Country Report Chile September 2008

Outlook for 2008-09

• There are signs that a realignment of Chilean politics is underway, which may bring to an end two decades of rule under the 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 2008-09.
• 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 3.6% (from 3.8% in our August report) owing to gloomier prospects for global trade growth and for Chilean private consumption growth.
• We have made a further upward revision to our inflation forecast for end-2008 to 8.3% (from 7.9% last month). Inflation will ease in 2009, but will remain above the ceiling of the 3% (±1 percentage point) target.
• The current account will move into a deficit of 0.3% of GDP in 2008, widening to 1% of GDP in 2009. This is an upward revision to our August forecasts (of deficits of 0.1% and 0.7% of GDP).

Monthly review

• An important public transport subsidy bill was passed by one vote in the Chamber of Deputies, but has yet to pass to the Senate.
• A record number have registered for the municipal elections, owing to a lack of unity in the Concertacion and the emergence of a third centrist coalition.
• The Central Bank raised its monetary policy rate by 50 basis points in August (the third consecutive rise of this magnitude), as it sought to bring inflationary expectations back towards the two-year target rate of 3%.
• The fiscal surplus narrowed sharply in the second quarter, raising the possibility of spending cuts later in the year.
• Changes are set to be made to Chile's sovereign wealth funds, with international fund management firms to manage 35% of the funds.
• The government has launched a new capital reform, chiefly aimed at promoting a deepening of the corporate bond market and improving access to funds for small and medium-sized businesses.
• A rebound in GDP growth has been accompanied by continued high inflation.
• Although banks continue to maintain healthy loan portfolios, credit growth is starting to slow.

Source: Country Report