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Chile Country Risk Report Q1 2017

  • October 2016
  • -
  • Business Monitor International
  • -
  • 47 pages

Core Views

Real GDP growth in Chile will remain modest in 2016, as copper sector weakness will continue to drag on economic activity. Rising prices will buoy the copper sector heading into 2017 and investment into non-copper sectors will become a key driver of economic growth. Chile's current account deficit will widen modestly in 2016 as weak copper prices undermine exports. However, a diversifying export base and rising copper prices will support narrowing deficits in the years ahead, while capital inflows support Chile's balance of payments position. The Chilean peso will gradually strengthen in H216 as copper prices begin to trade higher. Improving investor sentiment toward the region will offer tailwinds in the coming quarters, and a diversifying export base will reduce the unit's close association with copper prices. The Banco Central de Chile will end its rate hiking cycle, enacting no further rate hikes in 2016 before cutting rates once in 2017, in response to decelerating inflation and disappointing economic growth. Supported by the Chilean peso's strength, inflation will fall within the BCC's target range in the coming months. A narrowing fiscal deficit will keep Chile highly creditworthy in the coming years, as tax reforms help to support revenues while political gridlock prevents the passage of any major spending measures.

Table Of Contents

Chile Country Risk Report Q1 2017
Executive Summary.................................................................................................................................. 5
Core Views.......................................................................................................................................................................................5
Key Risks.........................................................................................................................................................................................5
Chapter 1: Economic Outlook.................................................................................................................. 7
SWOT Analysis........................................................................................................................................................... 7
BMI Economic Risk Index.......................................................................................................................................... 7
Economic Growth Outlook........................................................................................................................................ 8
Growth To Recover In 2017 On Fiscal Expenditure, Copper Prices...........................................................................................8
Chile's real GDP growth will decelerate in 2016, as a weaker-than-anticipated rebound in copper prices weighs heavily on the nation's
economy. However, in 2017 and beyond, recovering copper prices, rising public spending and Chile's strong appeal to foreign investors
will support a moderate uptick in growth.
GDP By Expenditure Outlook.................................................................................................................................... 9
TABLE: GDP GROWTH FORECASTS......................................................................................................................................................................9
TABLE: PRIVATE CONSUMPTION FORECASTS....................................................................................................................................................9
TABLE: GOVERNMENT CONSUMPTION FORECASTS.......................................................................................................................................10
TABLE: GROSS FIXED CAPITAL FORMATION FORECASTS..............................................................................................................................10
TABLE: NET EXPORTS FORECAST......................................................................................................................................................................10
Fiscal Policy And Public Debt Outlook.................................................................................................................. 10
Fiscal Deficits To Persist In The Coming Years.........................................................................................................................10
Lower than expected copper prices and rising political risks have caused us to revise up our forecast for Chile's fiscal deficit over the
next two years. Despite running persistent current account deficits over the next several years, we expect Chile's sovereign credentials
will remain strong.
Structural Fiscal Position........................................................................................................................................ 12
TABLE: MAIN REVENUE AND EXPENDITURE CATEGORIES.............................................................................................................................12
TABLE: FISCAL AND PUBLIC DEBT FORECASTS...............................................................................................................................................13
External Trade And Investment Outlook................................................................................................................ 13
Current Account Deficit To Gradually Narrow As Copper Prices Recover.............................................................................13
Following a modest widening in 2016, Chile's current account deficit will narrow in the years ahead, supported by rising copper prices
and a diversifying export base. Given the country's large stock of reserves and appeal to investors, Chile's external position will remain
strong despite the persistent deficits.
Outlook On External Position.................................................................................................................................. 15
TABLE: CAPITAL and FINANCIAL ACCOUNT BALANCE.........................................................................................................................................15
TABLE: CURRENT ACCOUNT BALANCE FORECASTS.......................................................................................................................................15
TABLE: TOP 5 GOODS IMPORTS IN 2015............................................................................................................................................................16
TABLE: TOP 5 GOODS EXPORTS IN 2015...........................................................................................................................................................16
Monetary Policy........................................................................................................................................................ 17
BCC Will Enact Rate Cut In 2017.................................................................................................................................................17
Moderating inflation and weak real GDP growth will spur the Chilean central bank to keep its benchmark rate at its current level through
the end of the year. With inflation set to reach the bank's target in 2017, the bank will enact one rate cut by end-2017 to support the
country's economic recovery.
Monetary Policy Framework.................................................................................................................................... 19
TABLE: MONETARY POLICY FORECASTS..........................................................................................................................................................19
Currency Forecast.................................................................................................................................................... 20
CLP: Appreciation To Proceed More Gradually Than Anticipated...........................................................................................20
The Chilean peso will appreciate more modestly than previously forecast over the next two years, weighed down by lower-thanexpected
copper prices and a cut to Chile's benchmark policy rate. Over a longer time frame, Chile's economy will continue to diversify,
reducing the peso's correlation to copper prices.
TABLE: BMI CURRENCY FORECASTS.................................................................................................................................................................20
Chapter 2: 10-Year Forecast................................................................................................................... 23
The Chilean Economy To 2025............................................................................................................................... 23
Strong Fundamentals And Gradual Diversification Support Robust Growth.........................................................................23
Chile will remain among Latin America's most advanced economies over the coming decade, supported by its strong fundamentals.
Manufacturing and services will increasingly drive growth, as the end of the commodity boom dims the copper sector's outlook.
TABLE: LONG-TERM MACROECONOMIC FORECASTS.....................................................................................................................................23
Chapter 3: Political Outlook................................................................................................................... 27
SWOT Analysis......................................................................................................................................................... 27
BMI Political Risk Index........................................................................................................................................... 27
Domestic Politics..................................................................................................................................................... 28
Ascendant Left Wing Will Weigh On Reforms............................................................................................................................28
Chilean President Michelle Bachelet will continue to face staunch opposition and legislative gridlock over the coming months.
Independent leftist parties are likely to gain ground in October's municipal elections, which will push Bachelet to pursue more leftist
legislative priorities ahead of the 2017 general election.
TABLE: POLITICAL OVERVIEW.............................................................................................................................................................................28
Long-Term Political Outlook................................................................................................................................... 29
Broad Stability To Persist.............................................................................................................................................................29
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 going forward. 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 reliant on
copper export-led growth.
Chapter 4: Operational Risk................................................................................................................... 33
SWOT Analysis......................................................................................................................................................... 33
Operational Risk Index............................................................................................................................................ 33
Operational Risk....................................................................................................................................................... 34
TABLE: CHILE OPERATIONAL RISK.....................................................................................................................................................................34
Business Crime ....................................................................................................................................................... 35
TABLE: BUSINESS RESPONSE TO RISK.............................................................................................................................................................36
Government Intervention......................................................................................................................................... 38
TABLE: BUSINESS TAXES.....................................................................................................................................................................................39
TABLE: PERSONAL INCOME TAX.........................................................................................................................................................................40
Chapter 5: BMI Global Macro Outlook................................................................................................... 43
Global Macro Outlook.............................................................................................................................................. 43
Broad Recovery But Three Notes Of Caution.............................................................................................................................43
TABLE: GLOBAL FORECASTS, 2015-2020...........................................................................................................................................................43
TABLE: DEVELOPED STATES, REAL GDP GROWTH, %....................................................................................................................................44
TABLE: EMERGING MARKETS, REAL GDP GROWTH, %...................................................................................................................................45
TABLE: CHILE - MACROECONOMIC DATA and FORECASTS...............................................................................................................................47

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