with an initial USD 500m of announced cuts, but as Larraín noted every 1% of extra growth in a year gives an extra USD 600m in revenue. So a combination of growth and fiscal prudence is likely to be important for achieving this goal.
Larraín noted that the government would like to regain the notch they lost on their credit rating but it is a longer term goal. Tackling the fiscal deficit and rising debt levels will be important in this respect. Chile still retains a strong credit rating and is rated (LT foreign currency) Aa3(negative)/A+(stable) by Moody’s/S&P rating reflecting its financial and institutional strengths.