## 1chlea2025001-print-pdf - 2.2 percent in 2024, close to its potential pace, driven by the strong mining and service ## Source details **Canonical URL:** [1chlea2025001-print-pdf - 2.2 percent in 2024, close to its potential pace, driven by the strong mining and service](https://www.imf.org/-/media/files/publications/cr/2025/english/1chlea2025001-print-pdf.pdf) ## Other formats - [Markdown version](/-/media/files/publications/cr/2025/english/1chlea2025001-print-pdf.pdf.md) - [Structured JSON version](/-/media/files/publications/cr/2025/english/1chlea2025001-print-pdf.pdf.json) --- ### Overview and outlook - Real GDP growth: - "2.2 percent in 2024, close to its potential pace." - Projected "2-2.5 percent in 2025, related to an expected recovery in domestic demand." - Table 1 selected series: Real GDP (annual percentage change): 2023 "0.2", 2024 "2.2", 2025 "2.2", 2026 "2.3", 2027 "2.3". - Inflation and monetary policy: - Inflation "set to return to the 3-percent target in early 2026" after electricity tariff effects subside. - BCCh policy rate lowered by "325 basis points since January 2024 to 5 percent in December 2024." - Technical assumption: nominal policy rate would remain between "4.5 and 5 percent throughout 2025." - CPI change (end of period): 2023 "3.9", 2024 "4.5", 2025 "3.5", 2026 "3.0", 2027 "3.0". - External and labor market: - Current account projected "to reach around 2½ percent of GDP in 2024 and 2025." - Unemployment rate (annual average): 2023 "8.7", 2024 "8.5", 2025 "8.2", 2026 "8.0", 2027 "7.8". - Growth uneven across industries; construction sector lagging. - Key macro aggregates (selected): - GDP (2023), in trillions of pesos: "282". - GDP (2023), in billions of U.S. dollars: "336". - Per capita (2023), U.S. dollars: "16,815". - Population (2023), in millions: "19.96". - Main products and exports: "Copper". - Key export markets: "China, U.S., Euro area". ### External risks and international reserves - External risks and channels: - "Commodity price volatility linked to the economic outlook of Chile’s main trading partners and the pace of the global green transition." - "Uncertainty surrounding monetary and fiscal policies in advanced economies" could lead to tighter financial conditions and higher volatility. - Reserves and liquidity: - Gross international reserves (GIR) "stood at US$44.4 billion at-end December 2024." - GIR equals "79.0 percent of the Fund’s ARA metric, below the recommended range of 100-150 percent." - Government usable liquid FX assets "amounted to US$4.6 billion as of November (equivalent to 8.1 percent of the ARA metric)." - Recommendation: "Rebuilding international reserve buffers is essential" and integrate reserve accumulation into BCCh’s longer-term financial stability strategy. ### Fiscal stance, outlook, and framework - Fiscal outcomes and projections: - Headline fiscal deficit: "projected to reach 2.7 percent of GDP in 2024" (Table: Central government fiscal balance 2024 "-2.7"). - Central government gross debt (percent of GDP): 2023 "39.4", 2024 "42.7", 2025 "43.7", 2026 "44.1", 2027 "43.5". - Staff projects a higher headline deficit of "1.8 percent of GDP for 2025 (vs authorities’ budgeted 1.0 percent)." - Staff estimates additional cumulative measures of "at least 1 percent of GDP are needed in 2026-2027" to reach a broadly balanced position by 2027. - Revenue performance and drivers: - 2024 revenue underperformance driven by "weaker-than-expected corporate income tax (CIT) collection, less buoyant VAT, and lower-than-budgeted lithium revenues due to sharp price drop." - Staff projects total tax revenues to rise by "about 1 percent of GDP in 2025" from new mining royalty tax, higher copper prices and production, recovery in consumption and import taxes, and better tax compliance. - Fiscal framework recommendations: - "Provide more details on debt-creating flows outside the fiscal deficit ('below-the-line' items)." - "Update fiscal forecasting methods." - "Adopt a medium-term strategy to rebuild the size of the Economic and Social Stabilization Fund (ESSF)." - "Simplify the presentation of the fiscal targets and budget execution in the Public Finance Report." ### Financial sector resilience and reforms - System soundness: - Banks’ capital adequacy, liquidity, and profitability at or above pre-pandemic levels; NPLs slightly above pre-pandemic levels. - Nominal credit growth: "3.7 percent (yoy) in November 2024." - Macroprudential settings and implementation: - CCyB: "setting the neutral level of the countercyclical capital buffer at 1 percent of risk-weighted assets with a gradual and state-contingent implementation path from the current level of 0.5 percent." - Ongoing deployment of Basel III capital and liquidity requirements; prompt implementation of the Financial Market Resilience Law recommended. - Policy