The IMF’s recent global growth forecasts made for grim reading predicting that the ‘great lockdown’ would plunge the world economy into the deepest recession since the Great Depression of the 1930s followed by a recovery in 2021. Mirroring this, the IMF forecasts GDP growth for the South American region will contract by 5.1% in 2020 but then recover by 3.4% in 2021.
Chile looks to be one of the South American countries that is better positioned to counter a Covid induced recession having sufficient fiscal space and a low enough debt to GDP level to be able to put in place an appropriate fiscal policy response to help counter the health and economic impacts of the virus. So far, Chile has delivered on the policy front responding with two sets of interest rate cuts (125bps in total) taking the benchmark interest rate to 0.5% plus fiscal measures.
Chile announced a total of USD16.8bn in two key stimulus programmes: the first package of USD11.75bn (~4.7% of GDP) to tackle Covid-19 through healthcare assistance, income protection measures and support measures for businesses. This was followed up with a USD5bn stimulus to provide further assistance to workers from the more informal sectors of the economy and additional funding for business guarantees and support mechanisms. These measures follow on from the USD6.7bn package that was announced in response to the 2019 inequality riots.
Helped by these measures, the IMF’s forecasts look for Chile’s growth to contract 4.5% in 2020 but to then recover by 5.3% in 2021. Moody’s rates the Chilean sovereign A1 with a stable outlook and view “managing social demands for more inclusive growth while dealing with lower growth prospects” one of the key credit challenges it faces. (The Covid-19 lockdown has resulted in the referendum on changes to the constitution (following the riots) being delayed.) Fitch rates the sovereign A with a negative outlook reflecting the deterioration in the public finances but notes: “how we resolve the Outlook will reflect the resilience of Chile's sovereign balance sheet, including prospects for fiscal consolidation when the crisis eases, and the medium-term growth outlook.” But they also note “Risks to the public finances are mitigated by Chile's much lower debt burden than the 'A' category median. Under our revised growth and deficit forecasts, debt/GDP would reach nearly 39% this year and 42% in 2021 - still about 7.5pp lower than the 'A' category median.”