IMF Executive Board Concludes 2009 Article IV Consultation with ChilePublic Information Notice (PIN) No. 09/111
September 09, 2009
Public Information Notices (PINs) form part of the IMF's efforts to promote transparency of the IMF's views and analysis of economic developments and policies. With the consent of the country (or countries) concerned, PINs are issued after Executive Board discussions of Article IV consultations with member countries, of its surveillance of developments at the regional level, of post-program monitoring, and of ex post assessments of member countries with longer-term program engagements. PINs are also issued after Executive Board discussions of general policy matters, unless otherwise decided by the Executive Board in a particular case. The staff report (use the free Adobe Acrobat Reader to view this pdf file) for the 2009 Article IV Consultation with Chile is also available.
On July 22, 2009, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation with Chile.1
The Chilean economy has proved resilient in the face of the global financial crisis. The sound policy framework, underpinned by an inflation target regime, a structural budget rule, and a flexible exchange rate, allowed the economy to enter the crisis with a fundamentally robust position. Large fiscal savings accumulated in past years have been critical to preserve stability and cover financing needs, while the imbalances in the financial and corporate sectors witnessed elsewhere have been absent.
Being highly integrated to the global economy, the global crisis transmitted quickly through trade and financial linkages. Real GDP slowed markedly in the fourth quarter of 2008 and contracted in the first quarter of 2009. Inflationary pressures eased considerably due to the weak domestic demand and the decline in food and energy prices, with the 12-month inflation rate falling from 9.9 percent in October 2008 to 2 percent by June 2009. Weak demand from main trading partners and lower copper prices resulted in an external current account deficit of 2 percent of GDP in 2008. However, the sharp compression of imports that accompanied the decline in domestic demand, shifted the current account into a projected surplus in 2009.
The policy response to the crisis has been sizable, well balanced and coordinated. Liquidity support measures have helped preserve financial stability. Since early 2009, the Central Bank of Chile cut the policy rate by 775 basis points to an historic low of ½ percent, and the government announced a stimulus package of 2.9 percent of GDP comprising higher public investment, transitory tax reductions and direct transfers and subsidies to low income households. In July, the Central Bank of Chile announced complementary measures to better align market rates with the policy rate; including the establishment of a liquidity facility at the monetary policy rate with tenors of up to six months; adjustments to the issuance of short-term central bank notes to ensure consistency with the new liquidity facility; and the suspension for the remainder of 2009 of the previously-planned issuances of 1-year notes and 2-year nominal bonds.
The government also adopted additional measures to foster employment and credit, and promote competition in the financial system. Fiscal measures are to be financed through the issuance of new government debt and with resources from the Economic and Social Stabilization Fund. The central bank has adjusted its debt management program for 2009 to offset any impact of the government’s additional financing needs. The government also has advanced structural reforms in the financial sector and domestic capital markets to strengthen the supervisory framework, as well as to bring forward the implementation of the reform of the pension system.
The 2009-10 outlook remains highly dependent on the external environment, in particular the speed of the global recovery and its impact on commodity prices. A further deterioration of global conditions would impinge on the pace of the domestic recovery and affect expectations on growth and income prospects in the near term. Nevertheless, the Chilean economy is well placed for an early return to sustained growth on the heels of the strong countercylical measures adopted by the authorities and the expected recovery of its main trading partners.
Executive Board Assessment
Executive Directors commended the Chilean authorities for their sound policy framework underpinned by an inflation target regime, a structural budget rule, and a flexible exchange rate regime. As a result of this strong framework and the authorities’ track record of exemplary policies, Chile’s economy is well placed to face the global crisis, which has caused a sharp deterioration in economic performance since the last quarter of 2008. Directors welcomed the authorities’ vigorous, well balanced, and coordinated policy response, which they viewed as critical for preserving financial and macroeconomic stability. While macroeconomic conditions have begun to stabilize in the second quarter of 2009, Directors noted that Chile’s near-term growth prospects are affected by the high uncertainty surrounding the timing and pace of the global recovery.
Directors endorsed the Central Bank of Chile’s decision to implement alternative means of monetary easing to support activity and a return of inflation to the target, noting the staff’s assessment that the exchange rate is broadly in line with fundamentals.
Directors welcomed the countercyclical fiscal stimulus, and recommended caution when deciding to withdraw such stimulus, encouraging the authorities to consider extending several revenue measures through end-2010, if needed. Once the recovery is well entrenched, Directors saw scope for unwinding those measures and specifying a structural target to preserve fiscal credibility and address long-term fiscal pressures.
Directors encouraged the authorities to consider extending the horizon for fiscal policy formulation and focusing on the level and growth in public per capita spending relative to income per capita, and its implications for net public assets. They commended the authorities for the significant progress in dealing with contingent liabilities, and welcomed their commitment to assess the fiscal impact of long-term liabilities related to pensions and central bank recapitalization, as prescribed by the Fiscal Responsibility Law. Directors encouraged the authorities to sustain reforms to lower the cost of doing business and to further promote formal employment.
Directors praised the authorities for their sound prudential and supervisory framework and for the progress in advancing reforms to deepen domestic capital markets. They noted that Chile’s capital markets have been a resilient source of corporate financing during the global crisis, and welcomed efforts aimed at facilitating foreign participation and market access for small and medium-sized firms. Directors suggested that the authorities consider keeping some new liquidity instruments and facilities even after the turbulence subsides. With credit risks expected to rise, Directors recommended that the authorities continue assessing the effectiveness of the models banks use to determine provisioning levels, and explore options to reduce their procyclicality. They also encouraged the authorities to consider broadening the perimeter of regulation to non-bank institutions outside the direct purview of the supervisory authorities.