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CHILE
1. General trends
The Chilean economy continued to grow briskly in 2011 as seen in 6% GDP growth on the heels of the
6.1% posted in 2010. Unemployment rates have been declining at a steady pace since 2009 to an average
of 7.2% in 2011 compared with 8.3% in 2010. Average annual inflation stood at 3.3% (4.4% to
December) and, while in line with central bank expectations, trended up along with several indices
signalling idle production capacity depletion. International copper prices trended down during the second
half of the year as the global economy slowed, but they remained higher than in previous decades. These
factors, plus burgeoning domestic demand, contributed to a current account deficit of 1.3% of GDP versus
the prior-year surplus of 1.5%.
So far in 2012 growth in economic activity has been slowing, albeit not as much as expected.
Projected growth for the year has therefore been revised upwards to between 4% and 5%. Unemployment
rates have continued to fall, reaching lows that have not been seen in many years and are very close to full
employment. As production capacity gaps are filled, inflation has been edging up and, while still
moderate, is above the upper limit of the monetary policy target range.
The national accounts methodology was changed in 2011 in order to estimate real variations;
base-year prices are no longer fixed but are calculated using prior-year prices.
2. Economic policy
(a)
Fiscal policy
There were no significant macroeconomic policy changes in 2011. Fiscal policy continued to be
guided by a medium-term structural balance target (0% of GDP in 2014) and, because of the effective
deficits in 2009 and 2010 (4.5% and 0.4%, respectively), nudged public spending up slightly. Economic
growth and copper prices triggered a jump in tax revenues in 2011. Total consolidated central government
revenue posted a real increase of 11.6% between 2010 and 2011, to 24.3% of GDP. Spending was low
during the first half of the year but recovered in the second half to show real growth of 3.2% and reach
22.9% of GDP. This contributed to an effective surplus for 2011 equivalent to 1.4% of GDP and reversed
the deficit positions of the two previous years.
Because the economy is growing faster than the trend and average copper prices held above
medium-term projections, correcting revenue for these cyclical factors would still yield a structural deficit
on the order of 1.6% of GDP.
The evolution of public revenue and expenditure allowed for a partial rebuilding of sovereign
wealth fund savings and would support a new round of countercyclical government action, if necessary.
Even so, these funds have not yet regained their pre-global financial crisis highs. At year-end market
prices, the Economic and Social Stabilization Fund (FEES) stood at US$ 13.157 billion and the Pension
Reserve Fund (FRP) reached US$ 4.406 billion. The balance of the former is down from the high of
US$ 20.211 billion recorded at year-end 2008 because the fund was drawn on to deal with the fallout
from the 2008-2009 global financial crisis.
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(b)
Monetary and exchange-rate policy
Monetary policy, guided by an inflation target range in the area of 3%, continued the gradual
withdrawal of monetary stimulus. Rising inflation expectations led the central bank to raise the monetary
policy rate several times from mid-2010 on, to an annual 5.25% in June 2011. Since then, the
deteriorating outlook in Europe and the slumping price of some commodities (including fuels) augured
lower external inflationary pressures and prompted a more gradual withdrawal of monetary stimulus. As a
result, the monetary policy rate was held steady through December.
Exchange-rate policy continued to be based on a floating regime, although the central bank did
intervene with a foreign-currency purchase programme that ended in December as expected. The Chilean
peso experienced average nominal appreciation of 5.2% against the dollar. The real effective multilateral
exchange rate index calculated by ECLAC shows real appreciation of 1.1% over 2010.
Although the foreign-currency purchase programme was launched in times of substantial
appreciation pressure, it was presented as an initiative to build up international reserves as a measure of
protection against potential external turbulence.
3. The main variables
(a)
Economic activity
The short-term impact that the February 2010 earthquake and tsunami had on output subsided
during the year, thanks to a growth spurt in domestic demand on both the consumer and the investment
side for the second year in a row as spending rose post-earthquake and both components rebounded
cyclically after a sluggish 2009 in the wake of the global financial crisis. Personal consumption rose 8.8%
in 2011 on the strength of expanding employment, rising real wages and credit-access conditions
returning to normal. By contrast, government consumption (which has at other times driven demand)
grew slowly and did not really pick up until the fourth quarter, when it rose by 3.9%. Capital formation in
machinery and equipment was more moderate than the high rates of growth seen in 2010 (40.3%),
expanding by 25.8% in 2011. By contrast, investment in construction and works trended up, increasing by
12.7% after two years of slow growth (1.9% in 2010) and contributing to the positive employment trend.
A significant proportion of the demand for machinery, equipment and consumer durables went overseas
and was a factor in the steady increase in imports, which posted real growth of 14.4%. In line with slow
global growth, exports continued their sluggish performance and rose by 4.6%.
The fastest-growing sectors of production were those associated with domestic demand
(commerce, construction and services). On the other hand, some export sectors (such as mining) declined
as a result of labour conflicts and a downturn in field yields for geological reasons. The salmon industry
recovered gradually after output was hard hit by a virus, but other catches (especially in the northern part
of the country) continued to suffer from a scarcity of pelagic resources.
