## cr18311-chile-bundle

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### CONTEXT
- Chile’s economy rests on strong fundamentals, solid institutional frameworks, and a sound track record of macroeconomic policies.
- New administration of President Sebastián Piñera (took office on March 11, 2018) aims to reinvigorate investment, improve competitiveness, and boost economic growth through structural reforms within five national agreements (acuerdos nacionales).

### CHILE’S ECONOMIC RECOVERY — Key findings
- Resilience and recent performance:
  - Per capita GDP growth averaged 1 percent in the past four years (down from 4 percent during 1990-2013).
  - GDP growth in the most recent year reached 1.5 percent, bottoming out in 2017Q1.
  - Growth rebounded in 2018H1: 5.3 percent yoy in 2018Q2 (highest since 2012Q3).
  - Private consumption grew 4.5 percent yoy in 2018Q2; investment grew 7.1 percent yoy in 2018Q2.
- Inflation and labor market:
  - Headline inflation close to 2 percent until May 2018; rose to 3.1 percent in September 2018.
  - Core inflation 2.1 percent in September 2018.
  - Unemployment 7.3 percent in August 2018.
  - Real wage earnings growth remained virtually null in July (year not specified).
- External and trade:
  - Current account deficit narrowed from 4.1 percent of GDP in 2013 to 1.5 percent in 2017.
  - Terms-of-trade increased 11 percent in 2017 due to copper prices and terms-of-trade changes.
  - Import growth rose strongly since late 2017, led by import-intensive business investment.
- Monetary stance:
  - Central bank cut policy rates by a cumulative 100 bps from January to May 2017.
  - Policy rate was 2.5 percent until October 2018, when it was raised to 2.75 percent.
  - Monetary policy mildly accommodative mid-2017 to early 2018; became more accommodative since mid-2018 with pickup in activity and inflation.
- Fiscal and financial:
  - Structural deficit in 2017 was 2 percent of GDP (0.4 percentage point wider than 2016 on comparable parameters).
  - Headline fiscal deficit in 2017 was 2.8 percent of GDP.
  - Fiscal deficit in the first half of 2018 was 0.1 percent of GDP.
  - Sovereign rating downgrades: Fitch and S&P in 2017Q3; Moody’s lowered Chile’s rating in July 2018.
  - Non-performing loans about 2 percent of total loans.
  - Corporate debt remains high by international standards.

### OUTLOOK AND RISKS
- Growth and labor market:
  - Growth projected at 4 percent in 2018.
  - Medium-term potential growth estimated at about 3 percent.
  - Unemployment projected to move toward a neutral rate of around 6 percent.
- Inflation:
  - Headline inflation 3.1 percent in September 2018; core inflation picking up more slowly due to residual slackness.
- External sector projections:
  - Goods trade balance projected to decline from 2.9 percent in 2017 to 2.0 percent in 2018 and 1.6 percent of GDP in 2019.
  - Current account deficit projected to widen to 2.5 and 2.7 percent of GDP in 2018 and 2019, before narrowing to about 2 percent of GDP over the medium term.
  - Staff assesses Chile’s external position and exchange rate broadly in line with medium-term fundamentals.
- Risks (Risk Assessment Matrix, Annex V):
  - External risks: financial shocks, rising protectionism, declines in copper prices, faster-than-expected U.S. monetary tightening, weaker trading partner growth (especially China).
  - Domestic upside risk: stronger-than-expected rebound in investment from structural reforms.
  - Domestic downside risks: cyber-attacks, high leverage in the non-financial corporate sector, increasing household debt.
  - Mitigating factors: corporate debt often linked to parent-company debt, long maturities, exchange rate hedging, and recovery in activity.

### AUTHORITIES’ VIEWS
- Growth expectations:
  - Authorities expect economy to grow 4–4½ percent in 2018 and 3¼–4¼ percent in 2019 (largely from rebound in private investment).
  - Trend growth estimated at 3½ percent; planned reforms possibly raising trend growth to 4 percent (not included in staff projections).
- Corporate debt:
  - Authorities do not see significant concerns given hedging mechanisms and foreign-based operations; caution that measuring indebtedness as a percentage of domestic GDP may understate balance sheet strengths.
- Fiscal:
  - Authorities reiterate commitment to meet recently-announced fiscal targets and stabilize central government debt; assert tax reform is “more than funded,” relying heavily on electronic invoicing to reduce evasion.

### MACROECONOMIC POLICY — Fiscal Policy
- Debt and consolidation:
  - Between 2007 and 2017, gross debt rose by nearly 20 percentage points of GDP.
  - Public net-debt position about 5 percent of GDP in 2017.
  - Fiscal targets: improvement in structural balance by 0.2 percent of GDP per year over the next four years.
  - Staff projects authorities’ consolidation plans will stabilize debt as a share of GDP by the early 2020s.
- Fiscal outcomes and projections:
  - Authorities announced expenditure cuts of US$4.4 billion between 2018 and 2022; also inherited unbudgeted expenditures of US$5.6 billion over same period (now included in baseline).
  - Staff expects fiscal balance to improve in 2018 by about 1 percentage point of GDP to minus 1.7 percent of GDP.
  - Staff expects fiscal balance to worsen slightly in 2019 (to about 2 percent of GDP) due to lower copper price and changes in reference assumptions; authorities expect a somewhat smaller deficit in 2019.
  - Meeting structural balance targets may require constraining expenditure below the committed expenditure path announced in the 2019 budget.
- Tax reform considerations:
  - Proposed measures: return to a single and fully integrated tax system; broader definition and simplified record keeping for SMEs; accelerated depreciation; more favorable treatment to withdraw retained earnings (from FUT); tax on digital services; mandatory electronic invoicing; strengthened toolkit for tax authorities; faster VAT reimbursement; higher VAT incentives on new housing.
  - Expected effects:
    - Tax integration lowers the effective PIT from business activity by about 9 percent for firms in the semi-integrated system.
    - Integration, accelerated depreciation, and faster VAT reimbursement should spur investment and growth.
  - Staff recommendations and cautions:
    - Take into account OECD (2018, Tax Challenges Arising from Digitalization) when designing digital services tax.
    - Ensure final outcome is equitable and funded.
    - Consider complementary options to offset inequality and contain evasion/avoidance: strengthen tax administration, raise the top marginal PIT rate, introduce a final flat withholding dividend tax.
    - Authorities estimate revenue loss from integration at about 0.2 percent of GDP but expect package to be sufficiently funded; staff notes electronic invoicing revenue gains require significantly strengthening tax administration.
    - Additional revenue options if needed: reduce special tax regimes (e.g., renta presunta), extend VAT to professional services, reassess excise taxes (e.g., gradually align diesel with gasoline tax).

### FISCAL INSTITUTIONS AND ANCHOR
- Proposal for Autonomous Fiscal Council:
  - Five members nominated by the President and approved by the Senate.
  - Council to have own resources and mandates not coinciding with government term.
  - Tasks: conduct analyses; evaluate calculation of structural revenues; monitor compliance with structural balance targets; propose mitigating measures.
- Recommendation: embed a solid medium-term anchor (e.g., adequate debt ceiling or structural balance) to strengthen predictability and credibility.

### MONETARY POLICY
- Current stance and projections:
  - Monetary policy remains accommodative.
  - Real policy rate remains below the real neutral rate estimated between 1 and 2 percent.
  - Central Bank projects headline (core) inflation at 3.1 (2.7) percent y/y by end-2018.
  - Central Bank revised its output gap estimate for 2018 to close to zero.
- Normalization guidance:
  - Normalization should be cautious and guided by evidence of persistent convergence of inflation toward target supported by broad indicators.
  - Staff expects gradual convergence of policy rate toward medium-term level estimated between 4 and 5 percent, which—based on current expectations—should occur by 2020.
  - Central Bank expects a more visible pickup in core inflation partly due to 2017-base effects and estimates a smaller neutral policy rate range (4–4½ percent).
- Communication and governance:
  - Revamped communication: align Monetary Policy Report release (4 times a year) to policy meetings, regular press conferences, reduced meetings from twelve to eight.

### FINANCIAL SECTOR, MACROPRUDENTIALS, AND BANKING LAW
- New general banking law:
  - Closes gap with Basel III minimum capital requirements; banks have six years to increase minimum total solvency requirement to 10.5 percent from 8 percent of RWA.
  - Capital surcharge up to 3.5 percent of RWA for systemically-important domestic banks.
  - Authorities estimate capital needs about 0.5 percent of GDP (excluding Banco del Estado).
  - Minimum liquidity requirement equivalent to 60 percent of the liquidity coverage ratio, gradually increasing to 100 percent over 5 years.
- Institutional changes and tools:
  - Central Bank can set counter-cyclical capital buffers.
  - Financial Market Commission (CMF) will set capital surcharges for systemically-important institutions; CMF created by incorporating SVS and will incorporate SBIF.
  - Methodological and governance details of tools need clarification.
- Staff recommendations to close gaps:
  - Strengthen early-intervention and resolution regime; revise and expand triggers for resolution; broaden powers of resolution authority (CMF), including power to override shareholders’ rights.
  - Establish a national deposit insurance institution funded by member banks.
  - Strengthen supervisory coordination for cooperativas and cajas de compensación.
  - Establish a consolidated public credit registry across the entire financial industry.
  - Tighten exposure limits to own conglomerate; grant supervisors power over financial holding companies and affiliates.
  - Banco del Estado: recommend gradual capital injection to address estimated capital shortfall of about 0.5 percent of GDP; upgrade governance and efficiency.
- Authorities’ plans:
  - Develop a resilience agenda covering resolution framework, credit unions, and supervision of conglomerates.
  - Requested a Financial Sector Assessment Program from the Fund (scheduled for early 2020).
  - Recapitalization of Banco del Estado planned for 2020–2024.

