Chile, an example of growth in Latin America, will be the worst student this year: what has changed?

Chile, which for years has been an outstanding and exemplary student of economic growth in Latin America, will be the country that -together with Haiti- will have the worst performance in 2023: several national and international organizations predict that its GDP it could go down to 1.75%.

After explosive growth of 11.7% in 2021 and a faster-than-expected recovery from the Covid-19 pandemic, Chile started to slow down in the second half of 2022 and finished the year around 2%, weighed down by inflation unprecedented for decades, the fall in the price of raw materials, the weakening of the dollar and the effects of the international situation, with the war in Ukraine in the foreground.

Here is a summary of the main challenges that the Chilean economy -and the government of Gabriel Boric- will have to face in the coming months:

Recession

The alarms, which have been ringing for months, sounded loudly last week when the monthly index of economic activity (Imacec) data for November was published, considered an estimate of GDP and which fell 2.5% year over year.

The finance minister and former president of the central bank, Mario Marcel, then explained that the economy is “adjusting” after the overheating of 2021 – motivated by million-dollar social aid and early withdrawals from pension funds that have boosted consumption – and denied that “a catastrophe is coming”.

“We will continue to see negative 12-month numbers for many more months,” he admitted. “But in the second half of 2023 we will already see a recovery in activity,” assured Marcel.

The Chilean broadcaster is more pessimistic and expects GDP to contract between 1.75% and 0.75% in 2023, while the Economic Commission for Latin America (Cepal) predicts a recession of 1.1% and the World Bank of 0.9%.

“Projections in terms of investments and consumption are negative and the only variable at the aggregate level that will grow in 2023 is public spending (4%), which can help counteract the situation” Francisco Castañeda, director of the Mayor’s Business School of the University.

However, everyone agrees that the economy will return to the path of growth in the coming years, with increases of just over 2% in 2024 and 2025.

Inflation

Chile ended 2022 with the highest inflation in 30 yearswith an interannual increase of 12.8%, and adding the second consecutive year with record figures.

“The food division has reached the highest points in the latest measurements, and is about 40% of the incidence of annual inflation,” economist Recaredo Gálvez, from the Sol Foundation, explained to EFE.

To curb the rise in inflation, the Central Bank has started to progressively raise the key interest rate in 2021 to reach 11.25% in October, the highest level since 2001, and its intention is to keep it that way “until the imbalances are resolved. ” .

In its latest forecasts last December, the broadcaster predicted this average inflation will be 6.6% in 2023, but will close the year close to 3.7%.

the price of copper

Chile, with 28% of world production, is the world’s largest copper producer. The price of the red metal, indispensable in electric transmission, affects their fiscal coffers.

The slowdown in China, the world’s largest consumer, as well as the recession in Europe, prompted the Chilean Copper Commission (Cochilco) to adjust its average price projection downwards for 2023 to $3.7 per pound last December.

Both the proceeds from copper – the state-owned company Codelco is the largest copper company in the world and pays its benefits to the Treasury – and the tax reform promoted by the Government will be essential to finance an ambitious package of social measures to alleviate the crisis and serve the most vulnerable sectors.

Presented in July 2022, the tax reform is one of President Gabriel Boric’s emblematic projects, and aims to raise 3.7% of GDP over four years through a restructuring of the income tax, the reduction of tax exemptions and the application of a new mining “royalty”.

new constitution

The rejection by the Chileans of the proposal for a new constitution voted in a plebiscite held in September 2022 has relaxed the national and international markets.

The previous text, with a markedly progressive imprint and a refounding spirit, had alerted the economic sectors, but the agreement for carry out a new constituent process – the second which is undertaken with the aspiration of changing the Constitution heir to the dictatorship (1973-1990) – aims at more moderate and gradual reforms.

“Chile has clarified some doubts and there is a certain consensus on this new constituent process, which gives stability to the economy and has been reflected in the strengthening of the peso and in a higher value against the dollar,” Castañeda noted.

debts and savings

One of the variants that worries citizens is the dizzying growth in just one year of the value of the Unidad de Fomento (UF), a financial instrument designed for savings, but which has become a sword of Damocles for families, if used on a applicant basis in mortgage loans and payments, such as schools, rent or professional services.

The value of the UF, historically very stable and indexed to inflation, grew in 2022 and in previous years, going from 29,000 pesos on December 31, 2021 to over 35,000 in the first week of this year.

Good news for savings, but bad news for investments and the family economy, in a country where the vast majority of citizens rely on credit and accumulate debts in the millionsmost of which related to consumption.

Source: EFE

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