Country Report Chile July 2009

Outlook for 2009-10

• Sebastian Pinera of the newly created Coalicion por el Cambio (Coalition for Change, a broad-based alliance) remains favourite to win December's presidential election. He would maintain broad policy continuity if elected.
• Policymakers will prioritise stimulatory fiscal and monetary measures to mitigate the damage to the domestic economy wreaked by the global recession, backed by sovereign savings and a comfortable cushion of reserves.
• The fiscal deficit will reach 4.1% of GDP in 2009 and 1.4% of GDP in 2010. An official admission that the structural targets will be missed this year has led us to revise these forecasts from 3.3% and 1.2% of GDP since last month.
• Forward-looking economic indicators have improved, suggesting that the worst of the contraction in global GDP is over.
• Our GDP forecast of a 1% contraction in 2009 and 2.2% growth in 2010 is based on a premise of continued weakness in the second quarter, with a mild recovery getting under way in the third quarter of the year.
• Industrial production remains weak, reflecting low external demand, which is raising unemployment and depressing investment.
• The peso will continue its gradual strengthening, boosted by dollar inflows from the repatriation of US$4bn from Chile's sovereign wealth funds, as it has since its recovery in value started in late 2008.
• The current-account deficit will narrow to 0.9% of GDP in 2009, as a sharp fall in the trade surplus is more than offset by a falling income deficit.

Monthly review

• Eduardo Frei, the Concertacion's presidential candidate, has seen his poll ratings rise and is closing on Mr Pinera, boosted by a surge in popularity for Ms? Bachelet's incumbent government.
• The Concertacion has signed an electoral pact with the Partido Comunista which will help shore up its congressional vote.
• Fiscal and monetary stimuli continue apace, with the Central Bank cutting its interbank lending rate to 0.75% and the Ministry of Finance departing from its fiscal rule to maintain the countercyclical fiscal boost.
• The government is turning to debt and its sovereign wealth funds to finance the deficit, which is contributing to a rally in the exchange rate.
• A law on wage equality to reduce gender discrimination has been passed.
• Consumer confidence appears to be recovering despite the economic contraction deepening in April and unemployment reaching a four-year high.

Source: Country Report

This report covers the following industry codes:
SIC Code: 49;48
NAICS Code: 22;517