### CYBERSECURITY AND FINTECH
- FinTech:
  - Chile advanced in per capita FinTech investment and activity in Latin America (crowdfunding, peer-to-peer lending).
  - Santiago stock exchange launched first blockchain system for securities lending in Latin America.
  - Most FinTech companies operate in a regulatory grey area; regulator challenge is balancing innovation with integrity, stability, consumer protection, and AML/CFT.
  - Authorities plan FinTech regulation covering cryptoassets, crowdfunding, and a flexible approach to private-sector engagement.
- Cybersecurity:
  - Recent cyberattacks affected the financial system but did not destabilize financial stability; indicate regulatory gaps and underinvestment in cybersecurity.
  - Authorities requested IMF technical assistance, are assessing regulatory gaps, and introduced regulations dedicated to cybersecurity.
  - Central Bank announced creation of a Technological Observatory to enhance coordination and information sharing.

### STRUCTURAL REFORMS — GROWTH, DIVERSIFICATION, AND INCLUSION
- Structural challenges:
  - Demographic trends exert downward pressure on labor force participation.
  - Lack of diversification keeps the economy dependent on mining.
  - Income inequality is high; 2015 post-tax-and-transfers Gini index is 0.13 above the OECD average.
  - Baseline medium-term per capita growth about 2 percent implies slow convergence to advanced-economy income levels.
- Reform priorities and measures:
  - Streamline licensing and permit system through a single contact point; improve coordination among institutions.
  - Business regulatory agenda: twelve core measures, Sustainable Projects Management Office (GPS), Productivity Office (OPEN), proposed legislation to streamline notary services.
  - Strengthen competition (e.g., maritime sector) and improve market access for new and small firms.
  - Labor market reforms: reduce firing costs, incentivize flexible contracts (including telework), target training incentives and active labor market policies, reduce minimum contribution period for unemployment benefits, fund universal childcare via employer contributions to boost female employment.
  - Human capital and innovation:
    - Improve education quality, link teacher performance to student achievements, enhance early childhood education.
    - Increase engineering and technical-professional graduates; creation of 15 new technical institutes.
    - Enhance R&D and innovation capacity; spending on R&D (particularly by business sector) substantially lower than OECD peers.
  - SME support:
    - Improve access to working capital by eliminating provider payment delays.
    - Facilitate portability of collateral across lenders; promote joint-venture capital market.
    - Tailor training programs to SME needs (reinstating minimum voucher, courses on cash flow management, special taxation regimes, marketing).
- Potential gains:
  - Closing policy gaps to OECD 25th percentile could increase output by up to 6 percent over 5 years (Hadzi-Vaskov 2018); gains likely materialize after several years and may have an initial fiscal cost before positive net fiscal impact through higher output.

### PENSION REFORM
- System and issues:
  - Privately-managed funded schemes supported capital markets and reduced fiscal risks but provide inadequate benefits for many retirees (low replacement rates).
- Reform options discussed:
  - Increase future pensions via higher mandatory contribution rates.
  - Raise current pensions focusing on the solidarity pillar; introduce new long-term care insurance.
  - Other options: postpone retirement age; differentiate pension supplements by age and gender; enhance incentives for voluntary pensions.
  - Staff suggests complementing contribution-rate increases with gradual equalization of retirement ages for men and women and enhancing solidarity pillar via budget resources.
  - Authorities unveiled a proposal to expand mandatory coverage to self-employed professional services with an option for gradual contribution increases.

### STAFF APPRAISAL — MACRO OUTLOOK, FINANCIAL SECTOR, AND POLICY
- Outlook:
  - Recovery underway; H1 2018 growth strongest since 2012, supported by business and consumer confidence and rebound in mining and non-mining.
  - Free floating exchange rate acted as shock absorber.
  - Output growth projected to gradually converge to medium-term potential of about 3 percent.
  - Headline inflation projected to remain around 3 percent target.
- Risks and financial sector:
  - Downside risks: rising protectionism, sharp tightening of global financial conditions, weaker trading partner growth.
  - Upside risks: rapid implementation of structural reform agenda.
  - Financial sector remains healthy; main risks from high leverage of non-financial corporates mitigated by parent-company debt, long maturities, and hedging.
- Fiscal:
  - Gradual fiscal consolidation should enhance credibility; staff projects central government gross debt to broadly stabilize in 2021.
  - Authorities could consider strengthening fiscal framework or deeper consolidation to enhance credibility.
- Tax reform and fiscal council:
  - Staff welcomes commitment that tax reform will be fully funded and supports enhancement of fiscal council independence and mandate.
- Cybersecurity and FinTech:
  - Need to strengthen cybersecurity and FinTech regulation frameworks; staff welcomes authorities’ preparations for cybersecurity legislation and FinTech regulation.

### SELECTED EXTERNAL AND FISCAL INDICATORS (HIGHLIGHTS)
- NIIP expected to slightly deteriorate in 2018 to -23 percent of GDP (by about 2 p.p.).
- Gross external debt projected to decline to about 61 percent of GDP in 2018.
- 2017 current account: -1.5 percent of GDP.
- Current account projected to widen in 2018 to 2.5 percent of GDP.
- National savings declined mildly by about 1 p.p. since 2013; investment ratio dropped by about 4 p.p.
- 2018 current account gap rose from about ½ percent of GDP to 1½ percent in 2018, of which 0.3 percent of GDP is due to policy gaps.

### ASSESSMENT — EXCHANGE RATE, RESERVES, AND STRUCTURAL REVENUES
- Exchange rate:
  - EBA CA and REER index methodologies (June 2018 estimates) indicate exchange rate in line with fundamentals: average gap about 0, range 6.7 to -11.5 percent, mid-point -2.4.
- Reserves and FX intervention:
  - Chile has a free floating regime; central bank generally does not intervene.
  - FX reserves cover over 5 months of imports in 2017; reserves close to lower bound of IMF reserve adequacy metric.
  - Reserves assessed as broadly adequate given central government buffers (assets about 19 percent of GDP in 2017).
- Structural revenue and structural balance methodology (authorities’ approach):
  - Structural fiscal balance = structurally-adjusted revenues − total expenditure.
  - Structural revenues = actual revenues − structural adjustment.
  - Structural adjustment applies to four revenue categories: i) non-mining tax revenue (16.7 percent of GDP in 2017), ii) healthcare-related social security contributions (1.2 percent of GDP in 2017), iii) private mining tax revenue (0.5 percent of GDP in 2017), iv) gross copper revenue from state-owned company (0.5 percent of GDP in 2017).
  - Output gap and copper price gap parameters determine adjustments; rule of thumb: 1 percent of GDP output gap ≈ 0.25 percent of GDP structural revenue adjustment; 10-cent copper price gap ≈ 0.1–0.2 percent of GDP adjustment.
- Staff approach:
  - Staff replicates authorities’ methodology for current and following year using committee-announced trend GDP and long-term copper reference price; differences reflect projections for real GDP growth, copper prices, and exchange rates.
  - For 2020 onward staff uses an error-correction model to forecast committee copper reference price and progressively closes output gap.

### DEBT SUSTAINABILITY ANALYSIS — PUBLIC SECTOR (ANNEX IV) — Selected figures
- Nominal gross public debt (EoP):
  - 2016: 10.1; 2017: 21.0; 2018: 23.6; 2019: 24.7; 2020: 26.0; 2021: 26.7; 2022: 26.9; 2023: 26.6 (alternate row 26.1).
- Public gross financing needs (percent of GDP):
  - 2016: 0.4; 2017: 10.8; 2018: 3.9; 2019: 2.9; 2020: 2.3; 2021: 2.7; 2022: 4.8; 2023: 1.3 (alternate row 1.0).
- Net public debt (excludes Pension Reserve Fund):
  - 2016: -7.0; 2017: 4.4; 2018: 7.8; 2019: 9.4; 2020: 11.4; 2021: 12.8; 2022: 13.6; 2023: 14.1 (alternate row 14.3).
- Real GDP growth (percent):
  - 2016: 3.6; 2017: 1.3; 2018: 1.5; 2019: 4.0; 2020: 3.4; 2021: 3.2; 2022: 3.0; 2023: 3.0.
- Effective interest rate (percent):
  - 2016: 8.1; 2017: 4.6; 2018: 4.1; 2019: 3.9; 2020: 3.6; 2021: 3.9; 2022: 3.8; 2023: 3.8.
- Ratings: Moody's A1 / A1; S&P A+ / AA-; Fitch AA+.
- Contributions to change in gross public sector debt (percent of GDP):
  - Change in gross debt: 2016: 1.4; 2017: 3.8; 2018: 2.5; 2019: 1.1; 2020: 1.3; 2021: 0.6; 2022: 0.2; 2023: -0.3 (final -0.5); cumulative 2.5.
  - Identified debt-creating flows (cumulative): 4.7 percent of GDP.
  - Primary deficit (cumulative): 5.6 percent of GDP.
  - Automatic debt dynamics (cumulative): -3.2 percent of GDP.
- Key staff table series (selected, percent of GDP):
  - Total Revenue: 22.1, 20.9, 20.6, 21.1, 20.8, 21.0, 21.7, 21.2, 21.2, 21.2, 21.1, 21.0.
  - Total Expenditure: 21.6, 21.5, 22.2, 23.2, 23.6, 23.7, 23.4, 23.2, 22.8, 22.4, 22.1, 21.8.
  - Overall Balance (OB): 0.6, -0.6, -1.6, -2.1, -2.7, -2.8, -1.7, -2.0, -1.7, -1.2, -1.0, -0.8.
  - Structural Adjustment: 0.9, 0.0, -1.1, -2.7, -1.6, -0.7, 0.1, -0.4, -0.3, 0.0, 0.0, 0.0.
  - Structural Revenue: 21.2, 21.0, 21.7, 23.7, 22.5, 21.7, 21.5, 21.6, 21.4, 21.2, 21.1, 21.0.
  - Structural Balance: -0.4, -0.6, -0.6, 0.5, -1.1, -2.0, -1.8, -1.6, -1.4, -1.2, -1.0, -0.8.

