Cabinet reshuffle unlikely to improve economic prospects

CHILE - Report 25 Jun 2019 by Igal Magendzo, Robert Funk and Andrés Velasco

When President Sebastián Piñera took office in March 2018, consensus expectations for 2019 GDP growth stood at 3.7%, up from 3% a year before. But expectations have been sinking since September 2018. Central Bank forecasts have registered similar falling optimism. Is this the end of the Piñera effect? If so, business confidence fluctuations are revealing its fragility. But maybe the drop is also driven by additional factors, since global economy expectations are also worsening, and the price of copper has fallen.

In any case, the outlook for the Chilean economy doesn’t seem particularly bright. It is hard to foresee that growth will reach 3% in 2019, given that in Q1 GDP growth was a meager 1.6% y/y – the lowest rate since Q2 2017. April’s Monthly Index of Economic Activity marked 2.1% y/y, extending the Q1 downward trend.

On the demand side, the sharp deceleration of investment in machinery and equipment stood out. But investment in construction and engineering has been gaining some traction at the margin. Consumption growth fell for the third consecutive quarter, in the weakest expansion since Q3 2017. In April, retail sales data mirrored the negative trend. Exports were weak in Q1 as well, falling by 1.8% y/y. In May the value of exports reached -2.3% y/y.

The Central Bank surprised the market in May, by delivering a 50 bp cut in the Monetary Policy Rate (TPM). The communiqué showed that the majority of the Board is dovish. So the door is officially open for additional cuts, even as soon as the next RPM in mid-July. In our view, the board will likely wait until September. We believe this is mostly a preemptive action, that suggests fear of how the external environment might evolve.

Inflation remains subdued. In May CPI, with a monthly variation of 0.6%, lifted annual inflation from 2% to 2.3%.

Piñera has finally succumbed to pressure and shuffled his cabinet, placing new (or at least different) faces in the ministries of Economy, Public Works, Social Development and the Foreign Ministry. His presumed objective was to signal a change in course, and to try to reboot the sluggish economy. Yet while the global economic environment certainly plays a role, by not touching his political team Piñera seems to misunderstand the degree to which the economy is responding to a lack of progress in his domestic agenda. The president’s inability to push through key reforms (especially his tax reform plan) will hardly be fixed by the cabinet changes he’s made.

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