Country Report Chile June 2009

Outlook for 2009-10

• Sebastian Pinera of the newly created Coalicion por el Cambio (Coalition for Change, a broad-based liberal 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 done 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 3.3% of GDP deficit in 2009 narrowing to 1.2% of GDP in 2010). Ample fiscal savings and domestic debt issuance will finance the shortfall.
• After a cut of 700 basis points in the target interest rate in the first five months of 2009, monetary policy will be loosened slightly further as inflationary pressures fall and the Central Bank looks to combat recession.
• The outlook for the global economy remains poor, despite signs that the pace of the decline is slowing.
• 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 1% this year.
• The current-account deficit will narrow to 1.4% of GDP in 2009, as a sharp fall in the trade surplus is more than offset by a falling income deficit.

Monthly review

• The Concertacion's presidential candidate, Eduardo Frei, continues to lag MrPinera in opinion polls tracking voting intentions, despite the Concertacion government's rebound in popularity this year.
• MrPinera has formally launched his Coalicion por el Cambio electoral alliance, bringing together the current centre-right Alianza coalition and several former Concertacion members and groupings.
• The Central Bank cut its monetary policy rate again in Mayby 0.5%, to 1.25%, the lowest level on record, with both inflationary projections and GDP growth falling fast.
• Chile recorded its first fiscal deficit in six years in the first quarter, a product of slumping revenue and countercyclical expenditure growth.
• The government has reached an agreement to provide more employment protection during the recession.
• GDP contracted by 2.1% year on year in the first quarter, a result of the escalation of the global crisis in the fourth quarter of 2008, which has hammered business and consumer confidence and hit industrial output.