Country Report Chile May 2009

Outlook for 2009-10

• Sebastian Pinera of the opposition Alianza coalition is favourite to win December's presidential election. Although this would end two decades of rule by the Concertacion, it would maintain broad policy continuity.
• 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 3.3% of GDP deficit in 2009 narrowing to 1.3% of GDP in 2010). Ample fiscal savings and domestic debt issuance will finance the shortfalls.
• After a cut of 650 basis points in the target interest rate in the first four 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 0.8% this year.
• The current-account deficit will narrow to 1.8% of GDP in 2009, as a sharp fall in the trade surplus is more than offset by a falling income deficit.

Monthly review

• The popularity of the president, Michelle Bachelet of the Concertacion coalition, has risen further in the past month, owing mainly to popular support of her government's economic policies.
• Nevertheless, MrPinera remains favourite to win the presidential election, a view reinforced by progress he is making in creating a centrist coalition for change, bringing some disaffected former Concertacion members on board.
• The Central Bank has continued its rapid monetary relaxation, reducing its reference interest rate by a further 50 basis points in April.
• Transantiago, the public transport system for the capital introduced in February 2007, has accumulated losses exceeding US$1bn since its inception.
• The government is taking measures to support the ailing salmon farming industry.
• Economic activity fell sharply in February, and trade data support the view that the economy underwent a sharp fall in the first quarter.