### EXTERNAL DEBT SUSTAINABILITY AND SHOCKS (HIGHLIGHTS)
- Baseline external debt (percent of GDP):
  - 2017: 63.0; 2018: 61.0; 2019: 62.2; 2020: 61.7; 2021: 60.3; 2022: 59.6; 2023: 58.4.
- External debt-to-exports (percent):
  - 2013: 151.4; 2014: 175.9; 2015: 223.7; 2016: 235.9; 2017: 219.9; 2018: 212.2; 2019: 216.1; 2023: 212.8.
- Gross external financing needs (US$ billions and percent of GDP):
  - US$ billions: 2013: 57.9; 2014: 47.1; 2015: 46.6; 2016: 39.8; 2017: 47.9; 2018: 44.6; 2019: 52.8; 2023: 56.1.
  - Percent of GDP: 2013: 20.8; 2014: 18.1; 2015: 19.1; 2016: 15.9; 2017: 17.3; 2018: 14.9; 2019: 17.3; 2023: 14.8.
- Shock-test highlights:
  - Baseline external debt reported 58 (percent of GDP) in summary figure.
  - Non-interest current account shock: 63.
  - Interest-rate shock: 59.
  - Combined shock: 63.
  - Combined shock with 30 percent depreciation: 81.
- Policy implications:
  - Allow exchange rate to act as shock absorber; consider intervention to contain temporary disorderly conditions.
  - Maintain macro policies that limit debt-creating flows and preserve buffers.
  - Monitor contingent liabilities and financial asset acquisitions.
  - Stress-test external financing needs and maintain market access under adverse shocks.

### DATA AND STATISTICAL FRAMEWORKS
- Chile in process to gain adherence to SDSS plus (1996) and has a data ROSC published September 17, 2007.
- CBC reports core and 8 of 28 encouraged financial soundness indicators monthly; uses SRFs for monthly reporting of central bank and financial sectors.
- Key reporting frequencies and latest observations include Exchange Rates (latest observation September 25, 2018), International Reserve Assets (September 15, 2018), Broad Money (August 2018), GDP/GNP and IIP (Q2 2018).

*cr18311-chile-bundle - 2018. The staff team for the April mission comprised Luca Antonio Ricci (Head), Metodij Hadzi-Vaskov, Andrea Pescatori, and Alex Ho (all WHD), and Paolo Dudine (FAD).*

### 2018. The staff team for the April mission comprised Luca Antonio Ricci

### cr18311-chile-bundle - 2018. The staff team for the April mission comprised Luca Antonio Ricci

### CONTEXT
- Chile’s economy remains grounded in strong fundamentals, solid institutional frameworks, and a sound track record of macroeconomic policies.
- The new administration of President Sebastián Piñera, which took office on March 11, aims to reinvigorate investment, improve competitiveness, and boost economic growth through a series of structural reforms within the context of five national agreements (acuerdos nacionales).

### CHILE’S ECONOMIC RECOVERY GAINS MOMENTUM — Key findings
- The economy proved resilient through the prolonged slowdown, supported by expansionary monetary and fiscal policies and a free floating exchange rate regime.
- Per capita GDP growth averaged only 1 percent in the past four years (down from 4 percent during 1990-2013).
- GDP growth in the most recent year reached 1.5 percent, bottoming out in 2017Q1.
- Improved external conditions and lower domestic policy uncertainty supported a rebound in 2018H1:
  - Growth reached 5.3 percent yoy in 2018Q2, the highest since 2012Q3.
  - Private consumption grew 4.5 percent yoy in 2018Q2.
  - Investment grew 7.1 percent yoy in 2018Q2.
- Inflation developments:
  - Headline inflation was close to the lower bound (2 percent) until May 2018 and rose to 3.1 percent in September 2018, partly driven by energy prices and the peso depreciation.
  - Core inflation remained subdued at 2.1 percent in September 2018.
- Labor market:
  - Unemployment reached 7.3 percent in August 2018.
  - Private-sector salaried jobs accounted for an increasing employment share, while public sector and self-employed shares declined.
  - Real wage earnings growth remained virtually null in July (year not specified in excerpt).
- External and trade:
  - Current account deficit narrowed from 4.1 percent of GDP in 2013 to 1.5 percent in 2017.
  - Copper prices and terms-of-trade changes led to an 11 percent increase in the terms-of-trade in 2017.
  - Import growth rose strongly since late 2017, led by import-intensive business investment.
- Monetary stance:
  - Central bank cut policy rates by a cumulative 100 bps from January to May 2017.
  - Policy rate was 2.5 percent until October 2018, when it was raised to 2.75 percent.
  - Monetary policy was mildly accommodative from mid-2017 to early 2018 and became more accommodative since mid-2018 with the pickup in activity and inflation.
- Fiscal situation:
  - Structural deficit in 2017 was 2 percent of GDP, 0.4 percentage point wider than 2016 on a comparable parameters basis.
  - Headline fiscal deficit in 2017 was 2.8 percent of GDP.
  - Fiscal deficit in the first half of 2018 was reported at 0.1 percent of GDP.
  - Sovereign credit rating downgrades occurred: Fitch and Standard & Poor’s in 2017Q3; Moody’s lowered Chile’s rating in July 2018.
- Financial conditions:
  - CDS and bond spreads remained stable and generally lower than regional peers.
  - House prices and household mortgage growth slowed in 2016-17.
  - Non-performing loans about 2 percent of total loans.
  - Corporate debt remains high by international standards.

### OUTLOOK AND RISKS
- Growth projections and labor market:
  - Growth is projected at 4 percent in 2018.
  - Medium-term potential growth estimated at about 3 percent (based on staff projections and historical productivity growth).
  - Unemployment projected to move toward a neutral rate of around 6 percent.
- Inflation:
  - Headline inflation at 3.1 percent in September 2018; core inflation picking up more slowly due to residual slackness.
- External sector projections:
  - Goods trade balance projected to decline from 2.9 percent in 2017 to 2.0 percent in 2018 and 1.6 percent of GDP in 2019.
  - Current account deficit projected to widen to 2.5 and 2.7 percent of GDP in 2018 and 2019, before narrowing to about 2 percent of GDP over the medium term.
  - Staff assesses Chile’s external position and exchange rate to be broadly in line with medium-term fundamentals and desirable policies (Annex II).
- Risk assessment (Risk Assessment Matrix, Annex V):
  - External risks: financial shocks, rising protectionism, declines in copper prices, faster-than-expected U.S. monetary tightening, weaker trading partner growth (especially China).
  - Domestic upside risks: stronger-than-expected rebound in investment due to structural reforms.
  - Domestic downside risks: cyber-attacks, high leverage in the non-financial corporate sector, increasing household debt.
  - Mitigating factors: corporate debt often associated with parent-company debt, long maturities, exchange rate hedging, and recovery in activity and labor market improvement.

### AUTHORITIES’ VIEWS
- Authorities’ growth expectations:
  - Economy to grow 4-4½ percent in 2018 and 3¼-4¼ percent in 2019, largely from rebound in private investment.
  - Trend growth estimated at 3½ percent; planned reforms possibly raising trend growth to 4 percent (effect not included in staff projections).
- Risks: authorities concur with staff that downside risks mainly stem from uncertain external environment; view regional spillovers as limited.
- On corporate debt: authorities do not see significant concerns given hedging mechanisms and foreign-based operations; they caution that measuring indebtedness as a percentage of domestic GDP may understate balance sheet strengths.

### MACROECONOMIC POLICIES — Fiscal Policy
- Fiscal position and debt:
  - Between 2007 and 2017, gross debt rose by nearly 20 percentage points of GDP.
  - Public net-debt position about 5 percent of GDP in 2017.
- Fiscal consolidation plans:
  - Fiscal targets entail an improvement in the structural balance by 0.2 percent of GDP per year over the next four years.
  - Staff projects authorities’ consolidation plans will stabilize debt as a share of GDP by the early 2020s (see Annex IV).
- Fiscal outcomes and projections:
  - Authorities announced austerity measures to cut government expenditure by US$4.4 billion between 2018 and 2022.
  - Authorities indicated they inherited unbudgeted expenditures of US$5.6 billion over the same period, now included in the baseline.
  - Staff expects the fiscal balance to improve in 2018 by about 1 percentage point of GDP to minus 1.7 percent of GDP.
  - In 2019, staff expects the fiscal balance to worsen slightly with respect to 2018 (to about 2 percent of GDP) due to decline in actual revenues associated with a lower copper price and changes in reference long-term price assumptions.
  - Authorities expect a somewhat smaller deficit in 2019, owing to different structural adjustments.
  - Staff notes that meeting structural balance targets would require constraining expenditure below the committed expenditure path announced in the 2019 budget (see Annex III).
- Tax reform proposal and considerations:
  - Proposed measures include return to a single and fully integrated tax system from a combination of semi-integrated and integrated systems; broader definition and simplified record keeping for SMEs; accelerated depreciation; more favorable tax treatment to withdraw retained earnings (from FUT); a tax on digital services; mandatory electronic invoicing; strengthened toolkit for tax authorities; faster reimbursement of VAT; and higher VAT incentives on new housing.
  - Expected effects:
    - Tax integration should enhance efficiency and simplify reporting.
    - Integration will lower the effective personal income tax (PIT) from business activity by about 9 percent for firms in the semi-integrated system.
    - Integration, accelerated depreciation, and faster VAT reimbursement should spur investment and growth.
  - Policy recommendations and cautions:
    - Take into account the OECD (2018, Tax Challenges Arising from Digitalization) recommendations when designing the new tax on digital services.
    - Ensure the final outcome is equitable and funded.
    - Consider complementary options to offset inequality and contain tax evasion/avoidance, such as strengthening tax administration, raising the top marginal PIT rate, and introducing a final flat withholding dividend tax.
    - Authorities estimate revenue loss from integration at about 0.2 percent of GDP but expect the package to be sufficiently funded; staff notes the large positive revenue gain assumed from electronic invoicing will require significantly strengthening tax administration.
    - Additional revenue-raising options if needed:
      - Reduction of special tax regimes for income tax (e.g., better screening of renta presunta).
      - Extension of VAT coverage to professional services.
      - Reassessment of excise taxes (e.g., gradually aligning the diesel with gasoline tax).

*cr18311-chile-bundle - 2018. The staff team for the April mission comprised Luca Antonio Ricci (Head), Metodij Hadzi-Vaskov, Andrea Pescatori, and Alex Ho (all WHD), and Paolo Dudine (FAD).*

### 20.      The authorities proposed to enhance the fiscal council and could consider embedding a

### 20. The authorities proposed to enhance the fiscal council and could consider embedding a

### Fiscal institutional reform and anchor
- Proposal for a new Autonomous Fiscal Council:
  - Composed of five members nominated by the President and approved by the Senate.
  - Will have own resources and the mandate of the members will not coincide with the government term.
  - Tasks include: conducting analyses; evaluating the calculation of the structural revenues; monitoring compliance with structural balance targets; proposing mitigating measures.
- Recommendation to embed a solid medium-term anchor in the fiscal framework (examples cited: an adequate debt ceiling or structural balance) to strengthen predictability and credibility and help balance social objectives with fiscal discipline.
- References to analytical support: IMF 2018, SDN 18/04, and Selected Issues Paper (as cited in source).