priorities and institutional reforms: - Adopt "an industry-funded deposit insurance and a bank resolution framework." - Provide "budget independence to the CMF." - Enhance bank corporate governance and implement the Consolidated Debt Registry (to begin in 2026). - Close commercial real estate data gaps and "enhance stress test models." ### Structural reforms to lift potential growth - Priorities to raise trend growth and productivity: - "Expedite investment permit applications and environmental evaluations." - "Foster the development of emerging industries, particularly those related to renewable energy." - "Facilitate R&D" and ease restrictions on university researchers participating in technology ventures. - "Better integrate women into the labor market" to offset demographic pressures. - Development bank (AFIDE) design: - AFIDE should have "a targeted mandate, sound risk management practices, and robust corporate governance." - Initial capital from CORFO, Ministry of Finance, and possibly international financial institutions; limit fiscal contingent liabilities and ensure financial sustainability. - AI and labor market policy: - Chile is "among the most exposed to AI in Latin America." - Policy actions: "promoting technology diffusion, addressing skills gaps, and supporting workers’ transitions" to broadly and equitably capture AI benefits. ### Pension reform and demographic pressures - Core reform elements and fiscal implications: - Proposal to add "a 6-percentage points (pps) employer contribution" (government’s latest proposal divides the 6 pps into 3 pps to individual accounts and 3 pps to a Social Insurance Fund in earlier text; supplementary info indicates a 7 pps variant in legislative process). - Distributional note: an earmark of "1 percentage point" to address gender life expectancy in some proposals. - Replacement rates: contribution increase estimated to boost replacement rates by "approximately 10 percentage points," raising them above "70 percent for a median salary earner." - Fiscal costs concerns: government estimates fiscal costs could reach "0.8 percent of GDP in the medium term" under certain configurations. - PGU (Minimum Guaranteed Pension): - PGU benefits "equivalent to 46 percent of the average wage" for full recipients. - PGU reduced poverty by "2 percentage points." - PGU costs projected to rise from "2 percent of GDP to about 4 percent of GDP in 30 years" if adjusted in real terms in line with real wage growth; to "3.0 percent of GDP" if kept constant in real terms. - Proposal to increase PGU from "CLP 214,000 to CLP 250,000" would add annual fiscal costs of "about 0.4-0.5 percent of GDP." ### Labor market, gender, and AI exposure - Labor market dynamics: - Employment recovery uneven; mining and utilities expanded strongly while overall employment growth slowed. - Real wages increased "4.1 percent (yoy) as of November 2024." - Real minimum wages rose by "approximately 15 percent" between January 2023 and July 2024. - Female participation and policies: - Female labor force participation rose by "15 percentage points since 2000" to "53 percent in 2023." - Participation gender gap remains "about 20-percentage points." - Recommendation: improve access to quality childcare and replace size-dependent childcare policy with a more universal program to raise female participation. - AI exposure: - Chile has relatively high AI exposure in the region; "about 20 percent of workers are in the high exposure–low complementarity group." - Displacement risks concentrated among those with "secondary school education and an undergraduate degree." - Policy response: strengthen digital infrastructure, R&D, targeted training, and social protection to manage transitions. ### Risk assessment, scenarios, and sovereign debt sustainability - Key risks and likelihood (from Risk Assessment Matrix): - Commodity price volatility — Likelihood: "HIGH", Impact: "HIGH". - Monetary policy calibration — Likelihood: "MEDIUM", Impact: "MEDIUM". - Climate change — Likelihood: "MEDIUM", Impact: "MEDIUM". - Deepening geoeconomic fragmentation — Likelihood: "HIGH", Impact: "MEDIUM". - Domestic political polarization — Likelihood: "HIGH", Impact: "MEDIUM". - Debt dynamics and stress findings: - Public debt (percent of GDP) baseline projections: 2023 "39.44", 2024 "42.74", 2025 "43.74", 2026 "44.14", 2027 "43.54", with stabilization below "45 percent of GDP" under the government's medium-term commitment. - Gross financing needs (GFN) series (percent of GDP): 2023 "7.2", 2024 "4.0", 2025 "5.7", 2026 "5.7". - Medium-term risk analysis: Debt fanchart index (DFI) = "1.0" (Risk signal: "3/Low"); GFN financeability index (GFI) = "4.2" (Risk signal: "4/Low"). - Long-term projections: under baseline, debt declines to "around 32 percent of GDP in 2050"; alternative scenarios (historical