Country Report Chile

Outlook for 2008-09

• The president, Michelle Bachelet, will struggle to regain her authority over the centre-left ruling coalition, Concertacion Democratica, which has lost its majority in both houses.
• The centre-right Alianza por Chile (Alianza) opposition is well-placed for municipal elections in October 2008 and presidential and congressional elections in 2009.
• With an open economy and a fiscal policy based on a structural fiscal surplus rule, Chile's macroeconomic policies will remain mostly sound in 2008-09.
• However, a move in April by the Banco Central de Chile (the Central Bank) to intervene in exchange rate markets to quell the appreciation of the peso risks complicating its inflation-targeting regime.
• Fiscal policy will be more expansionary in the forecast period, but continued high prices for copper will enable Chile to post strong surpluses.
• Following a period of monetary tightening and rising inflation, private consumption growth has started to slow. This will bring GDP growth down to 3.6% in 2008. GDP growth will start to recover in 2009, reaching 3.8%.
• Inflation is likely to ease from its March high, but remain above the ceiling of the 3% (±1 percentage point) target throughout the year, ending 2008 at 6.3%.

Monthly review

• Although Ms Bachelet's personal approval rates continue to recover, the Concertacion is divided and struggling, leaving the leader of Renovacion Nacional, Sebastian Pinera, in a strong position.
• Divisions within the Concertacion are pushing it to the brink as negotiations for the municipal lists leads to threats of a split.
• The Central Bank has revised down its growth forecast for 2008 and warned of inflationary dangers.
• The fiscal surplus reached a record 3% of GDP in the first quarter, helped by continued strong copper prices.
• The government is set to send a labour and equity bill to Congress, which promises to put employability at the centre of the fight against inequality.
• First-quarter growth reached just 3%, dragged down by a negative net contribution from trade; communications remains the most dynamic supply-side sector.
• The current-account surplus narrowed sharply in the first quarter in year-on-year terms.