*Authorities’ views on fiscal policy*
- Reiterated strong commitment to meet the recently-announced fiscal targets and stabilize central government debt.
- Asserted the tax reform is “more than funded,” with most revenues to come from reduced tax evasion via electronic invoicing and electronic cross-checking, plus induced effects through higher economic growth.
- Belief that prior legislation on electronic billing has significantly reduced tax evasion.
- Expectation that income inequality is likely to decline due to strong GDP and employment growth and a broad range of social programs.

### Monetary policy
- Current stance:
  - Monetary policy remains accommodative.
  - Real policy rate remains below the real neutral rate estimated at between 1 and 2 percent.
  - In September, the Central Bank projects headline (core) inflation at 3.1 (2. 7) percent y/y by the end of 2018.
  - Central Bank revised its output gap estimate for 2018 to close to zero.
- Inflation expectations:
  - Described as better anchored than in other emerging markets and the average of advanced economies with inflation targeting regimes; rapidly converging toward the target in recent months.
- Guidance on normalization:
  - Normalization should be undertaken cautiously; tightening cycle should be guided by evidence of persistent convergence of inflation toward target supported by broad indicators.
  - Tension in signals: pickup in activity and headline inflation suggests faster tightening, while large gap between headline and core inflation (driven by energy prices and peso depreciation), remaining labor market slack, weak earnings growth, and recent moderation in activity argue for caution.
  - Staff expects a gradual convergence of the policy rate toward its medium-term level (estimated between 4 and 5 percent), which—on the basis of current expectations—should occur by 2020.
- Communication and governance:
  - Central Bank revamped communication: aligned Monetary Policy Report release (4 times a year) to policy meetings, introduced regular press conferences, and reduced number of meetings from twelve to eight.
  - Past communication framework improved predictability and helped minimize unwarranted financial market volatility.
- Authorities’ views on monetary policy:
  - Broad concurrence with staff assessment.
  - Central Bank considers the labor market more dynamic than official statistics suggest due to rapid demographic changes.
  - Central Bank expects a more visible pickup in core inflation in the rest of 2018, partly due to 2017-base effects, and estimates a smaller range for the neutral policy rate (4-4½ percent).

### Financial sector — New banking law and stability
- Main features of the new general banking law:
  - Aims to close gap with Basel III minimum capital requirements, provide new financial stabilization tools, and improve governance of supervisory and regulatory agencies.
  - Banks have six years to increase minimum total solvency requirement to 10.5 percent from 8 percent of risk-weighted assets (RWA).
  - Law mandates a capital surcharge of up to 3.5 percent of RWA for systemically-important domestic banks.
  - Authorities estimate capital needs at about 0.5 percent of GDP (excluding Banco de  l Estado).
  - Regulation imposing on banks a minimum liquidity requirement equivalent to 60 percent of the liquidity coverage ratio, gradually increasing to 100 percent over 5 years.
- Macroprudential tools and institutional changes:
  - Central Bank given authority to set counter-cyclical capital buffers.
  - Financial Market Commission (CMF) will set capital surcharges for systemically-important institutions.
  - Methodological and governance details for these tools still need clarification.
  - CMF created by incorporating the former securities and insurance superintendence (SVS) and will incorporate the banking superintendence (SBIF); transition to a collegial Board model underway.
  - Authorities have requested IMF technical assistance on integration, governance, and supervisory design.

- Remaining legislative and supervisory gaps (staff recommendations):
  - Resolution regime: strengthen early-intervention regime, revise and expand triggers for resolution, broaden powers and tools of the resolution authority (CMF), including power to override shareholders’ rights.
  - National deposit insurance scheme: replace current contingent-fiscal-liability arrangement with a national deposit insurance institution funded by member banks.
  - Coordination among supervisors: strengthen supervisory framework and inter-agency coordination for cooperativas and cajas de compensación.
  - Credit registry: establish a consolidated public credit registry across the entire financial industry while balancing consumers’ rights and data sharing.
  - Oversight of conglomerates: tighten exposure limits to own conglomerate (current expansion to any conglomerate is positive but exposure to own conglomerate should be tightened further); grant supervisors power to bring financial holding companies and affiliates into supervisory sphere.
  - Banco del Estado: recommend gradual capital injection to address estimated capital shortfall of about 0.5 percent of GDP; upgrade corporate governance, review operational risks, and increase efficiency.
- Authorities’ plans:
  - Agreed with staff suggestions for the post-law agenda.
  - Plan to develop a resilience agenda covering resolution framework, credit unions (cooperativas), and supervision of conglomerates.
  - Requested a Financial Sector Assessment Program from the Fund, scheduled for early 2020.
  - Recapitalization of Banco del Estado planned for 2020-2024.

### Cybersecurity and FinTech: challenges and opportunities
- FinTech:
  - Chile relatively advanced in per capita FinTech investment and activity in Latin America, notably in crowdfunding and peer-to-peer lending.
  - Santiago’s stock exchange launched the first blockchain system for securities lending in Latin America.
  - Most FinTech companies operate in a regulatory grey area; regulator challenge is to balance innovation and efficiency with integrity, stability, consumer protection, and combating tax evasion, money laundering, and terrorism financing.
  - Staff encourages authorities to speed up efforts to tackle capacity, regulatory, and legal challenges using international experience.
- Cybersecurity:
  - Recent cyberattacks affected the financial system; incidents did not destabilize financial stability but indicate regulatory gaps and underinvestment in cybersecurity.
  - Authorities requested IMF technical assistance, are assessing regulatory gaps, and have introduced regulations dedicated to cybersecurity.
- Authorities’ actions:
  - Preparing cybersecurity legislation aimed at enhancing information sharing, detection, and response.
  - Ministry of Finance and CMF announced in May 2018 plans to design FinTech regulation covering cryptoassets, crowdfunding, and a flexible approach to engage the private sector.
  - Central Bank announced creation of a Technological Observatory to enhance knowledge, coordination, and information sharing with the FinTech community.

### Transitioning to advanced-economy status — growth, diversification, and inclusion
- Structural challenges:
  - Demographic trends exert downward pressure on labor force participation.
  - Lack of diversification keeps the economy dependent on mining.
  - Income inequality is high; redistribution policies are limited.
  - The 2015 post-tax-and-transfers Gini index is 0.13 above the OECD average.
  - Baseline medium-term per capita growth, of about 2 percent, implies slow convergence to advanced-economy income levels.
  - Reaching advanced-economy status requires significant efforts to diversify and increase productivity.

### Pension reform
- System overview and issues:
  - Chile’s pension system is based on privately-managed funded schemes, has supported capital markets and reduced fiscal risks, but provides inadequate benefits for many retirees (low replacement rates).
- Reform proposals and staff view:
  - New administration considering comprehensive reform: increase future pensions via higher mandatory contribution rates; raise current pensions focusing on the solidarity pillar; introduce new long-term care insurance.
  - Other options under consideration: postpone retirement age; differentiate pension supplements by age and gender; enhance incentives for voluntary pensions.
  - Staff considers appropriate to complement contribution-rate increases with a gradual equalization of retirement ages for men and women (possibly contingent on life expectancy and employability) and to enhance the solidarity pillar via budget resources.
  - In August, authorities unveiled a proposal to expand mandatory pension and social security coverage to self-employed workers providing professional services, including an option for gradual increase in contributions.

### Business regulation and competitiveness
- Regulatory bottlenecks and reforms:
  - Numerous and complex regulations and permit procedures increase uncertainty, slow investment, and reduce competitiveness.
  - Scope to streamline procedures through a single contact point and improve coordination among license-issuing institutions.
  - Government’s “pro-investment agenda” announced with twelve core measures, establishment of a Sustainable Projects Management Office (GPS) and a Productivity Office (OPEN), and proposed legislation to streamline and lower cost of notary services.
  - Objectives: address regulatory bottlenecks, reduce red-tape and business costs, facilitate investment, and enhance firm productivity.
  - Strengthening competition (particularly in maritime sector) and improving market access for new and small firms likely to yield productivity dividends.

### Labor market
- Issues and needed reforms:
  - Labor law adopted in August 2016 created legal uncertainty about collective negotiations and minimum service obligations during strikes.
  - Labor Directorate issued an opinion (dictamen) clarifying negotiating groups can conclude labor agreements with employers; this is being challenged by labor unions in court.
  - Suggested measures to increase flexibility and reduce legal uncertainty:
    - Reduce firing costs (severance payments and legal procedures).
    - Incentivize flexible employment contracts (hours, timing, workplace), including proposals such as telework.
    - Revamp and better target training incentives and active labor market policies toward unemployed workers most likely to benefit.
    - Reduce minimum contribution period for unemployment benefits eligibility to help adjustment of workers with precarious jobs.
    - Proposal to fund universal childcare through contributions by all employers to lower female hiring costs and boost female employment.
  - Continued assessment of labor market policies recommended to prioritize resources and strengthen impact.

*Italic: Source: cr18311-chile-bundle - 20. The authorities proposed to enhance the fiscal council and could consider embedding a (excerpt from IMF staff report content provided).*

### 38.      Enhancing human capital and innovation capacity is key to achieve advanced-economy

### 38.      Enhancing human capital and innovation capacity is key to achieve advanced-economy status.

### Human capital and innovation capacity
- Building on recent progress in education coverage, policies need to focus on improving education quality.
- In international education assessments (e.g. PISA), Chilean students score better than Latin American peers, but significantly below OECD countries.
- Higher education is among the best in the region, but the share of engineering graduates is among the lowest in Latin America, which may constrain the ability to compete and diversify into new technologies and knowledge-based economy.
- Education priorities include:
  - continued quality assessments;
  - linking teacher performance to student achievements.
- Space to enhance R&D and innovation capacity, including through streamlined incentives schemes, as Chile’s spending on R&D and innovation, particularly by the business sector, is substantially lower than OECD-peers.

