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%.
Given Sebastien Piñera, Chile’s newly elected President, takes-up office on March 11 the OECD’s latest survey of Chile is perhaps timely in highlighting some potential areas that policy makers may wish to consider.
On a positive note, the OECD projects a recovery in Chile’s GDP growth from 1.7% in 2017 to 2.9% for 2018 and 2019 helped by a firmer copper price environment and a global economic recovery. That said, it highlights the need to deepen structural reforms to boost productivity, diversify the economy, improve global competitiveness while also advocating policy to reduce inequality.
Sebastian Piñera won the Chilean Presidential election with a convincing majority in the second round vote in December 2017 and will take up office in March 2018. He has already served as Chile’s President between 2010 and 2014 and is viewed as having a pro-business and pro-growth policy bias. Given that economic growth in Chile has been languishing (the Central Bank projects that the economy will grow just 1.4% in 2017) his policies had obvious voter appeal.
However, Congress is fragmented and the centre-right Chile Vamos coalition will not have a legislative majority in either the Senate or the Lower Chamber of Congress so enacting policy changes may not prove straightforward.
Fitch recently lowered its long-term foreign currency rating for the Republic of Chile by one notch to A from A+ and adjusted the outlook to stable from negative. The move reflects a ‘prolonged period of economic weakness and lower copper prices, which are contributing to a sustained deterioration in the sovereign balance sheet.’ They note ‘per-capita income convergence’ with its A-rated peers has weakened and while government debt to GDP remains below the A median it has risen from the low levels that underpinned the A+ rating. Fiscal policy remains prudent as spending has been pre-financed with tax increases but weaker copper revenues have eroded some of the fiscal space.
The first round of the Chilean Presidential election is due to be held on Sunday 19 November 2017 following the July primaries where the main parties elect their candidates. The incumbent President Bachelet will have served two terms in office so will no longer be eligible to run according to the Chilean Constitution but given how her approval rating has plummeted in her second term the voters look ready for a change. Not only have her attempts at pension and education reform been poorly received but voter concern has been compounded by the recent wildfires that have destroyed over half a million hectares of land.
In what has been a pretty rough ride market-wide so far this year, we look to our favoured LatAm gem (or is it a gift? - apologies for the typo yesterday), Chile. Although the country remains highly dependent on commodities, ~50% of exports - with copper a large chunk of this, Chile has managed to maintain “strong fiscal and government metrics” according to rating agency, Moody’s.