Country Report Chile October 2009

Outlook for 2010-11

• Sebastian Pinera of the Coalicion por el Cambio remains favourite to win December's presidential election and take office for a four-year term in March 2010. He would maintain broad policy continuity if elected.
• A Pinera-led government would seek to introduce changes to raise productivity levels and reduce rigidity in the labour market.
• The fiscal deficit will fall to 1.7% of GDP in 2010 before reverting to a surplus (of 0.1% of GDP) in 2011 as growth recovers and the government reverts to observing its structural fiscal rule following the 2009 to early 2010 stimulus.
• The Banco Central de Chile (BCC, the Central Bank) will maintain its accommodative stance until at least the first quarter of 2010, raising rates slowly thereafter to 2.5% by end-2010 and 4% by end-2011.
• Chile's economy returned to growth in mid-2009 and we expect GDP growth to reach 3.9% in 2010 and 4.3% in 2011, led by investment. Continued high unemployment will dampen private consumption growth in 2010.
• After posting negative rates in late 2009, inflation will gradually rise as demand recovers and commodity prices strengthen, and will average 2.9% in 2010-11, reaching the target range of 2-4% in mid-2010.
• The peso will weaken slightly in real terms, to Ps583:US$1 at end-2011, close to its 2000-08 real average, owing in part to the weakening effect of this year's rate cuts.
• The current-account deficit will widen in 2010 and 2011, to 0.5% and 2% of GDP respectively, as imports rise and the income deficit widens again.

Monthly review

• Increased welfare measures have failed to boost Mr Frei's electoral ratings; his move to the left has further opened the centre ground for Mr Pinera.
• Armed forces spending is to be brought within normal budgetary parameters once a bill to reform the Copper Reserve Law is passed.
• A capital market reform, unlikely to be passed before the elections, seeks to raise banking competition, but is not as deep as market participants wanted.
• The economic recovery has continued, with production and sales indices growing in August, the fourth month of growth in output.
• Monthly inflation turned positive in September, but following firm deflation in most months this year, the 12-month rate was negative, at -1.1%.
• The peso has weakened by 4% since end-June, in part owing to stimulatory rate cuts which have led investors to seek countries with higher returns.