### Small and medium enterprises (SMEs)
- Specific measures to address obstacles to SME growth:
  - Improve access to working capital via elimination of provider payment delays.
  - Facilitate portability of collateral across lenders.
  - Promote development of a joint-venture capital market.
  - Tailor training programs to SME needs by:
    - reinstating the minimum voucher for small firms;
    - creating training courses targeted to cash flow management, special taxation regimes, and marketing.

### Authorities’ views and planned actions
- Authorities broadly shared staff’s assessment and committed to:
  - streamline business regulation, improve the investment climate, and increase competitiveness.
  - make the labor market more flexible and inclusive.
  - raise living standards with a better pension system.
- Education responses highlighted by the authorities:
  - improving quality of education is a priority, especially in early childhood;
  - enhance assessment, training and monitoring of teachers;
  - improve language training.
  - In tertiary education, focus on enhancing technical-professional and engineering programs through targeted scholarships and the creation of 15 new technical institutes to reduce skill mismatches and allow students to combine work with education.
- Innovation and R&D:
  - Authorities acknowledged scope to improve innovation capacity and aim to enhance effectiveness of public policies, including through tax credits.
  - Authorities expressed some skepticism about adequacy of international measures of innovation and R&D.

### Closing structural policy gaps
- Staff study: considerable potential to enhance economic performance by closing structural gaps relative to OECD countries.
- Key reform areas include:
  - comprehensive streamlining of the licensing and permit system (with the largest potential beneficial impact), including through improved coordination among institutions;
  - higher labor market flexibility;
  - strengthened capacity for innovation and R&D.
- Closing Chile’s policy gaps to the level of OECD’s 25th percentile, which involves major reforms beyond the typical experience of historical reform episodes, could increase output by up to 6 percent over 5 years (see Hadzi-Vaskov 2018).
- IMF research shows such gains are likely to materialize after several years (Duval and Furceri, IMF Economic Review 2018).
- Fiscal impact: following an initial deterioration of the fiscal balance due to direct policy outlays, the set of reforms is likely to produce positive net fiscal impact through higher output over the medium term.

### Staff appraisal — macroeconomic outlook and risks
- Recovery and recent performance:
  - The economy is recovering after several years of subdued growth.
  - Growth in the first half of 2018 has been the strongest since 2012, supported by robust business and consumer confidence, and a considerable rebound in both mining and non-mining.
  - The free floating exchange rate has acted as a shock absorber.
- Outlook and risks:
  - Output growth is projected to gradually converge to its medium-term potential of about 3 percent.
  - Headline inflation projected to remain around the 3 percent target.
  - Downside risks: rising protectionism, sharp tightening of global financial conditions, weaker-than-expected growth in key trading partners.
  - Upside risks: rapid implementation of the structural reform agenda.
- Financial sector:
  - Remains healthy, though macro-financial linkages need close monitoring.
  - Risks mainly related to high leverage of non-financial corporates, mitigated because leverage is often associated with debt to parent companies or long maturity and exchange-rate hedging.
- Fiscal policy:
  - Announced gradual fiscal consolidation should enhance policy credibility.
  - Staff projects central government gross debt to broadly stabilize in 2021.
  - Authorities could consider strengthening the fiscal framework or deepening fiscal consolidation to further enhance credibility and market confidence.
- Tax reform:
  - Authorities presented a proposal to streamline the tax system to make it more efficient and pro-growth; essential to ensure final outcome is equitable and funded.
  - Staff welcomes commitment that reform will be fully funded.
  - To address income inequality and tax evasion/avoidance, authorities should consider strengthening tax administration and explore measures such as raising the top marginal PIT rate and introducing a final flat withholding dividend tax; could also consider widening the tax base.
- Fiscal council:
  - Authorities proposed enhancing the fiscal council to institutionalize a new council with more independence, its own resources, and a broader mandate.
- Monetary policy normalization:
  - Caution warranted in determining pace; normalization should be guided by evidence of persistent convergence of inflation toward the target supported by a broad set of indicators.
  - Despite pickup in activity and headline inflation, subdued core inflation, remaining labor market slack, weak earnings growth, and evolving domestic and external risks are key factors.
- Central bank communication:
  - Revamped communication framework welcomed: aligned release of reports to policy meetings, reduced number of reports, and introduced regular press conferences.
- Financial sector legislation:
  - Approval of the general banking law welcomed; it aims at closing the gap with Basel III minimum solvency requirements, enhancing stabilization tools, and improving corporate governance.
  - Going forward: important to strengthen the early intervention regime, broaden powers and tools for bank resolution, establish a national deposit-insurance scheme funded by member banks, and strengthen inter-agency coordination.
  - Staff welcomes draft laws to enhance responsibilities of financial market agents, reinforce data protection, and establish legal basis for risk-based insurance supervision.
- Structural reform agenda supported by staff:
  - Measures announced to streamline business regulation and licensing, improve coordination among public institutions, solve bottlenecks in the business environment, increase labor participation, facilitate resolution of labor market uncertainties and enhance social protection, address skill mismatches, and increase benefits in the pension system.
- Broader reforms for productivity and transition to advanced economy status:
  - Strengthen capacity for innovation and R&D;
  - Further improve quality of education;
  - Deepen labor market flexibility;
  - Enhance business environment for SMEs to boost productivity, medium-term growth prospects, and diversification.
- Cybersecurity and FinTech:
  - Need to strengthen cybersecurity and FinTech regulation frameworks; staff welcomes authorities’ efforts to prepare new cybersecurity legislation and plans for FinTech regulation based on international experience.
- Consultation timeline:
  - Staff proposes to hold the next Article IV consultation on the standard 12-month cycle.

### Selected external and fiscal indicators (highlights)
- NIIP expected to slightly deteriorate in 2018 to -23 percent of GDP (by about 2 p.p.).
- Gross external debt projected to decline to about 61 percent of GDP in 2018.
- 2017 current account: -1.5 percent of GDP.
- Current account projected to widen in 2018 to 2.5 percent of GDP.
- National savings have declined mildly by about 1 p.p. since 2013; investment ratio dropped by about 4 p.p.
- The 2018 current account gap rose from about ½ percent of GDP to 1½ percent in 2018, of which 0.3 percent of GDP is due to policy gaps.

*Source: cr18311-chile-bundle - 38. Enhancing human capital and innovation capacity is key to achieve advanced-economy status (IMF staff report).*

### 2018. Assessment

### 2018. Assessment

### Exchange rate assessment
- EBA CA and REER index methodologies (based on June 2018 estimates) indicate that the exchange rate is in line with fundamentals.
- The four methodologies indicate an average gap of about 0, a range from 6.7 to -11.5 percent and a mid-point -2.4.
- Conclusion: Even when considering the recent depreciation, the Chilean peso is assessed to be broadly in line with its medium-term fundamentals and policy settings.

### Capital and financial accounts
- Background:
  - The CA deficit is mostly financed from a relatively stable source of FDI net inflows, largely related to mining activities.
  - Chile has been resilient to copper price fluctuations and the taper tantrum episode, experiencing less capital flow volatility than other EMs.
  - Throughout, the corporate sector has maintained access to external funding.
- Assessment:
  - Chile has a fully open capital account.
  - Vulnerabilities are overall limited by a credible commitment to a floating exchange rate, strong macroeconomic policies, and a well-developed financial market for hedging.

### FX intervention and reserves level
- Background:
  - Chile has a free floating exchange rate regime. The central bank generally does not intervene in the foreign exchange market.
  - Chile had two intervention programs in 2008 and 2011, both aimed at weakening the peso and both based on purchases of USD.
  - FX reserves cover over 5 months of imports in 2017, and are close to the lower bound of the IMF reserve adequacy metric.
- Assessment:
  - A flexible exchange rate is the first line of defense in a small economy exporting commodities like Chile, with a large exposure to international shocks.
  - Reserves are estimated as broadly adequate, in light also of the large buffers available to the central government (with assets at about 19 percent of GDP in 2017) and the pure floating regime.

### Key aspects of Chile’s structural revenues and structural balance calculations
- Definition and scope:
  - The structural fiscal balance is defined as the difference between structurally-adjusted revenues and total expenditure (total expenditure is not subject to adjustments).
  - Structural revenues = actual revenues minus the structural adjustment.
  - The structural adjustment applies to four categories of revenue items:
    - i) non-mining tax revenue (16.7 percent of GDP in 2017)
    - ii) healthcare-related social security contributions (1.2 percent of GDP in 2017)
    - iii) private mining tax revenue (0.5 percent of GDP in 2017)
    - iv) gross copper revenue from the state-owned company (0.5 percent of GDP in 2017)
  - The remaining revenue items are not adjusted.
  - The first two categories are adjusted for the business cycle (the output gap, per authorities’ definition). The latter two are adjusted for the copper cycle (the copper price gap).
- Parameters determining adjustments:
  - Structural adjustments in any year hinge on four parameters: current and previous year output gaps (depend on trend GDP estimates), and current and previous year copper price gaps (depend on a copper reference price defined as the average forecast of future spot prices over the next 10 years).
  - Trend GDP level and the copper reference price to be used for year t are based on projections provided by two independent expert committees in year t-1 (August).
  - Authorities use these inputs plus their forecasts for real GDP and spot copper price for year t to estimate the output and copper price gaps for designing year t budget to meet the structural target. The same inputs together with actual realizations allow calculation of the final structural adjustment ex-post.

