Slower growth rate as the global commodity boom came to an end.
Chile industries performance outlook
Head of state/government:
President Michelle Bachelet (since March 2014)
18.0 million (est.)
Stable – but the government’s popularity has decreased
President Michelle Bachelet’s administration is backed by a comfortable majority of the centre-left Nueva Mayoría coalition in both houses of Congress. However, structural reforms to combat inequality and to promote infrastructure investments are progressing. In 2015 a corruption scandal involving the president’s son weakened the government’s authority. At the same time, a campaign-financing scandal hurt the conservative opposition’s reputation. Those incidents have sharply damaged approval ratings and popularity for both government and opposition. Next presidential and general elections are due to be held in November 2017.
Lower growth rates due to the end of the commodity boom
Chile’s open economy is highly dependent on copper exports (accounting for more than 50% of export earnings, 25% of direct and indirect government revenues and 10% of GDP) and on the global financial cycle (due to its large internationally integrated financial sector). Growth has slowed down since 2014 as the global commodity boom came to an end (especially lower imports from China) and domestic demand decreased, affecting both investments and consumption. However, government spending growth continues, with GDP forecast to increase 2.2% in 2016 and 2.8% in 2017. Non-copper-related revenues have increased over the past decade (copper now accounts for 6.5% of direct government income, down from 34% in 2005), but there is still more potential to diversify the economy by increasing investments in non-mining related sectors. Income inequality, low education and low productivity remain stumbling blocks for long-term economic growth.
Inflation increased 4.4% in 2014 and 2015, on the back of several interest rate cuts in 2014 intended to stimulate the economy and the depreciation of the Chilean peso. Inflation is expected to be lower in 2016 due to a recent monetary tightening.
More pressure on import-dependent sectors
In 2016 the external environment is expected to remain difficult, as a consequence of uncertainty involving the Chinese economy and persistently low copper prices. The Chilean peso depreciated by about 30% since 2013, which led to an increase in import prices. Import-dependent sectors like consumer electronics, retail and plastics are the most vulnerable, and we have observed that some businesses are using currency depreciation and price volatility as a pretext for delayed payments.
A resilient economy
Despite increased currency volatility, the Central Bank still has ample reserves to intervene in the managed float of the currency, and further depreciation should be limited. The economy’s shock resistance is strong, given prudent macroeconomic and financial policies, low public debt (less than 20% of GDP), a sustainable external debt rate of 62% of GDP in 2016, and sufficient liquidity due to Chile’s Sovereign Wealth Fund (SWF). When copper prices were high, substantial fiscal savings were stored in the SWF, for use in case of a downturn. The value of the SWF currently amounts to USD 22.3 billion, or 9.2% of GDP. The Chilean business environment is one of the best in the region and the government continues to stimulate foreign investment. Chile’s banking sector is healthy, well-regulated and sufficiently capitalised, with low non-performing loans (about 2% on average). Good access to foreign and domestic capital by local companies reduces the refinancing risk.