averages) could raise debt "to almost 100 percent of GDP by 2050." ### Key staff policy recommendations (summary) - Fiscal policy: - Fill "a gap of at least 1 percent of GDP" to reach a broadly balanced fiscal position by 2027. - Rely on "tax compliance measures" to mobilize revenue, but "remain flexible to adjust current spending" if mobilization falls short; preserve public investment. - Enhance fiscal transparency and rebuild the ESSF. - Monetary and reserves: - Maintain "a cautious data dependent approach" to rate cuts. - Resume reserve accumulation and "continuously build international reserves" as part of a longer-term strategy. - Financial sector: - Continue implementation of Basel III and Financial Market Resilience Law. - Adopt industry-funded deposit insurance and bank resolution framework; grant CMF budget independence. - Close commercial real estate data gaps and strengthen stress testing. - Structural reforms: - Expedite permits and environmental evaluations; support renewable-energy-related industries; facilitate R&D; boost female labor participation; design AFIDE with clear governance and risk frameworks. - In AI era: "promoting technology diffusion, addressing skills gaps, and supporting workers’ transitions." *Source: CHILE — STAFF REPORT FOR THE 2024 ARTICLE IV CONSULTATION (excerpts and tables from the provided content).* ### 2.2 percent in 2024, close to its potential pace, driven by the strong mining and service ### 1chlea2025001-print-pdf - 2.2 percent in 2024, close to its potential pace, driven by the strong mining and service ### Overview and outlook - Real GDP growth: "2.2 percent in 2024, close to its potential pace" and "2-2.5 percent in 2025, related to an expected recovery in domestic demand." - Inflation: "set to return to the 3-percent target in early 2026" after the impact of the significant increase in electricity tariffs between June 2024 and early 2025 subsides. - Current account: "projected to reach around 2½ percent of GDP in 2024 and 2025." - Labor market: "the unemployment rate remaining high"; projected unemployment rate (annual average) 2024: "8.5", 2025: "8.2". - Growth uneven: "recovery has been uneven across industries, with the construction sector lagging." ### External risks and uncertainty - Key external risks: - "commodity price volatility linked to the economic outlook of Chile’s main trading partners and the pace of the global green transition" - "uncertainty surrounding monetary and fiscal policies in advanced economies" that "could lead to tight financial conditions for longer periods of time and higher financial volatility" - Domestic risks: "concerns about crime, migration, and inequality persist; and political polarization is hindering the structural reform progress." ### Macroeconomic policy stance and recent actions - Monetary policy: - "The Central Bank of Chile lowered the monetary policy rate by 325 basis points since January 2024 to 5 percent in December 2024." - Recommendation: "A cautious data dependent approach to the pace of monetary policy easing is warranted." - Real monetary policy rate: "close to its estimated neutral range." - Fiscal policy: - Headline fiscal deficit: "projected to reach 2.7 percent of GDP in 2024 due to a notable revenue underperformance and despite significant spending restraint compared to the budget." - Medium-term target: "broadly balanced fiscal position by 2027." - Fiscal gap to close: "a gap of at least 1 percent of GDP needs to be filled" over the next three years to reach the balanced target. - Policy tools: reliance on "the important tax compliance law" for revenue; need to "remain flexible to adjust current spending in case revenue mobilization falls short of plans, while aiming to preserve public investment outlays." - Financial sector resilience: - Countercyclical capital buffer: "setting the neutral level of the countercyclical capital buffer at 1 percent of risk-weighted assets with a gradual and state-contingent implementation path from the current level of 0.5 percent" to provide banks with planning certainty. - Ongoing implementation of Basel III capital and liquidity requirements and prompt implementation of the Financial Market Resilience Law recommended. ### Fiscal framework and public finances - Structural fiscal balance includes adjustments for output, copper prices, and lithium revenues; "The lithium adjustment starts in 2022." - Recommendations to strengthen fiscal framework: - "Providing more details on debt-creating flows outside the fiscal deficit ('below-the-line' items)." - "Updating fiscal forecasting methods." - "Adopting a medium-term strategy to rebuild the size of the Economic and Social Stabilization Fund (ESSF)." - "Simplifying the presentation of the fiscal targets and budget execution in the Public Finance Report." ### Pension system and