### Properties of the structural adjustment (other things equal)
- a) Current year gaps usually have a dominant effect compared to previous year gaps. Signs of previous year gaps’ impact are ambiguous and depend on the sign of the net tax credit for that year.
- b) Output gap (authorities’ definition: percentage deviation of the trend GDP from actual GDP; note: opposite to standard IMF definition):
  - A positive (negative) current-year output gap (i.e., actual GDP is lower (higher) than trend GDP) implies a negative (positive) structural adjustment to the business cycle and structural revenues higher (lower) than actual revenues.
  - Rule of thumb: a 1 percent of GDP output gap implies a structural revenue adjustment in the order of about ¼ percent of GDP.
  - As the current-year output gap closes, the size of the structural adjustment shrinks and structural revenues converge from above (below) to actual revenues.
- c) Copper price gap:
  - A positive (negative) current-year copper price gap (actual copper price higher (lower) than reference long-term price) implies a positive (negative) structural adjustment to the copper cycle and structural revenues that are lower (higher) than actual revenues.
  - Rule of thumb: a 10-cent copper price gap implies a structural revenue adjustment in the order of about 0.1-0.2 percent of GDP.
  - Authorities’ calculation example: the effect of a possible 10 cent copper price change in 2019 is $450mn, or about 0.15 percent of GDP.
- The text chart and table (referenced) show historical decomposition of the structural adjustment into output and copper price gaps, with corresponding parameters.

### Staff approach to estimation of the structural balance
- Objectives and methodology:
  - Staff anchors calculations on a methodology, formulae, and parameters as close as possible to the authorities’ ones while relying on IMF projections for actual GDP, copper prices, and exchange rates.
  - For the current and following year, staff uses the series of trend GDP and the long-term copper reference price announced by the two independent expert committees (binding for final structural balance calculations).
  - Differences between staff and authorities for those years reflect different projections for real GDP growth, copper prices and exchange rates, not different parameter choices.
  - For projections beyond next year, staff uses an error-correction model to forecast the long-term reference copper price expected to be announced by the committee and closes the output gap progressively over time taking into account staff’s assessment of the economy.
  - For the current and next year staff does not use the output gap published in its medium-term framework; instead it uses the authorities’ committee values to replicate the official measure.
- Illustration (staff projections described):
  - In 2018 staff expects the fiscal balance to improve substantially vis-à-vis 2017 by about 1 percentage point of GDP to minus 1.7 percent of GDP, due to an increase in actual mining revenues and a decline in expenditure as a share of GDP.
  - Actual revenues increase from 21.0 percent of GDP in 2017 to 21.7 percent of GDP in 2018.
  - Structural revenues decline as share of GDP from 21.7 percent in 2017 to 21.5 percent in 2018 due to a significant change in the structural adjustment (from -0.7 percent of GDP in 2017 to +0.1 percent of GDP in 2018), mainly as a result of a smaller output gap (which contributes about 0.7 percent of GDP to the change in the structural adjustment).
  - Given lower structural revenues (by about 0.2 percent GDP), expenditure will need to decline as well (by about 0.4 percent of GDP) to attain the authorities’ target of a 0.2 percent improvement in the structural balance.

### Key statistics from staff table (selected series, in percent of GDP)
- Total Revenue: 22.1, 20.9, 20.6, 21.1, 20.8, 21.0, 21.7, 21.2, 21.2, 21.2, 21.1, 21.0
- Total Expenditure: 21.6, 21.5, 22.2, 23.2, 23.6, 23.7, 23.4, 23.2, 22.8, 22.4, 22.1, 21.8
- Overall Balance (OB): 0.6, -0.6, -1.6, -2.1, -2.7, -2.8, -1.7, -2.0, -1.7, -1.2, -1.0, -0.8
- Structural Adjustment: 0.9, 0.0, -1.1, -2.7, -1.6, -0.7, 0.1, -0.4, -0.3, 0.0, 0.0, 0.0
- Adjustment to Output Gap: 0.1, -0.4, -0.8, -1.1, -0.6, -1.0, -0.3, -0.3, -0.1, 0.1, 0.0, 0.0
- Adjustment to Copper Price Gap: 0.8, 0.3, -0.2, -1.5, -1.0, 0.3, 0.4, -0.1, -0.2, -0.1, -0.1, 0.0
- Structural Revenue: 21.2, 21.0, 21.7, 23.7, 22.5, 21.7, 21.5, 21.6, 21.4, 21.2, 21.1, 21.0
- Structural Balance: -0.4, -0.6, -0.6, 0.5, -1.1, -2.0, -1.8, -1.6, -1.4, -1.2, -1.0, -0.8
- Note: 1/ The output gap used for the structural adjustment calculation is measured as the difference between staff’s real GDP and the potential GDP of the committee of experts for the years for which it is available and binding. Beyond those years, the output gap is progressively closed over time taking into account staff’s assessment of the state of the economy.

### Annex IV. Debt Sustainability Analysis

### Annex IV. Debt Sustainability Analysis

### Public Sector Debt Dynamics (Baseline)
- Nominal gross public debt (EoP) by year:
  - 2016: 10.1
  - 2017: 21.0
  - 2018: 23.6
  - 2019: 24.7
  - 2020: 26.0
  - 2021: 26.7
  - 2022: 26.9
  - 2023: 26.6
  - 2023 (repeated row formatting): 26.1
- Public gross financing needs (percent of GDP) by year:
  - 2016: 0.4
  - 2017: 10.8
  - 2018: 3.9
  - 2019: 2.9
  - 2020: 2.3
  - 2021: 2.7
  - 2022: 4.8
  - 2023: 1.3
  - 2023 (repeated): 1.0
- Net public debt (excludes Pension Reserve Fund) by year:
  - 2016: -7.0
  - 2017: 4.4
  - 2018: 7.8
  - 2019: 9.4
  - 2020: 11.4
  - 2021: 12.8
  - 2022: 13.6
  - 2023: 14.1
  - 2023 (repeated): 14.3
- Real GDP growth (percent) by year:
  - 2016: 3.6
  - 2017: 1.3
  - 2018: 1.5
  - 2019: 4.0
  - 2020: 3.4
  - 2021: 3.2
  - 2022: 3.0
  - 2023: 3.0
  - 2023 (repeated): 3.0
- Inflation (GDP deflator, percent) by year:
  - 2016: 4.0
  - 2017: 4.7
  - 2018: 4.7
  - 2019: 1.3
  - 2020: 2.0
  - 2021: 3.2
  - 2022: 3.1
  - 2023: 3.0
  - 2023 (repeated): 3.0
- Nominal GDP growth (percent) by year:
  - 2016: 7.7
  - 2017: 6.0
  - 2018: 6.2
  - 2019: 5.3
  - 2020: 5.5
  - 2021: 6.5
  - 2022: 6.2
  - 2023: 6.1
  - 2023 (repeated): 6.1
- Effective interest rate (percent, defined as interest payments divided by debt stock at end of previous year) by year:
  - 2016: 8.1
  - 2017: 4.6
  - 2018: 4.1
  - 2019: 3.9
  - 2020: 3.6
  - 2021: 3.9
  - 2022: 3.8
  - 2023: 3.8
  - 2023 (repeated): 3.8
- Ratings presented:
  - Moody's: A1 / A1
  - S&P: A+ / AA-
  - Fitch: AA+

### Contributions to Change in Gross Public Sector Debt
- Change in gross public sector debt (percent of GDP):
  - 2016: 1.4
  - 2017: 3.8
  - 2018: 2.5
  - 2019: 1.1
  - 2020: 1.3
  - 2021: 0.6
  - 2022: 0.2
  - 2023: -0.3
  - 2023 (final): -0.5
  - Cumulative: 2.5
- Identified debt-creating flows (percent of GDP):
  - 2016: 1.5
  - 2017: 3.0
  - 2018: 2.4
  - 2019: 1.3
  - 2020: 1.8
  - 2021: 1.0
  - 2022: 0.6
  - 2023: 0.1
  - 2023 (final): -0.1
  - Cumulative: 4.7
- Primary deficit (percent of GDP) by year and cumulative:
  - 2016: -0.5
  - 2017: 2.4
  - 2018: 2.4
  - 2019: 1.3
  - 2020: 1.6
  - 2021: 1.2
  - 2022: 0.7
  - 2023: 0.5
  - 2023 (final): 0.3
  - Cumulative: 5.6
- Primary (noninterest) revenue and grants (percent of GDP) by period:
  - 2007-2015 Actual: 21.4
  - 2007-2015 Actual (repeat row): 20.4
  - Projections (2018–2023): 20.5, 21.2, 20.8, 20.7, 20.7, 20.6, 20.5
  - Cumulative (2007-2015): 24.6
- Primary (noninterest) expenditure (percent of GDP) by period:
  - 2007-2015 Actual: 20.9
  - 2007-2015 Actual (repeat row): 22.8
  - Projections (2018–2023): 22.9, 22.5, 22.4, 21.9, 21.4, 21.1, 20.9
  - Cumulative (2007-2015): 30.2

### Automatic Debt Dynamics and Other Flows
- Automatic debt dynamics (percent of GDP) by year and cumulative:
  - 2016: 0.0
  - 2017: -0.4
  - 2018: -0.7
  - 2019: -0.3
  - 2020: -0.4
  - 2021: -0.6
  - 2022: -0.6
  - 2023: -0.6
  - 2023 (final): -0.6
  - Cumulative: -3.2
- Interest rate/growth differential (percent of GDP):
  - 2016: -0.1
  - 2017: -0.2
  - 2018: -0.4
  - 2019: -0.3
  - 2020: -0.4
  - 2021: -0.6
  - 2022: -0.6
  - 2023: -0.6
  - 2023 (final): -0.6
  - Cumulative: -3.2
- Of which: real interest rate (percent of GDP):
  - 2016: 0.2
  - 2017: 0.0
  - 2018: -0.1
  - 2019: 0.6
  - 2020: 0.4
  - 2021: 0.1
  - 2022: 0.1
  - 2023: 0.2
  - 2023 (final): 0.2
  - Cumulative: 1.6
- Of which: real GDP growth (percent of GDP):
  - 2016: -0.3
  - 2017: -0.2
  - 2018: -0.3
  - 2019: -0.9
  - 2020: -0.8
  - 2021: -0.8
  - 2022: -0.8
  - 2023: -0.8
  - 2023 (final): -0.8
  - Cumulative: -4.7
- Exchange rate depreciation contribution (percent of GDP):
  - 2016: 0.1
  - 2017: -0.2
  - 2018: -0.3
  - Subsequent projection entries: "....................." (no further numeric entries provided)
- Other identified debt-creating flows (percent of GDP):
  - 2016: 1.9
  - 2017: 1.0
  - 2018: 0.7
  - 2019: 0.3
  - 2020: 0.6
  - 2021: 0.5
  - 2022: 0.5
  - 2023: 0.2
  - 2023 (final): 0.2
  - Cumulative: 2.3
- Net acquisition of Financial Assets (negative; percent of GDP):
  - 2016: 1.3
  - 2017: 0.6
  - 2018: 0.4
  - 2019: 0.0
  - 2020: 0.3
  - 2021: 0.3
  - 2022: 0.3
  - 2023: 0.2
  - 2023 (final): 0.2
  - Cumulative: 1.3
- Contingent liabilities (percent of GDP):
  - 2016–2023: 0.0 (each year)
  - Cumulative: 0.0
- Net Repayment of Recognition Bond (percent of GDP):
  - 2016: 0.6
  - 2017: 0.4
  - 2018: 0.4
  - 2019: 0.3
  - 2020: 0.3
  - 2021: 0.2
  - 2022: 0.2
  - 2023: 0.0
  - 2023 (final): 0.0
  - Cumulative: 1.0
- Residual, including asset changes (percent of GDP) by year and cumulative:
  - 2016: -0.1
  - 2017: 0.7
  - 2018: 0.2
  - 2019: -0.2
  - 2020: -0.4
  - 2021: -0.4
  - 2022: -0.4
  - 2023: -0.4
  - 2023 (final): -0.4
  - Cumulative: -2.2

