Country Report Chile March 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 3.5% 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 350-basis-point cut in the target interest rate in the first two months of 2009, monetary policy will be further loosened in the first half of the year as inflationary pressures fall and the Central Bank looks to stave off recession.
• Collapsing industrial production in OECD countries is hitting emerging economies more severely, leading us to make further downward revisions to our forecasts for global trade and growth in 2009-10.
• Although Chile is in a strong position to provide a fiscal boost to support growth, the open nature of its economy means that trade and investment will fall more sharply than previously assumed, following our global revisions.
• We have cut our GDP growth forecast for 2009 to 0.4% from 1% owing to sharper declines in consumption, investment, exports and imports.
• The current-account deficit will widen to 3.4% of GDP in 2009, owing primarily to worsening terms of trade and a sharp fall in the trade surplus.

Monthly review

• Polls confirm MrPinera as favourite to win December's presidential election, and with unregistered voters appearing to show even stronger support for the Alianza candidate, he will push for increased voter registration.
• The net impact of an electoral alliance between the Concertacion and far-left groups is difficult to predict: it will boost the coalition's chance of congressional seats, but also risks alienating centrists within the Concertacion.
• With inflationary expectations falling sharply, at its monthly policy meeting in February the Central Bank cut its target lending rate by 250 basis points to 4.75%, the largest change in the countrys monetary policy rate on record.
• Fourth-quarter GDP growth slowed to an estimated 1.1%, with business confidence down sharply and investment projects being shelved or delayed.
• The collapse of commodity prices and falling global demand led to a fall in export earnings of 41.3% year on year in January.

This report covers the following industry codes:
SIC Code: 1
NAICS Code: 11