demographic pressures - Pension reform priorities: - "Raising contribution rates and the number of contribution periods" to sustainably self-finance old-age pensions. - Targeting the minimum guaranteed pension (PGU) to the most vulnerable, "linking the retirement age to life expectancy," and "implementing the proposed unemployment insurance for pension contributions." - Demographics: "the ratio of pensioners to the working-age population set to nearly double in two decades." ### Financial sector vulnerabilities and policy priorities - Financial system resilience: "remains resilient despite rising vulnerabilities related to the real estate sector and lower financial market depth." - Monitoring needs: "supervisors need to carefully monitor banks and insurers’ portfolio quality and buffers, including by closing commercial real estate data gaps and enhancing stress test models." - Market depth: "Rebuilding the depth of local financial markets by increasing pension contributions, which would increase the pool of investable savings, is important to help reduce market volatility and sensitivity to shocks." - Policy priorities listed: - "adopting an industry-funded deposit insurance and a bank resolution framework" - "providing budget independence to the CMF" - "enhancing bank corporate governance" - "implementing the Consolidated Debt Registry" ### Structural reforms to raise potential growth - Government initiatives (consultative approach): - "expediting investment permit applications and environmental evaluations to encourage investment" - "fostering the development of emerging industries, particularly those related to renewable energy" - "facilitating R&D" - "better integrating women into the labor market" to offset unfavorable demographics - Development bank: "requires a targeted mandate, sound risk management practices, and robust corporate governance." - AI and labor: "promoting technology diffusion, addressing skills gaps, and supporting workers’ transitions" to ensure AI adoption benefits the economy broadly and equitably. ### Key statistics and projections (selected from Table 1) - Real GDP (annual percentage change): 2023 "0.2", 2024 "2.2", 2025 "2.2", 2026 "2.3", 2027 "2.3" - Total domestic demand (annual percentage change): 2023 "-4.2", 2024 "1.0", 2025 "2.4" - Exports of goods and services (annual percentage change): 2023 "-0.3", 2024 "5.5", 2025 "4.3" - Unemployment rate (in percent, annual average): 2023 "8.7", 2024 "8.5", 2025 "8.2", 2026 "8.0", 2027 "7.8" - CPI change (end of period): 2023 "3.9", 2024 "4.5", 2025 "3.5", 2026 "3.0", 2027 "3.0" - Central government fiscal balance (in percent of GDP): 2023 "-2.4", 2024 "-2.7", 2025 "-1.8", 2026 "-0.8", 2027 "-0.4" - Central government gross debt (in percent of GDP): 2023 "39.4", 2024 "42.7", 2025 "43.7", 2026 "44.1", 2027 "43.5" - Public sector gross debt (in percent of GDP): 2023 "70.2", 2024 "73.5", 2025 "74.5", 2026 "74.9", 2027 "74.4" - Current account balance (in percent of GDP): 2023 "-3.5", 2024 "-2.3", 2025 "-2.5", 2026 "-2.5", 2027 "-2.7" - Gross external debt (in percent of GDP): 2023 "71.1", 2024 "77.5", 2025 "76.5", 2026 "76.6", 2027 "75.7" - GDP (2023), in trillions of pesos: "282" - GDP (2023), in billions of U.S. dollars: "336" - Per capita (2023), U.S. dollars: "16,815" - Population (2023), in millions: "19.96" - Main products and exports: "Copper" - Key export markets: "China, U.S., Euro area" ### Key policy recommendations (summary) - Fiscal policy: - Fill "a gap of at least 1 percent of GDP" to reach a broadly balanced fiscal position by 2027. - Use "tax compliance measures" as a key revenue source but "remain flexible to adjust current spending" if revenue falls short. - Ensure "any structural spending increases align with higher structural revenues" and consider "unifying fragmented social programs." - Enhance fiscal transparency, forecasting, and rebuild the ESSF. - Monetary and exchange rate policy: - Maintain "a cautious data dependent approach" to future policy rate cuts. - Resume reserve accumulation and "continuously build international reserves" as part of a longer-term financial stability strategy. - Financial sector: - Continue implementation of Basel III and Financial Market Resilience Law. - Adopt industry-funded deposit insurance and a bank resolution framework; give budget independence to the CMF. - Close data gaps in commercial real estate and enhance stress testing. - Structural reforms: - Expedite permits and environmental evaluations, support renewable energy industries, facilitate R&D, boost female labor participation, and ensure the proposed development bank has clear governance and risk frameworks. - In the AI era, "promoting technology diffusion, addressing skills gaps, and supporting workers’ transitions." *Source: CHILE — STAFF REPORT FOR THE 2024 ARTICLE IV CONSULTATION (excerpts and tables from the provided content).