Emerging

Crisis times

st  
13  
EcoEmerging// 1 quarter 2020  
economic-research.bnpparibas.com  
Chile  
Crisis times  
With violent protests rocking Chile since October, the government announced a series of measures to combat inequality and  
proposed a new version of its pension system reform. Above all, the government signed an agreement with the main opposition  
parties to draw up a new constitution. Yet persistently fierce political and social tensions are bound to curtail growth. Forecasts for  
the next two years have been revised largely downwards. The public debt and deficit are also expected to swell over the next five  
years.  
Political model called into question  
1-Forecasts  
The violent protests that have swept Chile since October largely  
surpass simple opposition to the reform measures proposed by  
Sebastian Piñera’s government, a coalition of centre-right parties in  
power since March 2018. Protest movements have sprung up  
spontaneously, bringing together a wide range of demands.  
According to several surveys, the protests are mainly motivated by  
frustration over rising inequality, the government’s determination to  
drive through pension and healthcare system reforms and the lack  
of confidence in institutions. The government’s initial response was  
very repressive, which only threw oil on the flames and reinforced  
the amplitude of protests. Sebastian Piñera then announced several  
vague economic and social measures.  
2
018 2019e 2020e 2021e  
Real GDP growth (%)  
4.0  
1.0  
1.3  
2.0  
Inflation (CPI, year average, %)  
Central Gov. balance / GDP (%)  
Public debt / GDP (%)  
2.4  
2.3  
3.0  
3.0  
-1.7  
-2.9  
-4.7  
-3.5  
25.7  
-3.1  
27.6  
-3.4  
30.1  
-2.7  
34.3  
-2.1  
Current account balance / GDP (%)  
External debt / GDP (%)  
62.0  
39.9  
7.6  
61.8  
36.9  
7.8  
70.7  
32.3  
6.5  
76.8  
34.1  
6.1  
Forex reserves (USD bn)  
Forex reserves, in months of imports  
Exchange rate USDCLP (year end)  
696  
744  
770  
750  
e: BNP Paribas Group Economic Research estimates and forecasts  
The proposed “social programme” amounts to a total of USD 1 bn in  
2
019 and USD 1.4 bn in 2020. The main measures comprise a  
2- Monthly GDP growth indicator has plummeted  
higher minimum wage and an increase in the minimum old-age  
pension, easier access to healthcare and greater public spending in  
several areas (support for the elderly and students; and  
infrastructure maintenance). Another USD 5.5 bn in measures were  
announced in December. To the best of its ability, the government is  
trying to limit the protest movement’s impact on economic activity by  
stimulating private consumption (notably via transfers to low-income  
families) and investment (including measures to support small and  
mid-sized enterprises, and to restore infrastructure damaged during  
the protests, notably in the capital).  
Monthly GDP, % y/y, s.a.  
1
1
1
4
2
0
8
6
4
2
0
2
4
6
-
-
-
As fiscal measures failed to calm the protests, the opposition parties  
proposed to elaborate a new constitution together to replace the  
existing one dating back to the Pinochet dictatorship in 1980. In late  
November, the government signed an “agreement for peace and a  
new constitution” with the main opposition parties.  
20062007200820092010201120122013201420152016201720182019  
Source: Central bank  
As a result, a referendum will be held next April to answer two  
questions. First, whether or not the constitution should be replaced,  
and if yes, what type of body should be in charge of elaborating the  
constitution: 1) a constituent assembly comprised exclusively of  
acting members of parliament, or 2) a mixed constitutional  
commission comprised of acting members of parliament and new,  
specially elected commission members. Next October, members will  
be elected to write the new constitution. Once the commission  
proposes a new text (within 12 months of their election), a final  
referendum will be held to decide whether or not to adopt the new  
constitution.  
Although a broad swath of the population seems to favour the  
proposal to draw up a new constitution, the political and social  
situation will remain extremely tense, especially with the approach  
of municipal and regional elections in March 2021, followed by  
presidential elections in November.  
What about pension reform?  
