Chile's Growth And Hopes For 2019 And Beyond!

ECONOMY


In the first half of 2018, Chile's gross domestic product was expected to rise to its highest level in five years. GDP data shows that the Chilean economy grew by more than 5% year-on-year (YoY) which is driven by annual investment in fixed capital and exports. The latter accelerates growth and is the highest since 2012. Annual growth forecasts for the central bank of Chile are between 3.25% and 4.25% for 2018 and 2019. Inflation is currently under 3%, which is a good signal for the South American Republic .

Copper accounts for a significant portion of Chile's exports of around 50%. The fiscal framework focuses on structural equilibrium, with planned cost-based adjustments to the copper cycle that facilitate the functioning of fiscal stabilizers. In particular, flexible exchange rate regimes can act as shock absorbers, due to proper oversight of financial institution currency exposures and comprehensive hedging of foreign exchange positions in the corporate sector, without concerns about financial stability affecting other developing market economies.

Latin America sees downward corrections to market revisions in 2018 and 2019. This is due to Argentina's important adjustments and delays in Brazil. At the same time, markets appear to be able to identify countries with stronger fundamentals - such as Colombia, Peru and Chile - with increasing uncertainty.

The main risk in the current global business cycle is supportive. So far, external conditions have continued to be favorable because the global economy is expected to surpass this year and next, keeping the main central banks flexible. Internal conditions are also positive for improving the domestic business cycle, driven by investment, exports and consumption.

The Chilean economy does not face major macroeconomic problems that could hamper this recovery. However, external risks are declining and Chile must be prepared to respond more precisely to such difficult scenarios.

Now Chile is very concerned about three basic things.

First, by tightening trade disputes, specifically with the US and China, which are important trade partners of Chile.

Second, Chile believes in higher inflationary pressures in the US and a faster Fed increase.

Third, the country is also thinking about another recession in emerging market sentiment, which can be triggered by one of the two previous factors.

                            The Central Bank of Chile

However, the Chilean Central Bank is ready to face new challenges. Although there are some exchange rate differences (currently 15%, one of the lowest in the region), the country has plenty of room to maneuver. The current framework allows monetary policy to focus on medium-term CPI inflation projections over the next two years, rather than short-term inflation based on the confidence the central bank has gained after nearly 30 years of independence.

This is important because external shocks can be inflationary in the short term due to currency devaluation, but are limited to medium-term growth and the outlook for inflation. Therefore, the impact of such scenarios on monetary policy is different in light of the short and medium term inflation compromise and is closely monitored by the ECB Regulatory Board to calibrate the appropriate monetary policy response.