Country Report Chile November 2008

Outlook for 2009-10

• There are signs that a realignment of Chilean politics is underway, which may bring to an end two decades of rule under the centre-left Concertacion Democratica (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.
• Policymakers will focus in the short term on restoring stability to domestic financial markets. Both the Central Bank and the government have sufficient resources to cover a funding shortfall left by the drying up of credit lines.
• With growth set to fall below the trend level defined under the structural surplus rule in 2009-10 and the price of copper possibly falling below the trend level, a counter-cyclical policy might come into operation in 2009-10.
• With inflation having peaked and a slowing economy now the prime concern, the Central Bank will start a period of monetary easing, reducing the intervention rate from 8.25% in the fourth quarter of 2008 to 6% by end-2009.
• We have made a downward revision to our growth forecast in 2009, to 2.8% (from 3.3% in our October report), owing to the rapid escalation of the global financial crisis.
• The inflation rate is forecast to fall gradually in the rest of 2008 and in 2009, only moving back into the 3% (1 percentage point) target range in late 2009.
• The current-account deficit will widen from 1% of GDP in 2008 to 1.7% of GDP in 2009 and 3.7% in 2010, as copper prices fall from high levels in 2008.

Monthly review

• Opinion polls continue to point to forthcoming gains for the centre-right Alianza por Chile (Alianza) opposition, but the personal rating of the president, Michelle Bachelet, is holding up
• A recent study suggests that the official poverty statistics underestimate the extent of the problem in Chile.
• The authorities have acted quickly to inject liquidity into local capital markets in sharp response to turmoil that took over in September and October, which left the currency trading at its weakest nominal level since 2003.
• The budget for 2009 is the most austere in six years, proposing to increase spending by 5.7% in real terms.
• Inflationary expectations are falling in a context of lower commodity prices and falling output growth.

Source: Country Report

This report covers the following industry codes:
SIC Code: 60;49
NAICS Code: 52;22