As the protest movement regained momentum in the beginning of  
the year, in mid-January the government proposed a new version of  
its pension system reform. According to the press release, the  
government proposes to raise payroll workers’ pension contributions  
st  
14  
EcoEmerging// 1 quarter 2020  
economic-research.bnpparibas.com  
to 16% of monthly wages, from 15% in the initial version of the  
reform. The current rate of only 10% is much lower than the OECD  
average of 18%. The difference in contributions would be covered  
by the employer, with no change in net wages. Additional  
contributions would be distributed between individual savings  
accounts and a “solidarity fund”. In both cases, the funds would be  
managed by a public administrator, which addresses criticisms of  
the current private management system, which is deemed to be too  
costly and inefficient. The reform would be implemented gradually,  
by increasing the contribution rate in steps of 0.5% a year, in order  
to ease the increase in the cost of labour.  
3
- Mild depreciation of the peso  
USDCLP  
8
50  
00  
8
750  
00  
650  
7
6
5
5
00  
50  
00  
The government affirms that the amount of pensions can no longer  
be less than the minimum wage, for all payroll workers having paid  
into the system for at least 30 years. Before it can be adopted, the  
new reform bill must first be presented to parliament.  
2016 2016 2017 2017 2018 2018 2019 2019 2020  
Source: Central bank  
Economic growth slows  
After rising 1.7% y/y in the first half of 2019 and then 3.3% in the  
third quarter, real GDP growth is expected to stall in the quarters  
ahead. The monthly growth index has already declined by 3.4% in  
October and November, after rising 2.3% in September.  
Government stimulus measures and low interest rates will not  
prevent household consumption and investment from declining. The  
consumer confidence index continues to erode and job market  
conditions have begun to deteriorate. At the same time, investor  
confidence continues to slump. According to the central bank’s  
survey, several companies said they have postponed investment  
projects that were initially planned for 2020. In contrast, in the  
mining sector, which has been relatively sheltered so far, solid  
growth prospects should help reduce the decline in investment. All  
in all, real GDP growth is estimated at 1% in 2019 and 1.3% in 2020,  
down from 4% in 2018.  
The economy’s strong fundamentals have helped limit the peso’s  
depreciation (8% since the outbreak of the crisis). Central bank  
communications have also helped reassure the markets, first via an  
early November press release in which the central bank stated that  
it had the necessary tools and adequate foreign reserves to contain  
any liquidity and volatility risks. Then in early December the central  
bank announced a currency sterilisation programme between early  
December 2019 and the end of May 2020. After hitting  
USDCLP 828 at the end of November, the exchange rate has  
returned closer to USDCLP 770 since early January (769 at 21  
January). Under these conditions, we foresee at least one more key  
rate cut to stimulate economic growth in 2020.  
Economic policy support  
The government’s fiscal consolidation efforts are no longer on the  
agenda, at least not in the short term. According to Ministry of  
Finance projections released in December, public expenditure  
should increase by 1% in real terms between 2021 and 2024. The  
new version of the pension reform bill is unlikely to change this  
projection significantly. The fiscal deficit should exceed 4% of GDP  
in 2020 before narrowing gradually thereafter. The public debt would  
increase from 28% of GDP in 2019 to 38% in 2024.  
At the same time, the central bank is expected to continue providing  
monetary policy support in 2020, after lowering its key rate by a total  
of 175 basis points, to 1.75%, in 2019. In its latest press release, the  
central bank indicated that monetary policy would remain  
accommodating “as long as inflation trends allow”. Yet its latest  
forecasts call for inflation to rise to about 3.5% on average in 2020  
(
up from 2.3% in 2019), which is higher than its target rate of 3%.  
The central bank’s scenario seems to be based on overly  
pessimistic assumptions. December’s inflation was only 3% y/y,  
lower than the central bank’s projection. The observed impact of  
currency depreciation was probably not as high as the central  
bank’s figure, and was partially offset by the impact of the economic  
slowdown.  
QUI SOMMES-NOUS ? Trois équipes d'économistes (économies OCDE, économies émergentes et risque pays, économie bancaire) forment la Direction des Etudes Economiques de BNP Paribas.
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