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Chile Politics October 2019

Chile: Piñera mollifies protestors with pricey concessions; lingering uncertainty likely to hamper business confidence

In late October, President Sebastian Piñera responded to the social unrest ignited by a hike in subway fares by overhauling his cabinet and promising a handful of fiscal measures intended to appease protestors. The reform program, which requires congressional approval, includes a 20% increase in the minimum pension, minimum wage guarantees, rolling back the subway fare hike and a 9.2% rise in electricity rates, and a higher income tax for high earners; however, it is not yet clear whether it will succeed at easing tensions as protesters took to the streets again last week demanding structural reforms. If approved, the measures could provide some short-term support to consumption next year, although the significant uncertainty is likely to erode investor confidence while the challenging external backdrop continues to drag on economic activity.

Although Piñera stopped short of backtracking on his economic agenda, some analysts speculate that planned reforms are likely to be delayed, while the chance of Congress approving the tax reform has declined substantially in the wake of the unrest. Instead, with the cost of the social program estimated at USD 1.2 billion in 2020, the measures will likely put pressure on the government’s fiscal stance. All told, the government estimates that the 2020 budget deficit will be raised 0.2 percentage points from the originally planned 2.0% of GDP. Regardless, Piñera will be eager to put the economy back on track, as increased domestic uncertainty is likely to further weigh on business sentiment.

Analysts at JPMorgan project a broadly unchanged outlook:

“In our view, the program unveiled yesterday night does not merit a revision of our below-consensus 2020 GDP projection. The measures announced yesterday are basically aimed at maintaining consumption growth rates in 2020. Yet, as discussed yesterday, in our view the developments observed in the last few days have already impacted domestic uncertainty, which coupled with external risks will likely continue to prove a drag on business confidence. Faltering confidence is likely to take a toll on investment. In our assessment, economic growth is likely to print for another year below its potential, and we are currently forecasting 2.3%y/y for 2020.”.

Meanwhile, Lorena Palomeque, senior economist at Credicorp, signaled increase uncertainty ahead:

“President Piñera gave an important signal and changed 8 of the 24 ministers and heads of the political and economic teams. The market reacted by showing slight improvements (IPSA: +0.4%; USDCLP: -0.5%; CDS 5-Yrs: -1.4%), but it is too early to confirm whether the new cabinet will boost the weak confidence and help resolve the social crisis. That said, the political agenda has already been affected, and the structural reforms will be a key factor to monitor in the upcoming weeks, especially looking forward to the 2020 budget discussion that will take place in Nov-19.”.

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