When China sneezes...

CHILE - Report 02 Feb 2016 by Igal Magendzo, Robert Funk and Alberto Etchegaray

January’s global market volatility had strong implications for the Chilean economy.Fortunately, it appears that at least some of the turmoil was an over-reaction. We will know the actual damage to the real economy later this year, when we have data for the first quarter.

In November the Monthly Index of Economic Activity (Imacec) surprised analysts on the downside. At the same time, business confidence shows no recovery. In spite of the apparent slowdown in December, retail sales were not as bad as they appear; the deceleration in December confirmed that this year a substantial part of Christmas sales occurred in November.

Notwithstanding the multilateral depreciation of the peso, the annual growth rate of manufacturing production remained in negative territory in December, as did mining production.

In the fourth quarter of 2015 the unemployment rate reached 5.8%, the lowest in two years. Although unemployment remains low, one should take this figure with caution. If current trends – a slowing of employment creation in public services, a moderation of employment creation in hotels, restaurants, construction and commerce, as well as the fall in mining sector employment – continue, from March on the unemployment rate will start to rise significantly.

2015 ended with a 12-month change in the CPI of 4.4%. The persistent inflation is mostly the consequence of the continued depreciation of the peso relative to the US dollar. In addition, inflation in Chile is quite persistent.

At its January Monetary Policy meeting, the Central Bank left the Monetary Policy Rate (TPM) unchanged. The corresponding minutes revealed that the position of Board members became more dovish. China is now the main source of uncertainty facing the Board. We believe that at the next meeting, the Central Bank Monetary Policy Rate will remain unchanged, and that there will be a hike in March. We do not rule out that if there is a rise, it will be the result of a split vote.

On a separate note, we highlight that the Treasury announced it wants to increase the stock of bonds around three benchmark maturities: 5, 10 and 20 years. With this in mind, it will offer (voluntarily) to swap out-of-benchmark bonds for on-benchmark bonds.

Hoping to restore order within her Nueva Mayoria coalition and improve her government's performance in the public opinion polls, Michelle Bachelet tried to push through a heavy legislative agenda of seven major reforms during the month of January. Unfortunately, only four bills were passed, and Bachelet's objectives were not met. The problem appears to be the obsession with meeting campaign promises, without considering whether the proposed policies are necessary, well designed, or desired by voters. Worse still, once Bachelet's proposals become mired in Congress, changes are introduced that dilute many of the proposals’ original good intentions.

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