One More Reform. But is There Time?

CHILE - Report 17 Aug 2016 by Igal Magendzo

President Bachelet's pension reform proposals both fit and break a pattern. As with previous reforms, the government appears to be bending to longstanding popular discontent, this time with the existing individual pension accounts and their administrators, known by their Spanish acronym as "AFPs".

Although much lauded abroad, the Chilean pension system provides most workers with low pensions, mostly because Chilean wages are low and formal employment can hard to come by. As a result, large street demonstrations several weeks ago led the government to respond with a proposal that seeks to raise obligatory contributions from 10 to 15%, create a common risk-sharing fund, regulate commissions, and close the gap in pensions received by men and women. The extra 5% contribution, the government claims, will be covered by employers.

In bending to perceived popular discontent with a hastily cobbled-together reform, without acknowledging the possible negative effects on employment, the government is repeating its past approach. But there is a difference: Bachelet's proposals are not too "far out" and were fairly well received. Additionally, the president made a special plea for national agreement on this issue, seemingly recognizing that the time for pushing reforms unilaterally – which one government senator called "the bulldozer" – seems to be over.
The Chilean economy continues to grow at low and stable rates, with no clear sign of either further deterioration or recovery. Economic activity is being adversely affected by the weakness of the mining sector. Excluding this sector, the picture is not auspicious, but appears somewhat less dramatic. Sectoral data (trade, manufacturing, mining and utilities) have been mostly flat so far this year. In July, business confidence remained at pessimistic levels, but confidence in the construction sector once again broke an historic record.
The labor market continues to weaken. The unemployment rate has been rising, the employment rate has been falling and job creation is down. Wage increases are still dynamic, but it is not possible to claim that this is a sustained improvement in earnings, since the breakdown of the data shows a widespread slowdown, except for some very specific sectors.

In July the CPI grew by 0.2% mom, slightly above the 0.1% expected by market analysts. The 12-month change remained above the 2% to 4% target range, but barely. The upside surprise is even greater when one considers that, had it not been for a 24% drop in the price of air transportation services, the CPI would have been higher by about 0.1%.
In the communiqué corresponding to the August Monetary Policy Meeting, the Central Bank put an end to nearly a year of upward bias. The Board stated, "Future changes in the MPR will depend on the implications of domestic and external macroeconomic conditions on the inflation outlook." Also, for the second consecutive month the communiqué mentioned the recent appreciation of the peso.

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