Country Report Chile December 2008

Outlook for 2009-10

• Sebastian Pinera of the centre-right opposition Alianza coalition is early favourite to win the December 2009 presidential election, which would end two decades of rule under the Concertacion coalition.
• Policymakers are relatively well placed to mitigate the damage to the domestic economy by the global financial crisis, owing to Chiles sound public finances and a comfortable cushion of reserves.
• We now expect the fiscal accounts to move into a cash deficit of 0.4% of GDP in 2009 (we had forecast a surplus of 3.3% of GDP in our November report) and 0.2% in 2010 (previously a surplus of 1.8% of GDP).
• We have made further downward revisions to our global growth forecasts. We expect the US, EU and Japan to be in recession in 2009, and are increasingly concerned about China's resilience to the global downturn.
• We now forecast a 5.5% contraction in investment in 2009 (previously we forecast growth of 2.8%) and contractions in both export and import volumes. This has led us to revise down our growth forecast for 2009 to 1%, from 2.8%.
• Recovery in 2010 will be mild, at 2.4% (down from 3.8% in our November report), with a return of positive export growth.
• Inflation will fall gradually in the rest of 2008 and in 2009, only moving back into the 3% (1 percentage point) target range in late 2009.
• Sharp falls in the copper price and collapsing demand have led us to revise up our forecasts for the current-account deficit, which we now expect will widen from 2.6% this year (up from 1%) to 5% in 2009 (1.7%) and 3.6% in 2010 (3.7%).

Monthly review

• The Alianza made significant gains in October's municipal elections, bolstering its prospects of performing well in the 2009 elections.
• The government has been weakened by ceding to public sector demands for a double-digit pay-rise after a strike in November, and by a scandal over negligence in healthcare, which led the minister of health to resign.
• The Central Bank is now projecting a harsher economic outlook for Chile, but with inflation still high, we do not expect monetary easing until early 2009.
• GDP growth surprised on the upside in September, but business and consumer confidence are falling sharply.
• Inflation was above expectations in October, and a tumbling copper price and still-strong domestic demand has seen Chile record its first monthly trade deficit in six years.

Source: Country Report