Country Report Chile April 2009

Outlook for 2009-10

• Sebastian Pinera of the centre-right opposition Alianza coalition is favourite to win the December 2009 presidential election. This would end two decades of rule by the centre-left Concertacion, but would entail broad policy continuity.
• In 2009-10 policymakers will prioritise stimulatory fiscal and monetary measures to mitigate the damage to the domestic economy by the global recession, backed by sovereign savings and a comfortable cushion of reserves.
• Stimulatory policies will result in fiscal deficits for the first time in seven years (we project a 3.4% of GDP deficit in 2009 narrowing to 1.5% of GDP in 2010). Ample fiscal savings and domestic debt issuance will finance the shortfalls.
• After a cut of 600 basis points in the target interest rate in the first three months of 2009, monetary policy will be loosened slightly further as inflationary pressures fall and the Central Bank looks to stave off recession.
• The collapse in global trade since end-2008 is causing severe problems for export-dependant sectors, leading us to make further downward revisions to our forecasts for global trade and economic growth in 2009-10.
• Although Chile is in a strong position to provide a fiscal boost, the open nature of its economy means that trade will fall more sharply than previously assumed, and we now forecast a contraction in GDP (of 0.5%) this year.
• The current-account deficit will widen to 3.8% of GDP in 2009, owing primarily to worsening terms of trade and a sharp fall in the trade surplus.

Monthly review

• Ms Bachelet has enjoyed a strong recovery in her popularity in recent months, helping to shore up her government in its final year in power.
• A mini cabinet reshuffle has followed the resignation of the minister of foreign affairs in protest at MsBachelet's refusal for her delegation to meet opposition leaders or dissidents on a recent state visit to Cuba.
• The main challenger to Eduardo Frei to become the Concertacion's presidential candidate in this year's election continues to battle, despite his minimal chances of overhauling Mr Frei.
• The Central Bank has continued its sharp monetary easing by reducing its interbank lending rate target from 4.75% to 2.25% in March.
• Economic expectations continue to deflate, after sharp falls in growth were recorded in the final quarter of 2008 and January 2009.
• The consumer price index fell for the fourth consecutive month in February.

This report covers the following industry codes:
SIC Code: 60;49
NAICS Code: 52;22