The OECD’s latest economic outlook forecasts that the Chilean economy will contract 5.6% in 2020 under their single Covid-19 outbreak scenario where they assume the economy will start to recover in 3Q. Under a second outbreak scenario they forecast that growth would fall 7%. In 2021 they look for growth to rebound 3.4% under the single outbreak and 1.9% under a second outbreak scenario.
The OECD report describes Chile as having responded with “swift and unprecedented fiscal and monetary stimulus packages” to the Covid pandemic and economic fallout; stimulus packages of 4.7% of GDP and 2% of GDP were put in place in March and April to support workers impacted by the pandemic and to provide liquidity and working capital to companies. They also highlight Chile is well positioned in the sense that “Credible institutions and sustainable fiscal policy have put the economy in a favourable position before entering the social crisis and the virus outbreak, which leaves room for further fiscal and monetary policies to support the economy, if needed.”
Since the release of the report, the Chilean government announced that a further USD12bn stimulus package had been agreed over the weekend. President Pinera described the measures as “a robust effort to revive employment, entrepreneurship, investment and economic activity”. The measures include income support measures for low income and unemployed, subsidies to support job creation and tax incentives for SMEs, all measures that fit with OECD’s policy recommendations to support the recovery.
Overnight, the Central Bank of Chile left interest rates unchanged at 0.5% in a unanimous decision. The statement noted the Board “will maintain a high monetary impulse for a prolonged period of time” and “it estimates that it will keep the MPR at its technical minimum over the entire projection horizon.” The central bank also extended the unconventional measures noting “The Board estimates that the economy requires an intensification of the monetary boost.” These measures include additional liquidity lines of USD16bn over 8 months to banks through to support credit growth and an USD8bn special asset purchase program.
Nevertheless, while the fiscal and monetary responses are supportive of the economy, Chile still has work to do to bring Covid-19 infections under control and President Pinera appointed a new health minister, Enrique Paris, over the weekend.