TPP Pullout Wouldn’t Hurt, But FTA Revision Would Be a Catastrophe
Economic activity continues to be quite depressed. The mining sector is dragging and, beyond seasonal fluctuations, the economy for the first 10 months of the year was flat. While October retail sales figures surprised slightly on the upside, performance remained anemic. But manufacturing production crashed. Business confidence continued relatively stable, though was still pessimistic. Foreign accounts did deliver some positive signals.
Labor market data for October showed no clear signs of recovery. Though unemployment unexpectedly fell by 0.4%, to 6.8%, the numbers don’t capture the level of deterioration of the labor market, as seen by the fact that the increase in employment continued to be concentrated in self-employment. Data on wages and labor costs confirm lower inflationary pressures for 2017.
After two months of downward surprises, in November the CPI increase came in slightly above market expectations. But the surprise was concentrated in non-core products. After being above the Central Bank target since April 2014, the 12-month variation of the IPCSAE, which excludes energy and foodstuffs, was exactly 3% in November.
The Central Bank in its most recent monetary policy board meeting introduced a change of bias, from neutral to dove. In our opinion, the Board did not cut the MPR for tactical reasons alone. We now expect a 25 bp cut in the MPR January. Markets expect that the Board will bring the MPR down to 3% (from the current 3.5%) before May.
President-elect Donald Trump has already stated a clear opinion: the Trans Pacific Partnership is a “bad, bad deal for American businesses, for workers, for taxpayers.” But U.S. withdrawal from the TPP wouldn’t produce relevant effects for Chile´s economy or politics. But an eventual renegotiation of the terms of the U.S.-Chile FTA or, even worse, its abrogation, would have catastrophic effects for Chile. Those look like improbable events today, but Chile’s diplomats will have to remain vigilant and tread carefully.
Despite leading in the polls, ex-president Sebastián Piñera has publicly suggested he may drop out of the presidential race, claiming his family is not fully behind the idea. But Piñera's second thoughts may have more to do with revelations that, as president, his company Bancard bought a stake in one of Peru's major fishing companies, Exalmar, even as Peru was taking Chile to the International Court of Justice over a dispute over maritime limits. Questions have arisen over what kind of blind trust was in place during Piñera's presidency, and possible conflicts of interest then, or in the future.
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