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Chile Business Forecast Report Q4 2014

  • July 2014
  • -
  • Business Monitor International
  • -
  • 45 pages

Core Views
Deteriorating investor sentiment and an ongoing slowdown in private consumption will drive Chilean real GDP growth lower in 2014. Economic growth will accelerate moderately in 2015 on the back of stronger government consumption, an improved net exports position and a slight rebound in fixed investment, though our forecast is below consensus. Near-term upside for copper prices will spur a rally in the Chilean peso over the coming weeks. However, we expect the rally will be short-lived, as weak economic growth, monetary easing by the central bank and monetary policy normalisation in the US are likely to keep the exchange rate under depreciatory pressure in H214.
A narrowing current account deficit will prevent the currency from taking a major leg lower in 2015.

The Banco Central de Chile will continue its monetary easing cycle in the coming months, cutting the benchmark policy rate by 50 basis points to 3.50% by end-2014. Well-contained inflation expectations will provide the bank leeway to pursue additional rate cuts amid signs of a continued slowdown in economic activity. A weaker Chilean peso in average terms will bolster Chile's export competitiveness while driving a contraction in goods imports in 2014, leading to a narrowing of the current account deficit. Chile's robust stock of foreign reserves and strong net international investment position will ensure that the balance of payments position remains stable despite a widening financial account deficit.

Major Forecast Changes
We have revised down our 2014 real GDP growth forecast from 3.1% to 2.8%. This implies a substantial drop-off from 4.1% real GDP growth in 2013 and average growth of 5.7% over 2010-2012. Our forecast for additional rate cuts this year by the Banco Central de Chile marks a shift from our prior view that the bank would hold rates at 4.00% through end-2015.

