Transcript Security Scenarios And The Global Economy

NS4540
Winter Term 2017
Chile: Economic Slowdown
Overview
• After many years of high economic growth, Chile is
attempting to create a welfare state, but facing many
difficulties in doing so
• While the Chilean liberal model has created
macroeconomic stability, it has failed to ensure an
equitable distribution of the fruits of that growth
• Economic development over the medium to long term
challenged by high levels of inequality which have been
targeted by the reforms adopted by the government since
2014 to maintain social cohesion.
• These reforms have been slow in coming and have faced
opposition, particularly from the business community, in
a difficult domestic and international economic climate.
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Income Distribution
• The share of national wealth has remained highly
unequal
• Share of income going to the wealthiest 10% was still
more than 41% in 2013 (from 47% in 1990)
• While share going to the poorest 10% remained below
10%
• Endemic nature of wealth inequalities increases the
difficulty in eliminating disparities linked to a relatively
compartmentalized social structure which limits social
mobility
• Also highlights the failures in Chile’s redistributive
policies which are the second most inefficient in the
OECD (after Mexico)
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Longer Term Patterns
• The Chilean economy has been the success story of
South America. But there has been something of a
deterioration over time.
• Economic growth in the 1990s averaged 6.3% per annum,
falling to 4.0% in the 2000s, and 3.8% from 2010-16
• Investment as a share of GDP averaged 26.5% in the
1990s, dropping, to 21.8% in the 2000s, only to rise to
23.3% from 2020-16
• Exports of goods and services grew at an average annual
rate of 9.6% in the 1990s, falling to 4.4% in the 2000s, and
1.6% between 2010 and 2016
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Recent Developments
• The Chilean economy has slowed down considerably in
the last several years
• Forecasts of the Chilean Central bank suggest that
growth will remain low in 2017/2018 and perhaps so into
the medium term
• Forecasts reflect
• The impact of currently low investment and
• The the fact that there is little room for sustainable fiscal or
monetary stimulus
• Growth has been decelerating from 5.8% in 2011, falling
to 5.5% (2012), 4.0% (2013), 1.8% (2014), 2.3% 2015 and
1.7% (2016).
• Over the past five years the Central Bank has gradually
reduced its estimate of the economy’s medium term
growth potential from around 5.0% to 3.2%
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Economic Obstacles I
• This plateau reflects both external and internal factors
• Copper price
• Over first ten months of 2016 the price of copper, Chile’s main
export averaged 2.14 $/pound down from $2.56/pound in 2015
• No significant increase is expected for 2017
• As a result copper’s contribution to revenues decreased to only
0.3% of GDP in first 9 months of 2016 compared to 4.2% when
copper averaged $4/pound
• World trade
• Export driven Chilean economy also been negatively affected by
sluggish world trade
• Exports to US were down to $6.2 billion in first 9 months of 2016
compared to $6.5 billion in same period 2015
• Trend could worsen if Trump carries through on protectionism
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Economic Obstacles II
• Structural Bottlenecks
• Along with growth investment as a share of GDP has fallen from
22.5% (2012), to 24.5%(2013), 22.2%(2014), 22.3% (2016), with
the IMF forecasting 22.0$ for 2017
• Drop attributed partly to a loss of local business confidence
blamed in part on the reform program of the center-left
government of President Bachelet
• After controversial tax and labor reforms government is now
proposing changes in the country’s private pension system
where there is much business opposition
• Longer term problems include
• Low educational standards, relative to the Asian emerging
economies
• An ageing population’s effect on the labor supply and
• Infrastructure deficits, particularly ports
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Economic Obstacles Concerns III
• Foreign investment
• FDI has fallen to $6.8 billion in the first half of 2016 as opposed
to 20.5 billion in whole of 2015 and 22.3 billion in 2014
• Household consumption
• Grew by 1.9% in 2015, down from 2.4% in 2014 and 5.5% in
2013. The slowdown reflects
• Unemployment running at 7.1% up from 6.6 year earlier. Has
been a deterioration in job quality in that drop in payroll
employment has been offset by an increase (usually more
precarious) self-employment
•
Wage growth has also slowed – 0.8% in 2016 down from 1.5%
in 2015
• Consumer confidence has been weakening since early 2014.
Recently reached its lowest level since the 2008-09 crisis
• Polls show some 60% consider the country has stagnated
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Stimulus Options I
• Lower growth appears at least for the time being to have
become the new “normal” and the stimulus options are
limited
• Monetary Policy
• In August 2016 annualized inflation dropped to 3.4% after more
than two years above or very close to the ceiling of the Central
Banks 2.0-4.0% target range. Forecasts suggest a year-end-rate
of 3.5% dropping to 3.0% in 2017
• Reduction due largely to stabilization of the peso against the
dollar after its depreciation in 2013-15
• However no reduction in reference interest rate – at nominal
3.5% since December 2015
• Given the reference rate is already negative in real times, not
clear how much impact any counts would have.
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Stimulus Options II
• Fiscal Policy
• With next presidential and legislative elections due in November
2017, Finance Ministry under pressure to have an expansionary
fiscal budget
• However under a fiscal rule introduced in 2001 government
spending is tied to the economy’s medium term growth potential
and long-term copper prices
• Currently this rule would limit the rise in spending to around 3%
in 2016 down from a budgeted 4.4% increase and a reported
4.1% over the first seven months of 2016
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• Consumer confidence has been weekening since early
2014. Recently reached its lowest level since the 2008-09
crisis
• Polls show some 60% consider the country has
stagnated
• Options
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