COVID-19 hitting hard – but Piñera’s ratings rise
COVID-19 is taking a heavy toll on the Chilean economy. Though we still lack hard data, it seems clear that this will be the worst economic event since the financial crisis of 1982. We hope the crisis will be short-lived, and that we’ll see recovery in H2. But at this point, no one can be sure.
The Central Bank announced that it would buy up to $8 billion in bank bonds. This is unprecedented. The Bank is also repurchasing its own debt: about $1.5 billion so far (until recently the Bank had been a net issuer of its own bonds). Government measures so far have concentrated on providing liquidity to SMEs, and on efforts to sustain company-employee contractual relationships.
Only $650 million of measures announced so far should lead to a direct fiscal deficit increase. These are one-time cash payments to the poorest families, a fund to help cities and a temporary suspension of the tax on credit. We believe the government still has plenty of space to increase transfers to firms and families, and that we’ll see more. Still, economists have been calling for an even larger effort. The government has announced a $2 billion fund aimed at self-employed and informal workers.
We expect the fiscal deficit to surpass 5% of GDP, which could rise with further measures. The ratio of public debt to GDP is likely to stay elevated for two to three years. But this shouldn’t be a problem, as government bond issues can easily help it outgrow the debt.
In our base case scenario, GDP will fall 3% in 2020, with strong labor market deterioration, but grow 1.5% in 2021. The Central Bank is less pessimistic, forecasting -1.5% to -2.5% for 2020, 3.75% to 4.75% growth in 2021 and 3% to 4% growth in 2022. We expect inflation to run at close to 2.5% through yearend, and be subdued in 2021. The Bank has conveyed that the TPM will likely remain at 0.5% for the next two years.
Chile’s management of the COVID-19 crisis is meeting with some public approval. As of April 9th, Chile had almost 6,000 cases, or roughly 32 per 100,000 inhabitants (compared with 132 in the United States, and 170 in France), with infections concentrated in Santiago. The growth rate has been slower than in the Netherlands or Spain. Early quarantine appears to have been key. Two big future challenges include the health system’s likely inability to meet the demand for beds, and especially ventilators, when cases peak in two or three weeks; and the economic hit, with much uncertainty over Chileans’ ability to withstand weeks or months out of work.
But the crisis has given the government somewhat of a break in the polls. President Sebastián Piñera’s approval rating has risen from a low of 9% a few weeks ago to 19% this week, while some 25% of respondents approved of the way he and Health Minister Jaime Mañalich have handled the pandemic. So from the government's point of view, perhaps not all the news is bad
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