Chile Special April 2020

Chile

Chile: Government unveils ambitious stimulus to contain the impact of Covid-19

April 20, 2020

On 19 March and 8 April, the government announced measures to combat the economic impact of the Covid-19 crisis totaling USD 16.8 billion. From that amount, USD 7.4 billion (about 3.0% of GDP) represent a direct fiscal cost to the Treasury, in the form of additional expenditure in healthcare, direct cash transfers to households, and tax suspensions and deferrals. The remaining USD 9.4 billion comes in the form of government liquidity guarantees, which could have a fiscal cost if triggered, and advanced tax refunds. Although the expenses will be partly covered through budget reallocations, the government estimates the fiscal deficit will near 8.0% of GDP this year, significantly larger than 2019’s 2.8% of GDP.

The Covid-19 crisis further complicates the situation for Chile's economy, which has already been scarred by last October's nationwide protests. While uncertainties surrounding the referendum for a new constitution, rescheduled to 25 October, had already dampened consumer and business sentiment, weakening global activity owing to the pandemic is resulting in falling demand for copper, the country’s key export, while also restraining capital inflows. Citing the aforementioned domestic and external challenges, on 12 March Fitch Ratings changed its outlook on Chile’s A grade rating from stable to negative. Looking ahead, a recession this year looks inevitable, while the uncertainty and length surrounding the constitutional process may limit the extent of the rebound in 2021.

With regards to the fiscal prospects for Chile, Daniela Velandia, director of research at Credicorp Capital, noted:

“We continue to expect a significant deterioration of public finances in the upcoming years with the ongoing social crisis also playing a role. For the particular case of 2020, we reaffirm our expectation of a fiscal deficit close to 9% of GDP, the result of the measures adopted amid the social crisis that started in Oct-19, the actions adopted on March 19th, and the projected contraction of the economy this year (i.e. lower tax collection).”

In its March assessment, the Central Bank projected the economy to contract between 1.5% and 2.5% in 2020, while it sees growth of between 3.8% and 4.8% for 2021. FocusEconomics panelists see the economy contracting by 2.2% in 2020 and expanding by 3.3% in 2021.


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