NS4540 Winter Term 2017 Chile: Economic Slowdown Oxford Analytica, Chile: Economic Prospects Will not Recover Rapidly Sept 13, 2016

Overview After many years of high economic growth, Chile is attempting to create a welfare state, but facing many difficulties in doing so While the Chilean liberal model has created macroeconomic stability, it has failed to ensure an equitable distribution of the fruits of that growth Economic development over the medium to long term challenged by high levels of inequality which have been targeted by the reforms adopted by the government since 2014 to maintain social cohesion. These reforms have been slow in coming and have faced opposition, particularly from the business community, in a difficult domestic and international economic climate.

Income Distribution The share of national wealth has remained highly unequal Share of income going to the wealthiest 10% was still more than 41% in 2013 (from 47% in 1990) While share going to the poorest 10% remained below 10% Endemic nature of wealth inequalities increases the difficulty in eliminating disparities linked to a relatively compartmentalized social structure which limits social mobility Also highlights the failures in Chile’s redistributive policies which are the second most inefficient in the OECD (after Mexico)

Longer Term Patterns The Chilean economy has been the success story of South America. But there has been something of a deterioration over time. Economic growth in the 1990s averaged 6.3% per annum, falling to 4.0% in the 2000s, and 3.8% from 2010-16 Investment as a share of GDP averaged 26.5% in the 1990s, dropping, to 21.8% in the 2000s, only to rise to 23.3% from 2020-16 Exports of goods and services grew at an average annual rate of 9.6% in the 1990s, falling to 4.4% in the 2000s, and 1.6% between 2010 and 2016

Recent Developments The Chilean economy has slowed down considerably in the last several years Forecasts of the Chilean Central bank suggest that growth will remain low in 2017/2018 and perhaps so into the medium term Forecasts reflect The impact of currently low investment and The the fact that there is little room for sustainable fiscal or monetary stimulus Growth has been decelerating from 5.8% in 2011, falling to 5.5% (2012), 4.0% (2013), 1.8% (2014), 2.3% 2015 and 1.7% (2016). Over the past five years the Central Bank has gradually reduced its estimate of the economy’s medium term growth potential from around 5.0% to 3.2% Oxford Analytica, Prospects 2007 Chile, November 9, 2016

Economic Obstacles I This plateau reflects both external and internal factors Copper price Over first ten months of 2016 the price of copper, Chile’s main export averaged 2.14 $/pound down from $2.56/pound in 2015 No significant increase is expected for 2017 As a result copper’s contribution to revenues decreased to only 0.3% of GDP in first 9 months of 2016 compared to 4.2% when copper averaged $4/pound World trade Export driven Chilean economy also been negatively affected by sluggish world trade Exports to US were down to $6.2 billion in first 9 months of 2016 compared to $6.5 billion in same period 2015 Trend could worsen if Trump carries through on protectionism Shortfalls in areas such as education and ports infrastructure have no rapid solution to boost competitiveness in the longer term 2017 would be Chile’s fourth year of growth of only 2% Business criticism of the government’s reforms is lowering confidence in the economy Growth has been decelerating sinceIn 2013 after three years of more than 5.0% annual GDP expansion, growth slipped to 4.0% and then to 1.9% in 2014 and 2.3% in 2015 Initially interpreted as a temporary decline related mainly to the price of copper, Chile’s principal export.

Economic Obstacles II Structural Bottlenecks Along with growth investment as a share of GDP has fallen from 22.5% (2012), to 24.5%(2013), 22.2%(2014), 22.3% (2016), with the IMF forecasting 22.0$ for 2017 Drop attributed partly to a loss of local business confidence blamed in part on the reform program of the center-left government of President Bachelet After controversial tax and labor reforms government is now proposing changes in the country’s private pension system where there is much business opposition Longer term problems include Low educational standards, relative to the Asian emerging economies An ageing population’s effect on the labor supply and Infrastructure deficits, particularly ports

Economic Obstacles Concerns III Foreign investment FDI has fallen to $6.8 billion in the first half of 2016 as opposed to 20.5 billion in whole of 2015 and 22.3 billion in 2014 Household consumption Grew by 1.9% in 2015, down from 2.4% in 2014 and 5.5% in 2013. The slowdown reflects Unemployment running at 7.1% up from 6.6 year earlier. Has been a deterioration in job quality in that drop in payroll employment has been offset by an increase (usually more precarious) self-employment Wage growth has also slowed – 0.8% in 2016 down from 1.5% in 2015 Consumer confidence has been weakening since early 2014. Recently reached its lowest level since the 2008-09 crisis Polls show some 60% consider the country has stagnated

Stimulus Options I Lower growth appears at least for the time being to have become the new “normal” and the stimulus options are limited Monetary Policy In August 2016 annualized inflation dropped to 3.4% after more than two years above or very close to the ceiling of the Central Banks 2.0-4.0% target range. Forecasts suggest a year-end-rate of 3.5% dropping to 3.0% in 2017 Reduction due largely to stabilization of the peso against the dollar after its depreciation in 2013-15 However no reduction in reference interest rate – at nominal 3.5% since December 2015 Given the reference rate is already negative in real times, not clear how much impact any counts would have.

Stimulus Options II Fiscal Policy With next presidential and legislative elections due in November 2017, Finance Ministry under pressure to have an expansionary fiscal budget However under a fiscal rule introduced in 2001 government spending is tied to the economy’s medium term growth potential and long-term copper prices Currently this rule would limit the rise in spending to around 3% in 2016 down from a budgeted 4.4% increase and a reported 4.1% over the first seven months of 2016

Consumer confidence has been weekening since early 2014 Consumer confidence has been weekening since early 2014. Recently reached its lowest level since the 2008-09 crisis Polls show some 60% consider the country has stagnated Options