Investors… On your marks, get set…

CHILE - Report 30 Mar 2018 by Igal Magendzo and Robert Funk

​February’s figures confirmed that inflation is low and will stay low and that inflationary pressures retreated. In addition, Inflation will fluctuate around 2% until July and will stay below 3% for the next two years. In its March quarterly Monetary Policy Report (IPOM in Spanish), the Central Bank lowered the inflation forecast considerably to 2.3% from 2.9%. Markets are expecting something closer to 2.5%. According to the Bank, the main reason behind this correction was the recent appreciation of the exchange rate.

The unemployment rate continues to hide the positive signs coming from the labor market. Employment continued to improve both in terms of dynamism and composition. However, the public sector continued to play a very relevant role. The high unemployment rate is explained by an “encouragement” effect.

As was widely expected, in its March Monetary Policy Report the Central Bank corrected the GDP forecast for 2018 from a 2.5%-3.5% range with no bias in December 2017 to a 3.0%-4.0% with an upward bias. In January, the Monthly Index of Economic Activity (IMACEC) corroborated that GDP is accelerating. Even though the Monetary Policy Report says that “investment showed a recovery in the last part of 2017”, the truth is that investment has been quite flat.

Not only were end-of-year sales good, but the year started on the right footing as well. It is worth noting that there was a change in the composition of retail sales in favor of non-durable goods. In the first month of 2018 the 12-month variation of manufacturing production returned to positive terrain. Nevertheless, the recovery was observed only in half of reported divisions.

The best news had to do with expectations. In February the Monthly Index of Business Confidence (IMCE) rose again, both the total and its sectorial components. The IMCE is encouraging about the future of investment.

Exports grew by 36% in the 12 months to February 2018, the largest figure since March 2011. Nevertheless, this was due to a positive base effect Recall that in February of last year exports collapsed because of the strike at La Esconidida. The positive note came from exports of agricultural goods. increase in mining exports. Imports of consumption goods and capital goods in February were consistent with the continued dynamism of consumption and the relative stability of investment.

On March 21st the Central Bank released the latest version of the quarterly Monetary Policy Report. The Report corroborated that monetary policy has turned slightly more hawkish and that there will be no further cuts, even under a relatively low inflation and low growth scenario.

Sebastián Piñera is the new President of Chile. He has announced his intention to have Chile be a developed country by 2025. What regulatory changes does his government plan in order to reach this goal? Which are the main difficulties that this plan may face?

Although the Constitutional Tribunal’s ruling on one aspect of Bachelet’s reform to higher education has alleviated fears of some in the private education sector, it has also handed Piñera’s new government a bit of a mess. Piñera will have to continue implementing the legal framework for the new system, while at the same time dealing with a social opposition which has been emboldened by the Tribunal’s decision.

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