Chile Economic Activity September 2017

Chile

Chile: Cabinet reshuffle is unlikely to lead to a significant shift in economic policy

September 6, 2017

The appointment in late August of new finance and economy ministers, following the resignations of the previous ministers in protest at the government’s decision not to authorize the Dominga mining project, is unlikely to alter the country’s fiscal stance as it prepares for presidential elections in November. The new finance minister, Nicolás Eyzaguirre, has declared publicly that the 2018 budget—due to be presented in the coming weeks—will be “austere” and “fiscally conservative”. This would see the government build on the progress made in the 2017 budget in establishing a tighter fiscal position, in order to shrink the budget deficit and slow the rapid rise in the public debt to GDP ratio.

Benjamin Sierra, Research Director at Scotiabank Chile, said: “It seems that he [Nicolás Eyzaguirre] will try to be more cautious and austere, trying to leave room to decide to the new government, instead of proposing excessive spending.” Economists at Itaú Chile concur: “We see Mr. Eyzaguirre maintaining a responsible management of public finances”. Eyzaguirre’s comments are in line with those made by former Finance Minister Rodrigo Valdés, who had previously talked of making “fiscal consolidation efforts” in the upcoming budget.

The former finance and economy ministers left the government to protest the blocking of the Dominga mining project in the north of the country, due to environmental concerns. The project, valued at USD 2.5 billion, would have seen an important injection of money into the economy at a time when investment is still flagging. Benjamin Sierra argues these resignations could have a slight effect on the upcoming presidential elections: “It could have some negative impact on some limited areas of the center or center-left voters who might lean more towards the Christian Democrat candidate (Goic) or even towards to Piñera”. However, voters are much more likely to be swayed by the candidates themselves, and the policies they offer.

It is unclear whether the cabinet reshuffle will affect the legislative progress of pension reform, another key plank of the government’s agenda. In August, President Bachelet announced plans to raise employer pension contributions by five percentage points. Part of the money raised would go into a “Collective Savings Fund”, designed to boost the pensions of current retirees and the less well-off. Pension reform has long been recommended by the IMF as a way of increasing replacement rates and ensuring sufficient retirement incomes, although there are some concerns over the potential impact on employment.

Rodrigo Valdés had been heavily involved in drawing up the reforms, meaning there is a consequent risk of a loss of political impetus. However, President Bachelet remains committed, and according to Itaú Chile, the reshuffle could actually help the process along: “[The] fluid relationship between Mr. Eyzaguirre and the President could smoothen the discussion of key economic bills such as…the pension reform bill”.

The Central Bank sees GDP expanding between 1.25% and 1.75% in 2017 and between 2.5% and 3.5% in 2018. Panelists participating in the LatinFocus Consensus Forecast see the economy growing 1.5% in 2017 and 2.7% in 2018.


Author:, Economist

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