Country Report Chile October 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.
• With an open economy and a fiscal policy based on a structural fiscal surplus rule, Chile's macroeconomic policies will remain mostly sound in 2009 and under the new government that takes office in March 2010.
• The government will review its spending plans, given fears over inflation control, and following a marked acceleration in 2008 we expect nominal spending growth to fall in 2009.
• We have made a downward revision to our growth forecast in 2009, to 3.3% (from 3.6% in our September report), owing to gloomier prospects for global trade growth.
• We have made a further upward revision to our inflation forecast for end-2008 to 8.5% (from 8.3% last month). Inflation will ease in 2009, but will only fall into the 3% (±1 percentage point) target range in 2010.
• The current-account deficit will widen from 0.5% of GDP in 2008 to 1.9% of GDP in 2009 and 3% in 2010, as copper prices fall from high levels in 2008.

Monthly review

• Public opinion polls continue to highlight the weak position of the government of the president, Michelle Bachelet of the Concertacion coalition.
• The centre-right opposition Alianza por Chile (Alianza) continue to gain confidence that it can win the December 2009 presidential election.
• The Central Bank reinforced its tightening stance, lifting its intervention rate in August and September meetings to 8.25%, and signalled further rises ahead.
• There is growing pressure for the botched Transantiago public transport system in the capital to be restructured, which would be politically damaging for the government.
• GDP grew by 4.3% in the second quarter, as private demand growth was stronger than expected. Monthly output in July increased by 6.2%.
• Strong import growth caused the current account to swing from surplus to a small deficit.