Article IV Consultation with Chile, Conference Call by Martin Mühleisen, the Mission Chief for Chile and Mr. Markus Rodlauer, Deputy Director of the Western Hemisphere Department
September 27, 2007
September 26, 2007
MS. LOTZE: Thank you very much. Good morning and welcome to this press conference call on the Article IV Consultation with Chile. I'm Conny Lotze of the External Relations Department, and I am joined in this call by Martin Mühleisen, the Mission Chief for Chile and Mr. Markus Rodlauer, Deputy Director of the Western Hemisphere Department. This call is on the record.
You have already had access under embargo to the documents and opening remarks through our Media Briefing Center. Mr. Mühleisen will make some opening remarks, which you should also have in English and Spanish. But to save a little time, he will only make his remarks in English and then we will open the floor to questions. The question and answer period will be interpreted into English and Spanish, so we are happy to take your questions in either English or Spanish.
MR. MÜHLEISEN: Thank you. Good morning. Buenos días. The staff report that you have seen reflects our assessment of economic developments and policies in Chile and in particular our discussions with the authorities during our visit in late May.
The global economic environment has changed since then, but we do not see Chile's strong economic position as being greatly affected. The recovery from the unexpected slowdown in the third quarter of last year remains broad based. And we believe growth will reach close to 6 percent in 2007 and remain around the potential rate of 5 percent next year.
Nevertheless, the risks to the outlook are now more on the down side, given uncertainties about the global financial system, the U.S. outlook, and investors' risk appetite, including for emerging markets. Twelve-month inflation is now projected to rise through the end of this year, reflecting exogenous shocks, including a jump in global food prices, unusually cold weather conditions in Chile, and disruptions in energy supply.
Given the strong growth momentum, with excess capacity in the economy gradually vanishing and unemployment at historically low levels, the Banco Centrale has appropriately raised interest rates in recent months. This should insure that inflation expectations remain well-anchored around the 3 percent target and that food and energy price shocks do not spill over into other sectors.
Looking ahead, with risks to the outlook more on the downside, the future monetary policy path will need to depend on economic and financial development in the coming months. The strong improvement in the government's financial position in recent years has allowed a moderate reduction in the target for the structural surplus rule. We support this reduction and commend the government for keeping overall spending increases consistent with macroeconomic stability, as well as for the efforts to maintain the high quality of public spending in Chile. Keeping a small positive surplus target is appropriate, as it will allow the build up of some reserves to address future liabilities such as in the context of the planned reform of the pension system.
Let me perhaps elaborate on the impact of the recent global financial turbulence. This impact has been relatively mild in Chile, both compared with most other countries in the region and also with Chile's own past experience. In our view, this is really a strong testimony to the very robust macroeconomic framework that Chile has built over the past two decades, with strong cushions against adverse shocks--a sound fiscal position, low public debt, and independent central bank, high international reserves, and a flexible exchange rate.
The past few weeks have also served to underscore how resilient Chile's financial markets have become in the face of global turbulence. Threats have widened relatively little. The exchange rate has been fairly stable, and in line with fundamentals. And the interbank market has continued to function in a normal way. This resilience reflects a healthy banking system and strong corporate balance sheets, again the result of Chile's excellent economic policy framework. Therefore, assuming no further major unexpected shocks or a global downturn, we believe that growth and employment in Chile will remain relatively strong, benefiting also from Chile's diversified export structure and continued brisk commodity demand.
Let me close with a brief discussion of structural reform. Chile is already an example for structural policies in many areas, resulting in an enviable record of growth and considerable success in reducing poverty. Planned reforms of the pension and education systems will further strengthen the foundations for long-term growth while also addressing key social concerns.
Likewise, we welcome the creation of the President's Commission on Labor Market Issues and Social Equity, as we see scope for improving labor market flexibility and also reducing labor informality. Last but not least, we remain impressed by the speed with which the financial sector in Chile has developed. Past reforms have already created a vibrant market that is increasingly integrated with the rest of the world. Planned reforms, such as the liberalization of investment rules for pension funds, should further enhance the effectiveness of markets, raise returns to pensioners and savers, and provide improved access to financing for entrepreneurs, large and small.
I should probably also mention that what you're now seeing in terms of the documents, the staff report and accompanying selected issues paper have been provided to the Board for the discussion of the Article IV Consultation back in July. The outcome of that discussion was contained in the PIN, in the Public Information Notice, that has already been published on the IMF's Web site, but now we are releasing the report. And these reports are somewhat shorter than in recent years, because we have done what the Fund called a streamlined consultation, which means that we have used somewhat fewer resources than in the past because of the absence of any systemic issues in Chile and the continued excellent performance of the Chilean economy.
QUESTIONER: Thank you. The studies say that the financial institutions remain vulnerable to external shocks. In the actual outlook, do you know what is the real exposure of, for example, pension funds and other investment funds from Chile to the credit crisis?
