Chile: Interview with Gemines


Alejandro Fernández has been the chief economist at Gemines since 1990. A graduate of the University of Chile and the University of Rochester, he has also served as an adviser for Chile’s Ministry of the Economy and the World Bank, as well as an academic at the University of Chile.


  • What is your economic outlook for this year?

The growth scenario is highly uncertain this year as a result of the social and political crisis. Depending on how these variables evolve, growth may be somewhat higher or somewhat lower than our baseline scenario of 1.2% (equal to 2019). The development of the coronavirus epidemic is also of great importance, due to the impact it will have on our most important trading partner: China. We are already observing negative consequences of this epidemic, with a decrease in the price of copper and problems with shipments of fruit and other goods to China.



The effects of the internal crisis will significantly weigh on domestic demand (including inventories), especially since it is anticipated that investment in fixed capital will contract strongly (5% or more), while consumption will grow modestly. Only public spending will have a clear expansionary effect. On the other hand, external demand should have a positive impact on growth, given a significant drop in imports is expected, especially of capital goods, intermediate goods and durable consumer goods. Exports, meanwhile, should grow somewhat, but this will depend on the evolution of the coronavirus epidemic.


  • What will be the impact of the government’s USD 5.5 billion stimulus package? Do you expect the government to deliver additional fiscal packages?

There is no doubt that the expansionary fiscal policy will be an important factor in preventing a further deterioration in the economy, especially in the case of investment. Nevertheless, its impact will be insufficient to give the economy a very significant boost.

I think there is no possibility of another reactivation package. Tax accounts are very complicated. The deficit will be at least 4.5% of GDP. And the pressures of social spending are very strong and already explain a considerable part of the 8.5% real increase in spending expected for 2020. The emphasis will be on pensions, health and education.


  •  What is your fiscal outlook going forward? Do you expect the increase in government spending to be sustainable in the medium- to long-term

​ It is by no means sustainable. The great challenge is to balance a gradual fiscal consolidation process with satisfying social demands. There is little that the current government will be able to do in this regard, which is very weak and has to respond to urgent pressures to raise spending. The next government hopefully has enough political strength to begin this consolidation process. It is known that there is much that can be done to make public spending more efficient, but it is politically very unpopular. On the other hand, the space to raise the tax burden more is narrow, unless the middle class pays income tax.


  • What is your outlook for monetary policy this year?

​This year the Central Bank of Chile will be largely inactive. With an expansive fiscal policy and rising inflation, it has no space to more expansive monetary policy. Nor does it seem likely that it will need to make it less expansive, since the increase in inflation is explained by the devaluation of the peso which, as has happened in the past, produces a transitory effect on inflation. This is thanks to its great credibility, which allows inflation expectations to be well anchored around the 3% target.


  • Amid the recent depreciation of the peso and the Central Bank’s effort to stabilize it, what is your outlook for the currency? Do you have concerns over financial stability ahead?

The Central Bank’s concern is not with the level of the exchange rate, but with the speed of the rise and with the intraday volatility, which was extremely high at the end of October and November. That explained the intervention in the FX market, which was suspended when the Central Bank considered that it was no longer necessary, despite being scheduled, initially, until May.



The evolution of the exchange rate depends basically on two factors: the price of copper and the degree of internal political instability. Our base scenario is that the exchange rate will average between CLP 780–790 per USD this year; however, if the price of copper recovers as was happening until before the coronavirus, it could end the year under CLP 770 per USD. If the political-social instability is very high, on the other hand, it could stay above CLP 800 per USD (CLP 810–820 per USD), or even higher eventually) for a good part of the year. In short, the interaction of these two factors will explain the evolution of the exchange rate and could be enhanced, both in a positive and a negative sense, either by allowing a more pronounced decline or a higher rise.

Regarding financial stability and the evolution of the exchange rate, today there is no concern. What could complicate the financial system somewhat is a significant increase in delinquency. That said, there does not currently seem to be a systemic risk, although it is certainly a matter to be observed nonetheless


  • What will be the outcome of the constitutional process?

 In October, the constitutional convention will be chosen, which will take nine months (which can be extended by another three months) to produce a new constitutional text. Therefore, between July and October 2021 we will have a proposal. If some degree of rationality prevails, the proposal should not demand fundamental changes to the most relevant aspects for the economy (property rights, initiative of exclusive public expenditure of the executive and independence of the Central Bank). There may, however, be changes in the catalog of people’s rights and how they should be satisfied. The proposal must be approved by two-thirds of the members of the convention.

Regardless of the specific content of the new constitution, the drafting process is going to be hectic and probably with undemocratic deviations. That is to say, that they [protestors] will try to use illegitimate means to pressure the members of the convention and force their support for certain proposals.


  •  Are there risks of a populist turn in politics?

 Of course there is populism and, in fact, we have seen some trends in that direction in recent months. That this becomes more marked and permanent is a risk, although I hope it is not a sustained trend. Irrespective, political challenges will be more important than the technical ones compared to what has been the norm over the last 30 years.

The complexity of the current situation is that, together with a series of real social and economic problems (inequality, abuse, insufficient meritocracy, etc.), we are facing a total crisis of the fundamental institutions of the republic: all the powers of the State (executive, legislative, judicial), the armed forces, police, churches and businessmen. There is no institution that appears as a reference that guides citizens.

Most of the institutions in question are probably better than those of many countries, but the perception of deterioration, corruption and lack of empathy with the ordinary citizen is total. Despite this, the country functions and, although worse than before, it has not collapsed and that allows us to be reasonably optimistic about the future.

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