* ### 1. Policy priorities are mainly of structural nature. With the economy broadly balanced, the ### 1. Policy priorities are mainly of structural nature. With the economy broadly balanced, the ### Policy priorities and structural context - Focus: boosting medium-term growth, improving inclusion, and strengthening financial and fiscal resilience. - Two-year Flexible Credit Line (FCL) arrangement approved on August 27, 2024, has substantially strengthened resilience against external shocks. - Concern: Chile’s income convergence has stalled over the past decade, which risks exacerbating inequality concerns despite recent moderate advancements and limits fiscal capacity to address social and other pressures. ### Political economy and reform progress - Facing a polarized Congress, the government adopts a pragmatic approach to equity and growth: - Passed: tax compliance reforms, increased mining revenues, raised universal pensions, progressed in fostering industries related to the global green transition. - Encountered political resistance on: contributory pensions, income tax, and student loan debt reforms. - With elections in November 2025, government priorities: reforms with broader support (streamlining the investment application process; promoting research and development (R&D)) while seeking agreement on pension reform. ### Recent economic developments - Growth: - Real GDP: 0.2 percent in 2023; expected to accelerate to 2.2 percent in 2024. - Mining and utilities (representing 16 percent of GDP) expanded strongly in first three quarters of 2024. - Other sectors (notably construction) grew more moderately. - Expenditure-side drivers: mainly net exports; consumption and investment growth remained sluggish. - Labor market: - Employment growth slowed in 2024; labor participation and unemployment rates have not yet returned to 2019 levels. - Contributing factors: significant rise in real minimum wages; decline in labor force participation of seniors and youths; gradual reduction of work hours from 45 to 40 hours per week. - Real wages increased by 4.1 percent (yoy) as of November 2024. - Inflation: - Headline inflation rose from 3.4 percent (yoy, 2023 basket) in December 2023 to 4.5 percent in December 2024. - Non-core inflation drove the year-to-year increase, due to a 43 percent hike in regulated household electricity prices (which make up 2.2 percent of the CPI basket) in June-October 2024, following a freeze during 2019-23. - An additional 10 percent increase in electricity prices is expected for early 2025. - Core inflation (3m/3m, seasonally adjusted) rebounded in 2024H2, driven by sticky service inflation and rebound in goods inflation from exchange rate passthrough and high shipping costs. - Monetary policy: - BCCh policy rate lowered from 8.25 percent at end-2023 to 5.0 percent in December 2024. - Long-term rates remain elevated amid still-high long-term rates in the U.S. - Fiscal developments: - Headline fiscal deficit projected at 2.7 percent of GDP for 2024, about 0.8 percent of GDP higher than budgeted. - Revenue underperformance in 2024 driven by weaker-than-expected corporate income tax (CIT) collection, less buoyant VAT, and lower-than-budgeted lithium revenues due to sharp price drop. - Government under-executed spending plan (primarily in Q4-2024) and sought additional revenue to comply with structural deficit target of 2.3 percent of GDP. - Despite headline deficit widening, structural non-mining primary balance estimated to improve somewhat, reflecting primarily lower spending in 2024. - Chile: 2024 Budget, Authorities' and Staff's Fiscal Projections (In percent of GDP): Authorities' projections in 2024Q3 vs Staff: - Structural fiscal balance: Authorities -1.9; Staff -3.1 - Headline fiscal balance: Authorities -1.9; Staff -2.7 - Total revenues: Authorities 24.0; Staff 22.1 - Non-mining tax revenues: Authorities 18.7; Staff 17.0 - Private mining tax revenues: Authorities 1.0; Staff 1.0 - Total expenditures: Authorities 25.9; Staff 24.8 - External sector: - Current account deficit narrowed to 3.5 percent of GDP in 2023 (from 8.7 percent in 2022) and to 2.7 percent of GDP in 2024Q3 (four-quarter moving average). - Drivers: weak import growth, lower (US$-denominated) import prices, annual average increase in copper prices. - Peso depreciated about 12 percent on average in 2024 amid narrowing Chile-U.S. interest rate gap (fell below 1 percent from May). - Financial sector: - Banks’ capital adequacy, liquidity, and profitability at or above pre-pandemic levels. - NPL ratios slightly exceed pre-pandemic levels; provisions remain adequate with strong collateral coverage. - Nominal credit growth: 3.7 percent (yoy) in November 2024. - Banks met the counter-cyclical capital buffer (CCyB) of 0.5 percent in