MR. MÜHLEISEN: In our view, the Chilean pension funds and other financial institutions have low exposure to the type of risks that we have read about in recent weeks, including the subprime market in the U.S. Exposures are generally well managed, and, as you know, subject to limits on investments that limit these portfolios to high quality paper and a limited amount of investment abroad.
QUESTIONER: I wondered if you can confirm your CPI forecast please for us for both 2007 and 2008? And also, if I could ask you if you consider revising those forecasts in the light of rising inflation since the you made your visit in May?
MR. MÜHLEISEN: Yes, we will revise our forecast for inflation. We have fed in the price forecasts that are part of our world economic outlook, especially for food components and energy. And this will yield a year-end 2007 inflation forecast that is broadly in line with that of the central bank, contained in its monetary policy report, of around 5½ percent.
And then for next year, we envisage that the energy and food price shocks will partly unwind and that inflation will return to the 3-percent target of the central bank by the end of next year.
QUESTIONER [interpreted]: Regarding the effect on the exchange rate of the international crisis, what are the possibilities of having the Chilean export sector resisting this shock?
MR. MÜHLEISEN: Well, we came to the judgment in our report that the exchange rate is valued broadly in line with fundamentals, and that assessment hasn't changed during the recent period of market turmoil. I already mentioned that Chile was only mildly affected.
While we have seen some appreciation against the U.S. dollar, the multilateral exchange rate for Chile has hardly moved. And in that context, we have no reason to doubt the outcome of the research that we have conducted in our background paper, namely that the exchange rate has not affected exports to any significant degree.
QUESTIONER: Thank you. Do you agree with other studies released by other institutions as, for example, the Cato Institute, that say that Chile needs to implement new reforms, for example, in the tax system?
MR. MÜHLEISEN: I think in general the Chilean tax system is characterized by a relatively low level of revenues relative to GDP compared to other countries. It is a relatively efficient tax system because it relies to a large extent on the value added tax. And while there's always room to fine-tune, I think broadly the Chilean tax system has been very successful.
In last year's report, we had some discussion about the gap between a marginal tax rate for corporate and individuals, and that may be a focus for tax reform going forward. But again, overall, the low level of taxation in Chile is something that has been very efficient from an economic perspective.
QUESTIONER [interpreted]: It's a follow-up question. What are the main challenges you think the Chilean economy faces given all the good things you have been saying about Chilean economy management?
MR. MÜHLEISEN: In our report, we mention that Chile has rightly set its sights towards catching up in terms of income and living standards with industrialized countries. And in that context, the greatest priority is to increase the human capital, employability and education levels of Chilean workers, which will help further diversify Chile's production structure away from commodity and close-to-commodity products toward a more diversified economic base.
In that sense, we agree with the government priorities about setting out further reforms in this area, while at the same time ensuring that social needs of the population are addressed and that a large share of the Chilean population enjoys the benefits of stronger growth going forward. And we welcome the progress achieved in reducing absolute poverty in Chile and support the government's effort in eliminating the remaining pockets in the years going forward.
The planned pension reform will go a long way, in our view, especially towards addressing old-age poverty and, in addition to that, we also think that reforms in the financial sector will be very important to integrate Chile further into a global capital market, and to increase the returns to Chilean savers and lower the financing costs for Chilean entrepreneurs.
QUESTIONER: Thank you. Are you already working with Chilean authorities to implement a contingent claims analysis to evaluate bank risk?
MR. MÜHLEISEN: Yes. If you look in the financial stability report of the central bank earlier this year, you will find a chapter on this topic that has been co-authored by IMF staff.
And we also carry in our background paper an application of the contingent claims analysis to the Chilean financial sector. That paper is only available as a summary so far, but we hope to publish it soon in the coming months as a working paper on the IMF Web site.
The summary is contained in the background paper, and we found that the Chilean financial sector is in a very good position and it seems very robust to external shocks.
QUESTIONER [interpreted]: Regarding the interest rate, we would like to know if you believe that the monetary policy of the Chilean government is--regarding an increase in the interest rate will be consistent--what consequences will it have vis-à-vis the differences with the United States and if you believe that this interest rate is consistent with the inflation prospects?
MR. MÜHLEISEN: Well, monetary policy in Chile is set according to Chilean economic conditions. And in that respect, we noted in the report that, back in May, there was a case for raising interest rates, which the Bank has done over the following couple of monetary policy meetings.
Now in recent weeks, the situation has in so far changed as the downside risks to growth have increased with the global financial turbulence and the slowdown in the United States. And while we do not think that the slowdown in the U.S. will have a major impact on the Chilean economy, the distribution of risk is now different, and the central bank has changed the bias in their last meeting to neutral.
With this strong growth momentum in the economy, it was important to anchor inflation expectations at the bank's 3-percent target. This has been achieved, and, with that, the outlook for monetary policy will depend on development in economic and financial markets over the next coming weeks and months.
MS. LOTZE: Thank you very much. We will close the press conference call at this point.