CHILE SPECIAL FOCUS – Economic Outlook
Still on track Chile’s accession to the OECD marks a leap forward for its economic prospects. The terrible earthquake is unlikely to dim the country’s prospects.
M
hat a year of mixed fortunes it has been for Chile. First, the year started in conďŹ dence as the country signed the accession agreement to join the OECD. Becoming the ďŹ rst South American member of this organisation is a seal on several years of economic and social progress, not to mention hard work, and was greeted with pride by many Chileans. But then in February, a tragic earthquake struck, rocking the economy and public conďŹ dence as well. The earthquake hit Chile in the midst of a strong recovery. Output growth had been running at rates around 7%, and unemployment was declining. Now, three months after the earthquake, the question is to what extent the economy has been affected. The answer, fortunately, is far more positive than many people feared. Indeed, economic activity is likely to be only slightly affected over the year as a
whole. Output and employment probably suffered in the weeks following the disaster, but a reconstruction-led rebound is now expected. The most affected regions, which were temporarily cut off from the rest of the country by the disaster, are relatively remote and sparsely populated. True, they account for roughly a quarter of industrial and agricultural production, and their output and exports are likely to have taken a severe hit. However, reconstruction efforts should boost private and public investment from the second half of this year. The government plans to augment already generous depreciation allowances to further support private investment and provide subsidies to repair damaged housing. Exceptionally low policy interest rates, currently at 0.5%, and high public spending on reconstruction should bolster a recovery. Unemployment, which edged up after the earthquake, will resume its downward trend too. Meanwhile, Chile’s mining sector continues to thrive, with high copper prices set to boost export revenues.
Chile and the OECD: Improving Together ÂşJ^[ Âş9^_b[Wd mWoÂť WdZ _ji [nf[hj_i[ m_bb [dh_Y^ j^[ E;9: ed a[o feb_Yo _iik[i$ 9^_b[ ^Wi X[[d [cXWha[Z ed W Yedj_dkeki [\\ehj je h[\ehc _ji [Yedeco$ El[h d[Whbo jme Z[YWZ[i _j ^Wi Z[l[bef[Z W ijhed] i[j e\ Z[ceYhWj_Y _dij_jkj_edi" WdZ _j ^Wi ikYY[[Z[Z _d YecX_d_d] heXkij [Yedec_Y ]hemj^ m_j^ _cfhel[Z ieY_Wb m[b\Wh[$ J^_i [nf[h_[dY[ m_bb X[ Wd Wii[j \eh j^[ E;9: Wi m[ jho je WZZh[ii Yecced _iik[i ikY^ Wi _d[gkWb_jo eh j^[ Yel[hW][ WdZ l_WX_b_jo e\ f[di_ed ioij[ci$QÂąS Dem _i j^[ j_c[ je mh_j[ W d[m Y^Wfj[h ed ]beXWb [Yedec_Y ]el[hdWdY[ WdZ _dj[hdWj_edWb Ye#ef[hWj_ed$ ?j _i j_c[ je Xk_bZ W ijhed][h" Yb[Wd[h WdZ \W_h[h mehbZ [Yedeco$ ?j _i j_c[ je _Z[dj_\o WdZ fhecej[ d[m iekhY[i e\ ]hemj^" fkhik[ d[m _Z[Wi \eh _ddelWj_ed" Z[l[bef W d[m W][dZW \eh `eXi" jWa[ ij[fi je h[ZkY[ _d[gkWb_j_[i WdZ fhecej[ d[m ]h[[d#]hemj^ ijhWj[]_[i$ J^[ E;9: _i ^edekh[Z je [cXWha ed j^_i d[m [dZ[Wlekh m_j^ 9^_b[ Wi W d[m fWhjd[h WdZ c[cX[h Yekdjho$QÂąS =WXh_[b =WhY_W CWhgk[p edY[ iW_Z" Âş?j _i dej jhk[ j^Wj f[efb[ ijef fkhik_d] Zh[Wci X[YWki[ j^[o ]hem ebZ" j^[o ]hem ebZ X[YWki[ j^[o ijef fkhik_d] Zh[WciÂť$ 9^_b[ _i W oekd] Yekdjho WdZ j^[ E;9: _i W oekd] eh]Wd_iWj_ed0 b[j½i fkhik[ ekh Zh[Wci je][j^[h QÂąS Chile became a member of the OECD in May 2010. This is an extract of a speech by OECD Secretary-General Angel GurrĂa delivered in Santiago, Chile, 11 January 2010, following the signing of the agreement on the terms of accession. For the full speech, see www.oecd.org/speeches.
IV 50
%#&& #! &' $%# ( ' * & '#% # ' #"#!*
% ( '(% " ( ! " &'% ' #" #% &'* & " %&#" & %) & " " &' '
" " %) & #!!(" ' #"& % "&$#%' ' #"
"( '(% " '% '* & ' % #"&'%( ' #"
' % &' (% "'& #' &
The damage done to infrastructure could amount to around $20 billion, around 9 billion of which would need to be ďŹ nanced by the government, according to ofďŹ cial estimates. That is about 5% of GDP, but the country is in a good ďŹ scal position to confront this challenge thanks to its erstwhile ďŹ scal rule which helped it put away a good part of the revenues it earned from the copper price bonanza. Meanwhile, central government debt stood at just 6% of GDP at end 2009. Assets accumulated in the Fondo de EstabilizaciĂłn Economica y Social (FEES), the sovereign wealth fund, are of the same order, even after the government had used some of them to ďŹ nance revenues shortfalls and the ďŹ scal stimulus related to the recession in 2009. So, despite the costs of reconstruction, the budget deďŹ cit should nevertheless diminish as copper prices rise and revenues rise on the back of the recovery. The government also plans to introduce some temporary tax increases in 2011, which it can afford to do, since tax rates in Chile are comparatively low. Meanwhile, the decision to use a mix of instruments to ďŹ nance the deďŹ cit will limit any drawdown from sovereign wealth funds, thus limiting pressure on the exchange rate.