June 19, 2019

An International Monetary Fund (IMF) staff team led by Mr. Luca Antonio Ricci visited Santiago during June 5-12, 2019 to discuss recent economic and policy developments. The IMF mission met with government officials, private sector representatives and academics during its stay. At the conclusion of the visit, Mr. Ricci issued the following statement:

“Economic activity has decelerated, partly owing to a temporary weather-related decline in mining. Following a strong rebound in 2018, with real GDP growing at 4 percent, the deceleration in economic activity since the start of 2019 has been stronger than expected. GDP expanded by only 1.6 percent (yoy) in the first quarter, dragged down by a contraction in mining and overall exports, despite solid domestic demand. Headline inflation, after dropping significantly under its new CPI measure starting in 2019, picked up somewhat in recent months due to its non-core food and energy components. By contrast, core inflation has remained subdued and close to the lower bound of the Central Bank’s target range. Nominal export registered a fourth consecutive month of contraction (yoy) in May. Confidence indicators have moderated lately against the backdrop of higher external and domestic uncertainty.

“Global risks remain skewed to the downside amidst high policy uncertainty. Global financial conditions remain broadly favorable but could change rapidly, triggered for example by a shift in global risk appetite, worsening of trade tensions, higher political uncertainty, or a stronger-than-expected growth slowdown. Trade tensions could persist or further escalate, hampering confidence, investment, and growth. Sovereign risk concerns could return in the euro area and a hard Brexit could create financial stability risks. Overall, external developments are likely to continue to instill volatility in copper prices and global trade.

“Overall, the worsening global environment and its impact on economic performance have called for support from macroeconomic policies while preserving macroeconomic stability:

• The government recently announced a stimulus package to support growth. The announced package of about USD 1.4 billion (about ½ percent of GDP) envisages both front-loading of public investment projects that should be fully financed by reallocation of resources from under-executed items within the existing budget and accelerating private sector investment by a fast-track expansion of existing concessions. Overall, the authorities expect an annual contribution to growth of about 0.4 percentage points spread over 2019 and 2020.

• The Central Bank recently cut the policy rate by 50 basis points, increasing the expansionary stance of monetary policy at a critical juncture. The decision was motivated by the weakening global outlook, weaker-than-anticipated growth in the first quarter, low inflation (especially core inflation remaining stubbornly close to the lower bound of the target range), as well as the revision of the Central Bank’s estimates for trend growth (up by 25 basis points) and for the neutral policy rate (down by 25 basis points).

“Maintaining the structural fiscal balance and inflation targets remains a priority for the authorities. Staff expects the authorities to meet the structural balance targets, though headline fiscal deficit is expected to be larger in 2019, mainly owing to the expectations of lower copper prices than envisaged in the budget. Debt is expected to stabilize by early 2020s. Given the looming uncertainty, the role of strong guidance on future monetary policy actions, which will need to remain conditional on clear signs of the expected inflation path, would become even more important.

“The government has been aiming to support growth and address development and social needs through a broad set of policy reforms. These reforms relate to the tax, pension, and healthcare systems, as well as the labor market, among others. While the lengthy legislative process has strived to garner broad support, it has also been contributing to domestic policy uncertainty, impairing confidence and investment decisions.

“Going forward, it is crucial to reach a broad agreement over the policy reforms soon, so as to support domestic confidence in this period of heightened global uncertainty.

“The IMF mission wishes to thank the authorities for their kind hospitality and fruitful discussions.”