Over the past 15 years, Chile’s economic reforms and prudent mac-roeconomic policies have delivered strong growth and low inflation. Per capita income has tripled in U.S. dollar terms, and poverty has been cut by two-thirds to 13 percent. Growth has slowed in recent years from its breakneck pace in the mid-1990s but continues on a 5 percent trend.
In the staff report discussed by the IMF’s Executive Board in July 2007, the economy was expected to grow by almost 6 percent in 2007, following a broad-based upswing in the first half of the year. Since then, the outlook has weakened as global food and energy price shocks have pushed inflation above 6 percent, eroding real incomes. However, the medium-term inflation outlook remains anchored around the central bank’s 3 percent target, and risk premiums in the interbank market and sovereign spreads have risen only moderately in recent months.
With Chile’s open economy and liberal trade regime, the country’s macroeco-nomic policy framework—a floating exchange rate, inflation targeting, and a commitment to running a fiscal surplus—is aimed at mitigating volatility from economic shocks. It has also helped maintain the economy’s competitiveness despite the high price volatility of copper, Chile’s main export product, and has provided added scope to address social priorities.
Chile has grown faster than many Latin American countries.
Real GDP growth (in percent)
Citation: 37, 1; 10.5089/9781451967494.023.A009
Surplus rule anchors fiscal policy
Fiscal revenues have continued to benefit from strong copper prices, but susceptibility to commodity price fluctuations remains a concern. Public spending increases are in line with revenues under the country’s “fiscal surplus rule,” which targets the structural surplus (that is, the fiscal surplus adjusted for deviations of output and copper prices from their long-term equilibriums). Chile adopted this rule in 2000 to insulate the economy from the effects of volatility in the price of copper. This has helped the country’s floating exchange rate to remain both stable and broadly in line with fundamentals.
Chile’s nominal fiscal surplus is expected to be well above 7 percent of GDP in 2007, thanks to strong corporate tax receipts and a rebound in value-added tax revenue. Invested government financial assets exceed 10 percent of GDP, and the central government has become a net creditor. Reflecting its stronger financial position, Chile has reduced its fiscal surplus target to ½ of 1 percent of GDP from 1 percent, beginning in 2008.
The key fiscal challenge, according to the IMF assessment, is for Chile to ensure high-quality public spending. This means carefully weighing the costs and benefits of new projects and improving both the efficiency and transparency of government spending.
Chile’s financial markets have been resilient in the face of global financial turbulence, owing to its healthy banking system and strong corporate balance sheets. The financial strength reflects major improvements in banking regulation and supervision after a financial crisis in the 1980s, but capital market reforms in recent years have also helped raise domestic saving, improve market liquidity and depth, promote access to capital markets for emerging companies, and stimulate competition in the local market. More recently, one focus has been on integrating the financial sector more closely with global capital markets, including in a package of measures passed into law in May 2007.
Structural reforms are broad based
The authorities have a broad structural reform agenda. In addition to capital market reforms, they have proposed a major pension reform to raise benefits, widen coverage, increase returns to saving, and encourage participation in the formal labor market. The proposed reform includes a universal public pension pillar and aims to boost participation by low-income groups and the self-employed. To address social concerns, a key priority is to improve education and build job-specific human capital.
At a September 26, 2007, press conference, two senior IMF officials did not see the recent changes in global economic conditions greatly affecting Chile’s strong economic position. “The risks to the outlook,” they said, however, “are now more on the downside, given uncertainties about the global financial system, the U.S. outlook, and investors’ risk appetite, including for emerging markets”