Table Of Contents

Chile Business Forecast Report Q4 2014
Executive Summary.... 5
Core Views..5
Major Forecast Changes5
Key Risks To Outlook....5
Chapter 1:Political Outlook... 7
SWOT Analysis.... 7
BMI Political Risk Ratings. 7
Domestic Politics .... 8
Education Reform To Pass Despite Opposition..8
The Chilean legislature will pass a bill to reform the country's education system by the end of 2014, fulfilling one of President Michelle
Bachelet's key campaign promises. That said, the process of passing the bill is likely to prove contentious, and we see scope for public
protests and periods of policy gridlock in the coming months.
Table: Political Overview....8
Long-Term Political Outlook.. 9
Broad Stability To Remain In Place..9
Market-friendly policies and strong institutions have been the hallmark of the Chilean government in recent years, and we believe that
the country will continue to set the benchmark for political stability in the region. That said, there is a risk that the political landscape
could fracture over the longer term if the leading parties fail to address long-term concerns about an economy over-reliant on copper
export- and investment-led growth.
Chapter 2: Economic Outlook.. 13
SWOT Analysis.. 13
BMI Economic Risk Ratings. 13
Economic Activity . 14
Subdued Fixed Investment To Hurt Growth.14
Deteriorating investor sentiment and an ongoing slowdown in private consumption will drive real GDP growth lower in Chile in 2014.
Economic growth will accelerate moderately in 2015 on the back of stronger government consumption, an improved net exports position
and a slight rebound in fixed investment, though our forecast is below consensus.
Table : Economic Acti vit y ...14
Monetary Policy 16
Monetary Easing To Continue Amid Economic Slowdown...16
The Banco Central de Chile will continue its monetary easing cycle in the coming months, cutting the benchmark policy rate by 50 basis
points to 3.50% by end-2014. Well-contained inflation expectations will provide the bank leeway to pursue additional rate cuts amid
signs of a continued slowdown in economic activity.
Table : Monet ary Polic y.16
Fiscal Policy . 17
Budget Surplus To Narrow Through 2015....17
Chile's primary budget surplus will shrink through 2015 as weaker real GDP growth suppresses revenue inflows and the government
increases public spending to stimulate the economy. Beyond 2015, stronger economic growth and an increase in the corporate tax rate,
which will bolster revenue growth, will see the budget surplus begin to widen again.
Table: Fiscal Policy....18
Balance Of Payments . 19
Wider Trade Surplus To Drive Slimmer C/A Deficit19
A weaker Chilean peso in average terms will bolster Chile's export competitiveness while driving a contraction in goods imports in 2014,
leading to a narrowing of the current account deficit. Chile's robust stock of foreign reserves and strong net international investment
position will ensure that the balance of payments position remains stable, despite a widening financial account deficit.
TABLE: Current Account20
Exchange Rate Policy 21
CLP: Continued Weakness, But Largest Sell-Off Is Past.21
Near -term upside for copper prices will spur a rally in the Chilean peso over the coming weeks. However, we expect the rally will be
short-lived as weak economic growth, monetary easing by the central bank and monetary policy normalisation in the US keep the
exchange rate under depreciatory pressure in H214. A narrowing current account deficit will prevent the currency from taking a major
leg lower in 2015.
Table: Currency Forecast21
Table : Exch ange Rate 22
Chapter 3: 10-Year Forecast 25
The Chilean Economy To 2023. 25
Slower Growth, But Strong Fundamentals...25
A stable political outlook and sound economic fundamentals position Chile for steady, albeit slower, economic progress, underpinning
our view that the country will have achieved developed-state status by 2023. While obstacles such as a high reliance on copper exports
and oil imports continue to pose a risk to economic progress, especially in light of what we view as a long-term downturn in Chinese
demand for Chilean copper, we remain optimistic about Chile's economic potential over the 10-year period to 2023. Diversification
away from exports to a more consumer-driven economy and further development of regional and South-to-South trade will provide an
important platform for growth over the next decade.
Table : Long-Term Macr oec onomic Forec asts ..25
Chapter 4: Business Environment 27
SWOT Analysis.. 27
BMI Business Environment Risk Ratings 27
Business Environment Outlook 28
Institutions.... 28
Table : BMI Busi ness And Oper ati on Ris k Rati ngs ...28
Table : BMI Leg al Framew ork Rati ng...29
Infrastructure 30
Market Orientation.. 31
TABLE: LABOUR FORCE QUALITY 31
TABLE: TRADE AN D INV ESTMENT RATINGS ...32
Operational Risk 33
TABLE: LATIN AMERICA - ANN UAL FDI INFLOWS.33
Chapter 5: Key Sectors.. 35
Pharmaceuticals and Healthcare .. 35
table : Pharm aceutic al Sales , Hist oric al Data and Forec asts .36
table : Healthc are Expe nditure Tre nds , Hist oric al Data and Forec asts 36
Table : Gover nme nt Healthc are Expe nditure Tre nds , Hist oric al Data and Forec asts ... 37
Table : Pri vate Healthc are Expe nditure Tre nds , Hist oric al Data and Forec asts .... 37
Telecommunications... 38
Table : Telec oms Sect or - Mobile - Hist oric al Data and Forec asts . 39
Table : Telec oms Sect or - Wireli ne - Hist oric al Data and Forec asts .. 40
Other Key Sectors.. 41
table : Oil and Gas Sect or Ke y Indic ators .41
table : Infr astructure Sect or Ke y Indic ators .41
table : Food and Dri nk Sect or Ke y Indic ators ...41
table : Aut os Sect or Ke y Indic ators .42
Table : Freight Ke y Indic ators ....42
Chapter 6: BMI Global Assumptions. 43
Global Outlook... 43
Global Recovery Still On Track..43
Table : Global Assumpti ons....43
Table : Devel oped States , Real GDP Growt H, %.44
Table : BMI VERSUS BLOO MBERG CON SENSUS REAL GDP GROWTH FORECASTS, %.. 44
Table : Emergi ng Markets , Real GDP Growth , %45

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