Global Insight Perspective | |
Significance | On 5 January the Chilean President Michelle Bachelet announced a US$4-billion stimulus package of increased public spending, tax breaks and exemptions, just as Central Bank data suggested a sharper-than-expected economic downturn. |
Implications | The plan is designed to create an additional 1% of economic growth and some 100,000 jobs, both directly and indirectly. To finance the plan, Chile will temporarily suspend its structural fiscal surplus rules. |
Outlook | With its solid budget surplus and some US$22-billion savings from copper windfalls, Chile is well positioned to pursue counter-cyclical policies, without jeopardising its sound macro-economic fundamentals. Successful economic crisis management may also be the biggest hope of the government to turn the electoral tide, ahead of the 2009 presidential election. |
Spending as the Way Out of the Economic Downturn
In a television address to the nation, Chile’s President Michelle Bachelet announced yesterday a US$4-billion stimulus plan designed to foster economic growth and create jobs, just as the country’s economy is stalling. The plan envisages additional public investment in infrastructure works, particularly roads, schools and housing, in the order of US$700 million. Employment will receive a boost with the introduction of loan subsidies for young people in low-income jobs, benefitting both employers and employees. Some 1.7 million families, currently receiving state subsidies from government anti-poverty programmes, will benefit from a 40,000 Chilean peso (US$62) bonus. On the tax front, the package contains substantial tax breaks and temporary exemptions, especially for private households and small and medium-sized enterprises. Tax cuts are estimated to total some US$1.46 billion, roughly equivalent to 1% of the GDP. Finally, the government will inject US$1 billion into the state-owned copper giant Codelco, in an effort to secure the flow of planned investments. To finance the plan, the government announced it will suspend Chile’s stiff fiscal surplus rule, reducing temporarily the surplus target from 0.5 % of GDP to zero. Chile will also tap money from its US$22-billion savings from copper windfalls. For today, a meeting with the presidents of the political parties is scheduled and tomorrow the laws containing the family bonus and tax measures will be sent to Congress.
Economic Growth Stalls
The announcement of the stimulus plan comes against the background of accumulating evidence that Chile is facing an economic downturn that could be worse than previously anticipated. The economic activity index IMACEC, released by the Central Bank on 5 January, showed a tame 0.1% year-on-year (y/y) expansion during November 2008, affected by poor performances of industrial production, mining, and commerce. Indeed, both mining and industrial production dropped 5.7% y/y during the reference month, while the retail sales index (IVCM), which includes supermarket sales, grew only 0.5% y/y, which can be mostly attributed to a 4.3%-y/y decline in durable goods' sales. Home appliances and new and used cars were the hardest hit by declining sales. The IMACEC seasonally adjusted series dropped 0.7% with respect to October 2008.
Outlook and Implications
On the economic front, weaker economic growth is anticipated for 2009. Chilean GDP expanded 4.2% y/y on average during the first three quarters of 2008. This year the economy will decelerate further, conditioned by the grim external environment and weaker domestic investments and consumption (see Chile: 24 December 2008: Global Economic Slowdown Impacts Investment Plans in Chile). IHS Global Insight forecasts Chilean GDP will grow 3.0% in 2009; however the risk to this forecast is on the downside. The Chilean central bank may cut the reference policy rate by up to 50 basis points on 8 January, amid weaker economic activity and lower inflation expectations.
Containing the looming economic downturn will also prove fundamental for the government as the forthcoming presidential election, scheduled for December 2009, has started to leave its mark on day-to-day politics. Facing a long-term fall in popularity, successful economic crisis management may be the biggest hope of the ruling Concertación government under President Bachelet to turn the electoral tide. Polls have consistently seen the putative opposition candidate Sebastián Piñera from the National Renewal (RN) commanding a comfortable lead over any Concertación candidate.