An In-Depth Investigation Into Chile's Growth And Expectations!
In the first part of 2018, Chile’s gross domestic product was expected to grow at its highest level in five years.
GDP figures show that the Chilean economy grew 5.3% year-on-year (YoY), which is guided by fixed capital investment and exports. This is the fifth quarter of accelerating growth and the highest since 2012. The latest estimate from the Chilean central bank for annual growth is between 3.25% and 4.25% for 2018 and 2019. Inflation is currently under 3%. And that is a good signal.
While copper accounts for a significant share of Chilean exports - around 50% - macroeconomic vulnerability to trade conditions is significantly reduced by a combination of monetary, fiscal and exchange rate policies that have existed for almost 18 years. In particular, a fully flexible exchange rate regime allows the local currency to reduce external shocks, while the inflation targeting system facilitates counter-cycle monetary policy.
The fiscal framework is based on a structural balance sheet, with planned expenditures based on copper prices adjusted to the cycle, enabling the functioning of fiscal stabilizers. In particular, flexible exchange rate regimes can act as shock absorbers, due to proper monitoring of currency risk of financial institutions and deep hedging of currency positions in the corporate sector, without fear of financial stability that affects other developing market economies.
Latin America sees 2018 and 2019 as a downward correction in line with market revisions. This is due to Argentina's important adjustments and delays in Brazil. At the same time, markets appear to be able to identify countries with stronger fundamentals - such as Colombia, Peru and Chile - in the face of increasing uncertainty.
The main risk in the current global business cycle is supportive. So far, external conditions have continued to be favorable because the global economy is expected to outperform this year and next, with major central banks maintaining their flexible positions. Internal conditions are also positive in improving the domestic business cycle, driven by investment, exports and consumption.
The Chilean economy does not face major macroeconomic problems that could hamper this recovery. However, external risks are down and Chile must be prepared to respond to more difficult scenarios appropriately.
Chile care deeply about:
1. Intensification of trade disputes, especially relating to the US and China, is an important trade partner of Chile.
2. Increased inflationary pressures in the US and a faster Fed increase
3. Another recession in emerging market sentiment that can be triggered by one of the two previous factors.
However, the Central Bank of Chile is ready to face new challenges. Although there are some exchange rate differences (currently 15%, one of the lowest in the region), the country have enough room to maneuver. The current framework allows monetary policy to focus on medium-term inflation forecasts - towards the CPI in the next two years, rather than short-term inflation based on the confidence the central bank has gained after nearly 30 years of independence.
This is important because external shocks can be inflationary in the short term due to currency devaluation, but are limited to medium-term growth and the outlook for inflation. Therefore, the impact of such a scenario on monetary policy is distinguished given the short and medium term inflation compromise and will be closely monitored by the Central Bank Board to calibrate the appropriate monetary policy response.