(b)
Prices, wages and employment
Until mid-2011, inflation measured by the consumer price index (CPI) was in line with the central
bank’s annual target of 3% (+/-1%). It continued to trend up and reached year-end levels that overshot the
target (annual rate of 4.4% in December). Core inflation indicators also rose at a faster pace, driven by
two types of factors. First, core inflation has begun to reflect international food and fuel price inflation
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passing through to domestic prices. Second, domestic demand has soared, pushing the price of nontradable goods and services up by more than 4% for the second consecutive year. In several cases, nontradable service components of the price indices really reflect the uptrend in wages as the labour market
narrows. This scenario has begun to feed higher inflation expectations for 2012.
With this growth pattern, the gradually narrowing labour market pushed wages up and led to
some labour shortages. Indeed, at times in 2011 the general hourly wage index was rising at twice the rate
of inflation; it reached a nominal 6.3% in December and drove the real wage index up by 1.8% for the
year. Employment expanded steadily, bringing unemployment rates down to levels usually regarded as
low for the Chilean economy. The unemployment rate averaged 7.2% in 2011 and stood at 6.6% in
December because of seasonal factors and a sustained downtrend. Wage employment grew faster than
own-account employment.
(c)
The external sector
Imports and exports of goods totalled US$ 70.619 billion and US$ 81.411 billion, respectively.
The services balance showed a deficit of US$ 2.417 billion; the income balance posted a US$ 14.015
billion deficit. The balance-of-payments current account posted a small deficit of 1.3% of GDP,
reflecting, on the one hand, growing domestic demand that pushed up imports of durable goods,
machinery and equipment and, on the other hand, slow or flat growth in the volume of certain key exports
(copper) and declining export prices. Total gross external debt continued to grow and reached US$ 99.446
billion at market value (46% of GDP). General government debt accounts for only a small portion:
US$ 5.568 billion, equivalent to 2.5% of GDP. Because the general government is a net creditor to the
rest of the world, its sovereign wealth fund savings are triple its external debt. As intended with the
foreign-currency purchase programme, central bank reserves rose sharply, by almost 51% for the year
(US$ 41.979 billion). All of these factors point to continued fiscal and external soundness for Chile and,
as explained above, give the authorities ample space for taking countercyclical action if necessary.
4. Main economic trends of the first half of 2012
In January 2012, external turbulence (owing above all to a failure to solve the sovereign debt crisis in
some euro zone countries) and slowing domestic activity during the second half of the year led the central
bank to preventively lower the monetary policy rate to 5%. But at that point external fuel and food price
crises and narrowing gaps in idle production capacity worsened the risk of higher inflation, making it
likely that the central bank will resume the withdrawal of monetary stimulus in the first half of 2012.
Given the riskier global environment and the possibility of external shocks, expectations were that
a new programme supporting the nominal exchange rate would not be needed in 2012. But as the
international financial markets started to return to relatively normal territory in the first quarter of the year
thanks to action taken by the European Central Bank to address the liquidity requirements of euro-zone
banks impacted by the crisis and to fiscal deficit reduction agreements adopted by euro-zone
governments, financial flows into Chile and the emerging countries have surged and added to
appreciation pressures. As a result, discussion of a new foreign-currency purchase programme during the
year cannot be ruled out.
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5. First quarter of 2012: general trends and outlook
Economic activity indicators for the first few months of the year show that growth slowed to a yearly pace
of about 5%. Unemployment continued to trend down to stand at just above 6%. Twelve-month inflation
eased off from the rate seen in the final quarter of 2011 but was still higher than the 2011 average. Yearend inflation is expected to be in the area of 4%, which is slightly above the 4% ceiling of the inflation
target band for 2012.
During January 2012, external turmoil (arising especially from the lack of a solution to the
sovereign debt crisis in some euro zone countries) led the central bank to preventively lower the monetary
policy rate to 5%, where it remains as of mid-June. While inflation expectations are above the upper end
of the target band, external fuel prices have helped moderate them and shifted any expected policy rate
hikes towards the second quarter. Even so, as it did at the outbreak of the 2008 crisis, the central bank
continues to signal that it is prepared to change policy direction in the event of a significant worsening of
the external environment.
Export value remained relatively flat at US$ 20.5 billion for the quarter. Imports, buoyed by
domestic demand, show an upward trend that, during the second half of 2011, gave rise to current-account
deficits. These uptrends make it highly likely that this deficit position will remain through the end of
2012. This pattern, coupled with global market uncertainty and the end of the currency purchase
programme, brought international reserves down from the December level, to US$ 38.77 billion in April.
Official projections for 2012 show the consolidated central government returning an actual deficit
equivalent to 0.5% of GDP. The projected actual balance includes a cyclical component of 1.0% of GDP,
which would leave the structural deficit estimated for the year overall unchanged at 1.5% of GDP.
In April the administration sent parliament a bill that introduces tax changes aimed at bringing in
US$ 700 million per year in revenue for funding education improvements.