Country Report Chile
In March 2014, Michelle Bachelet will become Chile’s next president. She has an ambitious reform agenda and aims to reform the tax and education system. Despite a slowdown in late 2013, the growth outlook remains relatively good.
Strengths (+) and weaknesses (-)
+ Strong institutions
Especially by Latin American standards, Chile has strong institutions. The quality of governance is high and corruption is low.
+ Good fiscal position
According to estimates, public debt was 14% of GDP and the budget deficit 1% of GDP in 2013. The government has committed itself to a structural fiscal surplus rule since 2001. The government is thereby a net creditor.
- Dependence on commodity (copper) exports
Copper exports accounted for 53% of total exports in 2012 and other commodities for another 26%.
- Relatively high level of inequality
Although inequality has fallen in the past two decades, it remains relatively high. In recent years, there have been rising social demands, particularly in the field of education.
1. Centre-left regains power
In March 2014, Michelle Bachelet from Chile’s left-wing political block will succeed Sebastián Piñera from the right-wing political block and become Chile’s next president. Bachelet was already president between 2006 and 2010. In December 2013, she won the second round of the presidential elections by obtaining more than 60% of the vote. Unlike her previous centre-left government, Bachelet’s new coalition, the Nueva Mayoría, also includes the radical Partido Comunista (PC). Bachelet has promised to implement an ambitious reform agenda.
Tax and education reform are an important part of this agenda. In recent years, education has been a major issue in Chile. In 2011, there were nation-wide protests, when students demonstrated for free and better education. While Chile performs relatively well compared to other Latin American countries in the field of education, the recent PISA education survey by the OECD showed that the educational performance of Chilean students is below the OECD average. The new government wants to spend more money on education and increase the accessibility of education. It aims to finance the additional spending by an increase of the corporate tax rate from 20% to 25% and reducing the opportunities for companies to defer payment of taxes. Although the business community is likely to oppose the resulting tax increases, we expect Chile to remain a relatively attractive place to do business. Furthermore, while the government may increase income redistribution, the overall macroeconomic policy mix is likely to remain business-friendly.
Bachelet also aims to implement a number of other important political and social reforms. She wants to revise the electoral system and the constitution and legalize abortion (in a number of cases) and same-sex marriage. Bachelet’s coalition, the Nueva Mayoría, has a majority in both houses of congress. It has 68 deputies in the 120-member chamber of deputies and 21 senators in the 38-member Senate. This should allow the government to easily implement reforms that require simple majorities. However, these majorities are not big enough to pass constitutional reforms without some support from the opposition.
2. Growth slowed down in late 2013, but outlook remains relatively good
Economic growth in Chile seems to have slowed down in late 2013. According to the Central Bank’s index of economic activity, economic growth in October and November fell to 2.8% year-on-year (yoy). In the first nine months of 2013, yoy growth was 4.5%. The deceleration in late 2013 seems to be caused by weak performance of the manufacturing and wholesale sectors, while mining activity remained strong. The slowdown in the manufacturing sector appears to be the result of a weaker investment growth, due to some uncertainty about the economic policies of the new government and the fact that some energy and mining projects are affected by delays as it has become more difficult to obtain environmental permits.
Meanwhile, consumption remained strong, partially as unemployment stayed very low. It was 5.7% in the September-November period and thus reached the lowest level (for that period of the year) in three decades. Despite the low unemployment rate, inflation has remained rather low. It increased to 3% in December 2013 and was thus exactly in the middle of the 2-4% inflation target range. This allowed the central bank to reduce its main policy rate by 25 basis points in both October and November. As a result, this rate now stands at 4.5%.
3. Energy will remain a major concern for Chile
One of the issues Chile’s new President Michelle Bachelet will have to deal with is energy. Due to a lack of investment in energy generation, spare capacity is very low. Large scale investment in the mining sector will even increase demand for energy. Furthermore, unlike most of its neighbours, Chile lacks sizeable reserves of fossil fuels. Planned large hydroelectric dam projects have faced a lot of opposition from environmental group and indigenous communities. Meanwhile, Chile’s Supreme Court has recently upheld an appeal by fishermen and environmentalists against a large coal-fired energy plant complex operated by a Chilean subsidiary of Spanish Endesa. The ruling may make it more difficult to build coal-fired plants. Bachelet has stated that one main dam project is not viable. She is nevertheless expected to follow a pragmatic course, but dealing with the energy issue will force her to take some difficult decisions.
With a per capita income of USD 16,010 (or USD 19,140 at PPP) in 2013, Chile is one Latin America’s richest countries. In the late 1960s and 1970s, political polarization culminated in the 1973 coup d'état by the military that overthrew the Allende government. A military dictatorship led by general Pinochet ruled Chile until 1990. Between then and 2010, Chile was governed by a centre-left government. The centre-right coalition that got into power afterwards will, on its turn, be succeeded by a centre-left government in March 2014. Since the end of military rule, Chile has managed to reduce its traditionally high inequality, but the income distribution has remained relatively unequal. In recent years, opposition to the economic and political elite has grown and support for the two voting blocks that have ruled Chile since 1990 has weakened. The large-scale 2011 student protest were a reflection of this trend. Nevertheless, politics has remained relatively consensual by Latin American standards.
Chile’s economy has continued to be dependent on copper exports. The country’s institutions and macroeconomic policies are strong and Chile has a friendly business environment. The country is one of the least corrupt countries of Latin America. Since the end of 1999, a full-fledged inflation targeting regime has been in place. Chile has been fiscally prudent. The government has committed itself to a structural fiscal surplus rule since 2001. Thanks to low public debt, a sizeable stock of foreign reserves and two sovereign wealth funds, the Chilean government is a net creditor. Chile has concluded free trade agreements with many other countries. Furthermore, the Chilean companies have strongly increased their investments in neighbouring countries in recent years.