### External Debt Sustainability: Baseline and Shock Tests
- Baseline: External debt (percent of GDP) by year:
  - 2013: 48.4
  - 2014: 57.9
  - 2015: 65.6
  - 2016: 66.2
  - 2017: 63.0
  - 2018: 61.0
  - 2019: 62.2
  - 2020: 61.7
  - 2021: 60.3
  - 2022: 59.6
  - 2023: 58.4
- Change in external debt (percent of GDP) by year:
  - 2013: 2.6
  - 2014: 9.5
  - 2015: 7.7
  - 2016: 0.7
  - 2017: -3.2
  - 2018: -2.0
  - 2019: 1.2
  - 2020: -0.5
  - 2021: -1.4
  - 2022: -0.7
  - 2023: -1.2
- Identified external debt-creating flows (sum of components; percent of GDP) by year:
  - 2013: 0.9
  - 2014: 4.5
  - 2015: 3.5
  - 2016: 0.1
  - 2017: -3.9
  - 2018: 0.3
  - 2019: 1.1
  - 2020: 1.7
  - 2021: 1.9
  - 2022: 1.4
  - 2023: 1.2
- Current account deficit, excluding interest payments (percent of GDP) by year:
  - 2013: 3.0
  - 2014: 0.4
  - 2015: 0.5
  - 2016: -0.1
  - 2017: -0.5
  - 2018: 0.9
  - 2019: 1.2
  - 2020: 1.0
  - 2021: 0.9
  - 2022: 0.7
  - 2023: 0.6
- Deficit in balance of goods and services (percent of GDP) by year:
  - 2013: -0.5
  - 2014: 1.0
  - 2015: -0.1
  - 2016: 0.9
  - 2017: 1.8
  - 2018: 0.6
  - 2019: 0.0
  - 2020: 0.4
  - 2021: 0.6
  - 2022: 0.7
  - 2023: 0.7
- Exports and Imports (percent of GDP) by year:
  - Exports:
    - 2013: 31.9
    - 2014: 32.9
    - 2015: 29.3
    - 2016: 28.1
    - 2017: 28.6
    - 2018: 28.8
    - 2019: 28.8
    - 2020: 28.5
    - 2021: 28.2
    - 2022: 28.0
    - 2023: 27.4
  - Imports:
    - 2013: -32.5
    - 2014: -31.9
    - 2015: -29.4
    - 2016: -27.2
    - 2017: -26.9
    - 2018: -28.2
    - 2019: -28.7
    - 2020: -28.1
    - 2021: -27.7
    - 2022: -27.2
    - 2023: -26.7
- Net non-debt creating capital inflows (negative; percent of GDP) by year:
  - 2013: -1.3
  - 2014: 0.0
  - 2015: -2.3
  - 2016: 0.4
  - 2017: -0.9
  - 2018: 0.1
  - 2019: 0.3
  - 2020: 1.1
  - 2021: 1.4
  - 2022: 1.2
  - 2023: 1.2
- Automatic debt dynamics (external, percent of GDP) by year:
  - 2013: -0.8
  - 2014: 4.2
  - 2015: 5.3
  - 2016: -0.1
  - 2017: -4.3
  - 2018: -0.7
  - 2019: -0.5
  - 2020: -0.5
  - 2021: -0.4
  - 2022: -0.4
  - 2023: -0.5
- Contribution from nominal interest rate (percent of GDP) by year:
  - 2013: 1.1
  - 2014: 1.3
  - 2015: 1.8
  - 2016: 1.5
  - 2017: 2.0
  - 2018: 1.6
  - 2019: 1.5
  - 2020: 1.4
  - 2021: 1.4
  - 2022: 1.3
  - 2023: 1.2
- Contribution from real GDP growth (percent of GDP) by year:
  - 2013: -1.8
  - 2014: -0.9
  - 2015: -1.4
  - 2016: -0.8
  - 2017: -0.9
  - 2018: -2.3
  - 2019: -2.0
  - 2020: -1.9
  - 2021: -1.7
  - 2022: -1.7
  - 2023: -1.7
- Contribution from price and exchange rate changes (external DSA) includes:
  - 2013: -0.1
  - 2014: 3.8
  - 2015: 4.9
  - 2016: -0.8
  - 2017: -5.5
  - (subsequent entries contain ellipses "..." indicating truncated or omitted detailed numeric entries in the source)
- Residual, including change in gross foreign assets (percent of GDP) by year:
  - 2013: 1.7
  - 2014: 5.0
  - 2015: 4.2
  - 2016: 0.6
  - 2017: 0.7
  - 2018: -2.3
  - 2019: 0.1
  - 2020: -2.2
  - 2021: -3.3
  - 2022: -2.1
  - 2023: -2.5
- External debt-to-exports ratio (percent) by year:
  - 2013: 151.4
  - 2014: 175.9
  - 2015: 223.7
  - 2016: 235.9
  - 2017: 219.9
  - 2018: 212.2
  - 2019: 216.1
  - 2020: 216.5
  - 2021: 213.6
  - 2022: 213.2
  - 2023: 212.8
- Gross external financing need (US$ billions) by year and as percent of GDP:
  - US$ billions:
    - 2013: 57.9
    - 2014: 47.1
    - 2015: 46.6
    - 2016: 39.8
    - 2017: 47.9
    - 2018: 44.6
    - 2019: 52.8
    - 2020: 53.5
    - 2021: 54.3
    - 2022: 54.9
    - 2023: 56.1
  - In percent of GDP:
    - 2013: 20.8
    - 2014: 18.1
    - 2015: 19.1
    - 2016: 15.9
    - 2017: 17.3
    - 2018: 14.9
    - 2019: 17.3
    - 2020: 16.6
    - 2021: 16.0
    - 2022: 15.3
    - 2023: 14.8
- Scenario with key variables at their historical averages (percent of GDP) projection:
  - 2019: 61.0
  - 2020: 59.3
  - 2021: 57.8
  - 2022: 55.2
  - 2023: 53.6
  - 2024 (implied next): 51.8
  - Change reported for "Debt-stabilizing non-interest current account": -0.6
- Historical and projection key macroeconomic assumptions (selected):
  - Historical average Real GDP growth (percent): 4.1
  - Standard deviation (Real GDP growth): 1.8
  - Baseline real GDP growth (percent) by year (2013–2023 partially listed): 2.3, 1.3, 1.5, 3.0, 2.4, 4.0, 3.4, 3.2, 3.0, 3.0, 3.0
  - GDP deflator in US dollars (change, percent) historical and projections include: 0.2, -8.0, -8.5, 1.2, 9.2, 2.1, 8.5, 4.1, -1.5, 2.4, 2.4, 2.3, 2.2
  - Nominal external interest rate (percent) series includes: 2.4, 2.5, 2.9, 2.4, 3.4, 2.7, 0.3, 2.8, 2.5, 2.4, 2.3, 2.2, 2.2
  - Growth of exports (US$ terms, percent) series includes: -1.5, -3.5, -16.6, -1.9, 13.1, 1.1, 13.8, 8.7, 1.9, 4.7, 4.5, 4.3, 3.4
  - Growth of imports (US$ terms, percent) series includes: 0.2, -8.0, -13.7, -5.2, 9.5, 5.2, 20.6, 13.5, 3.8, 3.5, 3.7, 3.5, 3.5
  - Current account balance, excluding interest payments (percent of GDP) series includes: -3.0, -0.4, -0.5, 0.1, 0.5, -0.5, 2.1, -0.9, -1.2, -1.0, -0.9, -0.7, -0.6
  - Net non-debt creating capital inflows (percent of GDP) series includes: 1.3, 0.0, 2.3, -0.4, -0.9, -0.1, 2.0, -0.1, -0.3, -1.1, -1.4, -1.2, -1.2

### External Shock Tests and Bound Tests (summary of figures and scenarios)
- External debt (percent of GDP) baseline and under shocks:
  - Baseline reported as 58 (in summarized figures)
  - Non-interest current account shock: 63
  - Interest-rate shock: 59
  - Combined shock: 63
  - Combined shock (30 percent depreciation scenario): 81
  - Historical scenarios box figures and averages presented for baseline and scenarios; shading denotes actual data.
- Notes on shocks and methodology:
  - Individual shocks are permanent one-half standard deviation shocks.
  - Ten-year historical average used for baseline comparisons.
  - Permanent 1/4 standard deviation shocks applied to real interest rate, growth rate, and current account balance in some tests.
  - For historical scenarios, historical averages are calculated over the ten-year period and used to project debt dynamics five years ahead.
  - Real depreciation shock example shows historical value 52 and baseline 58 in a presented chart.

