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Press Release by IMF
On November 7, 2018, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation with Chile.
The Chilean economy has been recovering from a prolonged slowdown that started with the decline in copper prices in 2011 and intensified over the last few years. Reflecting a considerable rebound in both mining and non-mining, owing also to robust confidence, economic growth in the first half of 2018 has been the strongest since 2012. Headline inflation moved close to the central bank's target of 3 percent in recent months, partly driven by energy prices and peso depreciation, though core inflation has been picking up more slowly, dragged down by residual slack in the labor market. Labor force growth outpaced employment over the past few quarters, resulting in a higher unemployment rate, though the quality of job growth improved, with private sector salaried jobs accounting for an increasing employment share.
After several years of consistent deterioration, the headline fiscal balance registered a substantial improvement of about one percent of GDP expected in 2018, owing to stronger copper revenues and lower expenditure. The central bank started the tightening cycle in October, raising the policy rate from 2.5 to 2.75 percent, while maintaining an accommodative stance. The banking system is generally well-capitalized, non-performing loans remain low, and a new banking law that aims to close the gap with Basel III minimum solvency requirements has been recently adopted.
GDP growth is projected at 4 percent in 2018. After a strong performance in the first half of the year, some slowdown is expected in the second half, in line with a recent softening in economic activity. As the output gap closes and monetary policy normalizes, growth is projected to gradually converge to its medium-term potential of about 3 percent. Inflation is projected to remain around the central bank's target, supported by the strong monetary policy institutional framework and anchored inflation expectations. The announced gradual fiscal consolidation should be sufficient to stabilize the debt-to-GDP ratio at close to 27 percent by
the early 2020s. With the economic recovery and a projected worsening in the terms of trade, the current account deficit is expected to widen to about 2½ percent of GDP in 2018-19, before narrowing to about 2 percent of GDP over the medium term.
Risks appear balanced. Key downside risks stem from the uncertain external environment, mainly related to rising protectionism, a sharp tightening of global financial conditions, and a weaker-than-expected growth in Chile's main trading partners. A rapid implementation of the recently-announced structural reforms, and a stronger-than-expected rebound in investment offer upside risks to the outlook.
Executive Board Assessment
Executive Directors noted that the economic recovery is under way, the outlook is favorable, and risks are balanced. They agreed that the economy has been largely shielded from the recent volatility in the region, supported by strong fundamentals and a free-floating exchange rate that has played the role of a shock absorber. Going forward, Directors emphasized the importance of tackling structural impediments to higher potential growth.
Directors agreed that the announced gradual fiscal consolidation should enhance policy credibility while striking a balance between stabilizing debt and addressing development and social spending needs. They noted that strengthening the fiscal framework via an appropriate fiscal anchor, or deepening the consolidation in case of better-than-expected economic performance, could further enhance credibility and market confidence. In this context, Directors welcomed the authorities' plans to broaden the mandate of the fiscal council while ensuring its independence. Directors also took positive note of the authorities' proposal to streamline the tax system to make it more efficient and pro-growth. They underscored the importance of ensuring that the final outcome is equitable and funded. Directors recommended strengthening tax administration and broadening the tax base if revenue turns out lower than projected.
Directors underlined that further monetary policy normalization should be undertaken cautiously. They emphasized that the tightening cycle should be guided by analyzing the behavior of different indicators, in order to gauge the evidence of persistent convergence of inflation toward the target. In this context, Directors welcomed the revamped communication framework of the central bank.
Directors noted that the financial sector remains healthy, but stressed that macro-financial linkages deserve close monitoring. They welcomed the recently approved general banking law, which will bolster the resilience of the banking sector by closing the gap with Basel III minimum solvency requirements, enhancing stabilization tools, and improving corporate governance. Directors highlighted the importance of strengthening the tools for early intervention and bank resolution, while establishing a national deposit-insurance scheme funded by member banks. Directors underlined that cybersecurity and FinTech regulation frameworks need to be strengthened, and welcomed the authorities' ongoing efforts in these areas.
Directors concurred that advancing the structural reform agenda would support stronger, more inclusive growth. They welcomed the authorities' commitment to streamline business regulation, improve the investment climate, increase competitiveness, and reform the pension system. Directors also emphasized that a broader set of reforms, such as those aimed at strengthening innovation capacity, improving the quality of education, deepening labor market flexibility, and enhancing the business environment for SMEs, would help improve productivity, increase diversification, and speed up the transition to advanced economy status.