Earlier this week, Chile unveiled an USD5.5bn stimulus package in response to a weak economy and the fallout from the October protests (concerning inequality which were initially triggered by a planned increase in metro fares). In October economic activity fell 3.4% yoy which was much weaker than analyst expectations with non-mining activity (services, commerce and manufacturing) particularly hard hit.
Ignacio Briones, the Chilean Finance Minister, said the Ministry of Finance was slashing their growth estimate to 1.4% for 2019 following the social unrest. Given that the economy grew 3.3% in Q3 this is a big slowdown. They forecast growth will be 1-1.5% in 2020. The increase in spending will increase the fiscal deficit to 4.4% of GDP next year and Briones expects debt to stabilise at 38% of GDP in 2024.
Briones commented: "Like any Chilean household that faces unforeseen trouble, we will turn to our savings and our borrowing capacity, while remaining aware that both have limits that cannot be exceeded." Going forward, we expect the length and extent of the slowdown and how effective government policy is in responding to this to be key drivers from a credit point of view. Chile has fiscal scope to engage in countercyclical policy (under the fiscal rule) but if growth were to remain weak and fiscal deficits continue for a long period of time then this is likely pressure metrics such as government debt to GDP levels. Our base case remains that Chile will stabilise the situation.
The Central Bank has bought forward its policy meeting to later today and while further rate cuts seem warranted the situation is complicated by weakness in the Chilean peso. The Chilean peso has weakened ~9.3% (spot basis to 3 December) against the US dollar since the start of October with the central bank intervening in the market at various points. US dollar-denominated Chilean bonds have been resilient: For example, Chile 3.4% 2028 is trading off ~1.5pts since the start of October at the time of writing.