### Key Findings and Policy Recommendations (from Debt and Risk Analysis sections)
- Debt dynamics findings (implicit in projections):
  - Gross public debt rises from 10.1 (2016) to mid-20s (projected 2023 values around 26.6–26.1) in nominal terms.
  - Net public debt (excluding Pension Reserve Fund) turns positive from 2017 onward, reaching 14.3 by 2023.
  - Automatic debt dynamics contribute negatively to debt ratios over projections (cumulative -3.2 percent of GDP).
  - Primary deficits contribute to identified debt-creating flows with cumulative primary deficit of 5.6 percent of GDP over the projection period.
- External sector resilience:
  - Gross external financing needs remain sizable (US$ billions), ranging from US$39.8 (2016) to US$57.9 (2013) with projections around US$52.8–56.1 through 2019–2023.
  - External debt-to-exports ratios peak historically above 230 (2016) and are projected to remain elevated but declining toward 212.8 by 2023.
  - Scenario analysis indicates vulnerability to combined shocks (e.g., 30 percent depreciation raises external debt ratios substantially, from baseline 58 to 81 in the presented scenario).
- Policy recommendations (aligning with risk management and DSA implications):
  - Allow the exchange rate to play its role as a shock absorber and provide liquidity; consider exchange rate intervention if necessary to contain temporary disorderly conditions.
  - Maintain macroeconomic policies that limit debt-creating flows and preserve buffers given exposure to global financial conditions and trade shocks.
  - Monitor contingent liabilities and financial asset acquisitions to manage other identified debt-creating flows and residual volatility.
  - Stress-test external financing needs and maintain adequate access to international markets, considering scenarios with adverse interest rate, growth, and depreciation shocks.

*Source: IMF staff.*

### 1996. In coordination with STA, Chile is in  the

### cr18311-chile-bundle - 1996. In coordination with STA, Chile is in  the

### Data reporting and statistical frameworks
- Chile is in the process to gain adherence to SDSS plus (1996).  
- A data ROSC was published September 17, 2007.  
- The CBC uses the standardized report forms (SRFs) to report monthly data for: central bank, other depository corporations (ODCs), other financial corporations (OFCs), and monetary aggregates. Data for the ODCs exclude savings and credit cooperatives.  
- The CBC reports all core and 8 of 28 encouraged financial soundness indicators on a monthly basis.  
- Table of Common Indicators Required for Surveillance (As of October 1, 2018) — latest observations and frequencies include (examples from table):  
  - Exchange Rates: Date of Latest Observation September 25, 2018; Date Received September 25, 2018; Frequency D; Frequency of Reporting D; Frequency of Publication D.  
  - International Reserve Assets and Reserve Liabilities of the Monetary Authorities: Date of Latest Observation September 15, 2018; Date Received September 15, 2018; Frequency W; Frequency of Reporting W; Frequency of Publication W.  
  - Broad Money: Date of Latest Observation August 2018; Date Received September 2018; Frequency M; Frequency of Reporting M; Frequency of Publication M.  
  - GDP/GNP: Date of Latest Observation Q2 2018; Date Received August 20, 2018; Frequency Q; Frequency of Reporting Q; Frequency of Publication Q.  
  - International Investment Position: Date of Latest Observation Q2 2018; Date Received August 20, 2018; Frequency Q; Frequency of Reporting Q; Frequency of Publication Q.

### Background and economic outlook
- Chile characterized as one of the most open and globally integrated economies; macro framework includes fully-fledged inflation targeting and a flexible exchange rate.  
- Recent upside surprises in Chilean economic data; greater dynamism of investment, especially in machinery and equipment, outperforming projected GDP growth for 2018–2020.  
- Inflation: annual headline CPI inflation reached 3.1 percent in September (just above the 3 percent target); core inflation remains near 2 percent. Inflation expected to reach 3.1 percent by year-end.  
- Labor market: salaried-jobs growth rising, dynamism in construction and trade; slack may exist due to strong immigration not yet captured by surveys; authorities see lag between employment and activity beginning to dissipate.  
- Potential and trend growth: potential growth revised up; convergence between potential and trend growth—estimated at 3 to 3.5 percent for the next ten years—will occur sooner than expected.  
- Economic growth projections (authorities’ revised): range between 4 and 4.5 percent in 2018, and between 3.25 and 4.25 percent in 2019.

### External sector and reserves
- External environment described as volatile with increasing near-term risks; commodity prices dropped, particularly metals; Chilean peso depreciated against the dollar.  
- Authorities and staff view Chilean current account and real exchange rate as broadly aligned with fundamentals.  
- Main external risk: abrupt deterioration of financial conditions in emerging economies; particular concerns about developments in the United States, China, and Brexit uncertainties in Europe.  
- External asset positions and sovereign buffers:  
  - Economic stabilization fund amounts to 14 billion dollars (approximately 5 percent of GDP) as of September 2018.  
  - International Reserves of the CBC amount to 37.4 billion dollars (approximately 14 percent of GDP).  
  - Pension funds external assets amount to 86 billion dollars as of the second half of 2018.  
- Corporate sector indebtedness: highly leveraged in aggregate but composition matters — natural hedges, foreign exchange hedges, significant FDI (parent-company) debt, mostly long-term; corporate indebtedness as percent of GDP stabilized since 2015.

### Monetary policy
- Policy rate kept at 2.5 percent for 16 months, described as one of the most expansive in the region.  
- October 2018 monetary policy meeting: CBC Board decided to raise the policy rate by 0.25 basis points; signaled that normalization will continue gradually and be well-communicated if foreseen scenario is maintained.  
- Anticipation that monetary policy will remain expansionary for some time — possibly the longest period of continued monetary expansion since the current regime’s adoption. CBC prepared to act countercyclically if downside external risks materialize.  
- Since January 2018, CBC Board meeting frequency changed to eight times per year (from monthly); meetings last one and a half days; communiqué lengthened and includes voting results and decision; IPoM published quarterly coinciding with meeting months; Financial Stability Report (IEF) published separately.

### Fiscal policy
- Fiscal consolidation agenda: 2019 Budget Law forecasts a decline in overall fiscal deficit from 2.8 percent of GDP in 2017 to 1.9 and 1.7 percent of GDP respectively for 2018 and 2019.  
- 2019 fiscal measures support development needs (education, healthcare, pensions) and boost public investment. Expenditure growth in 2019 estimated at 3.2 percent in real terms.  
- Fiscal austerity package: USD 4.4 billion to be implemented linearly over a four-year horizon.  
- Structural fiscal deficit reduction target: approximately 0.2 percent of GDP per year to 1 percent of GDP by 2022.  
- Public debt-to-GDP ratio expected to stabilize in the near term at a low level relative to peers; sovereign risk spreads remain low historically and relative to peers.  
- Institutional reforms: legal and financial independence for the Fiscal Council with a broader mandate via proposed Autonomous Fiscal Council bill (expected short-term approval).  
- Tax Modernization bill aims to simplify tax payment process, improve efficiency, support small-to-medium enterprises, foster investment and growth while safeguarding fiscal discipline; estimated that approval of the tax bill would increase GDP growth by over 0.5 percent per year over the next decade.  
- Authorities state the announced tax on digital services is an interim measure while a global consensus is achieved and that OECD recommendations have been taken into account.

### Financial sector resilience and reforms
- Authorities broadly agree the financial sector remains healthy; IMF FSAP programmed for 2020 to design further resilience measures.  
- Domestic credit: characterized by low interest rates. Corporate debt stabilized relative to GDP; household debt growing as percent of total loans with larger mortgage contribution.  
- Non-performing loan ratios: bank consumer loans NPLs at 2 percent; consumer loans in the non-banking sector around 5.5 percent in February 2018.  
- Household Finances Survey (Encuesta Financiera de Hogares) findings (2014–2017): share of households that save increased by 10 percentage points to 36 percent; share of indebted households decreased from 73 to 66 percent; indebtedness indices (debt-to-income and financial burden to income) increased; mortgage debt increased in the highest income group; significant improvement in financial inclusion.  
- Real estate sector development over the last decade described as healthy with no evident financial vulnerabilities; house price increases aligned with growth, disposable income, and urbanization; growth supported by healthy financing architecture.  
- New Banking Legislation: aligns bank capital requirements with Basel III standards; enhances governance for the bank regulator; broadens regulatory tools; extends government guarantees for term deposits. Implementation of Basel III expected to be gradual over four years; estimated impact on banking sector is low relative to average returns of last six years; banks may substitute AT1 for T2 during transition.  
- Countercyclical capital reserve requirements specifications to be applied during 2019, becoming the most important macroprudential policy in Chile.  
- Financial market infrastructures: ROSC assessment finds sound and robust institutions with some gaps; as of July 2018 Chile improved rating of all financial market infrastructures except one (trade depository; “Repositorio de Transacciones”). CBC developing an Integrated Information System for Derivatives (“Sistema de Información de Derivados”) to reach a trade depository standard and working on regulation to allow compensation and liquidation denominated in US dollars.  
- Cybersecurity: authorities created a technological observatory; regulators coordinate and seek technical assistance and best practices internationally.

### Reform agenda and structural priorities
- Authorities committed to ambitious structural reforms to raise medium-term growth and living standards: measures to streamline investment processes, reduce regulatory bottlenecks, and inaugurate an office to track and facilitate large-scale sustainable investment projects.  
- Plans to simplify environmental permit processes to reduce discretion, enhance transparency, and guarantee high environmental standards.  
- State modernization initiatives: improve availability of e-documentation across the public sector to reduce administrative burdens; proposed bill to modernize and reduce notary procedures.  
- Trade and external integration: Chile has 26 free trade agreements with 64 economies covering over 85 percent of global GDP; recent conclusion of bilateral trade agreement negotiations with Brazil; efforts to strengthen financial integration with Pacific Alliance economies and to advance trade in services liberalization.  
- Human capital and labor market reforms: focus on early childhood education, strengthening technical and professional schooling, reviewing vocational curricula for digital economy skills, initiatives to improve female labor force participation and add flexibility for younger age groups.  
- Pension reform proposal highlights: gradual increase in mandatory contribution rates to privately-managed individual accounts; greater competition by allowing new administrators to manage additional mandatory contributions; significant increase in current pensions relying on the publicly funded solidarity pillar; incentives to postpone retirement, especially for women, rather than enforcing an older retirement age.

*Statement by Gabriel Esteban Lopetegui, Executive Director for Chile and Carola Moreno, Advisor to the Executive Director, November 7, 2018.*

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_Source: https://www.imf.org/-/media/files/publications/cr/2018/cr18311-chile-bundle.pdf_