May 2024 and fully repaid pandemic-related liquidity measures (FCIC) by July 2024. ### Authorities’ views (as presented) - External position: broadly agreed with staff’s assessment, noting transportation costs remain above pre-pandemic levels and that copper price rise is driven by long-term demand trends; highlighted foreign direct investment, especially in mining, historically finances a substantial portion of the current account deficit. ### Outlook and risks - Growth outlook: - Real GDP projected to grow around the potential growth rate of 2-2.5 percent in 2025 and the medium term, supported by domestic demand recovery and continued mining export growth. - Inflation and fiscal targets: - Inflation expected to return to the 3-percent target in early 2026 after electricity tariff effects subside and service inflation declines. - Government aims to narrow fiscal deficit to 1.1 percent of GDP in 2025 and 0.5 percent of GDP in 2026; staff considers these targets difficult to reach without additional measures. - Current account: - Projected to widen somewhat in 2025-26 due to domestic demand recovery increasing imports. - External risks: - Elevated: commodity price volatility tied to trading partners and global green transition; copper and lithium price swings directly impact fiscal revenues and non-mining activity. - Risk of prolonged high long-term U.S. interest rates could tighten financial conditions and increase volatility in Chile. - Climate risks: storms, wildfires, floods; global green transition could boost demand for copper, lithium, renewable energy. - Domestic risks: - Social discontent over crime, immigration, inequality; political polarization may hinder structural reforms. - Policy implication: building buffers and resilience is essential to mitigate adverse shocks and preserve policy space. ### Fiscal policy: ensuring sustainability while addressing social priorities - Near-term fiscal projection and risks: - Staff projects a higher headline deficit of 1.8 percent of GDP for 2025 (vs authorities’ budgeted 1.0 percent). - Staff estimates total tax revenues to rise by about 1 percent of GDP in 2025, driven by the new mining royalty tax, higher copper prices and production, recovery in consumption and import taxes, and better tax compliance. - Staff projections assume some spending under-execution, building on 2024 experience. - Preserving public investment projects recommended if revenue mobilization disappoints. - Medium-term targets and needs: - Meeting government's target of broadly balanced fiscal position by 2027 remains appropriate but requires additional efforts. - Staff estimates additional cumulative measures of at least 1 percent of GDP are needed in 2026-2027. - Revenue mobilization from the tax compliance law could largely fill this gap if yields materialize and are not allocated to new spending. - Importance of ensuring proposed CIT reform is revenue-neutral and supports stronger private investment. - For new spending initiatives and to maintain fiscal sustainability (including fiscal pact priorities), additional revenue mobilization will be needed. - Government proposal to increase carbon emission tax on power generation from US$5 to US$10 per ton of CO2 for three years to help finance electricity subsidy for vulnerable households. - Pension reform: - Broad agreement to add a 6-percentage points (pps) employer contribution to raise replacement rates; divergence on splitting between individual and redistribution accounts. - Latest proposal (as of end-November 2024): allocate 3 pps to individual savings and 3 pps to a social insurance fund; of the latter, 1 pp to address life expectancy pension gap for women, 2 pps as reimbursable contribution returned after retirement over 20 years. - Concerns: reimbursable contribution and minimum guaranteed pension (PGU) would create substantial fiscal costs as population ages. - Policy recommendations: limit PGU increases to inflation only; consider targeting PGU to most vulnerable elderly; strengthen individual savings (align women’s retirement age with men gradually; link retirement age to life expectancy; adopt insurance for pension contributions during unemployment; incentivize formalization; reduce fees and improve competition among pension funds). - Spending efficiency: - Support for plans to create a one-stop service window and combine fragmented social programs to improve access, coverage, efficacy. - Procurement reform (ChileCompra), effective December 2024, aims to enhance competition, promote SME participation, and raise transparency across all branches of government. ### Fiscal sustainability and governance - Public debt outlook: - Under baseline, central government debt will remain below, but very close to, 45 percent of GDP during 2025-30. - Scenario risk: if overall deficit remained at 2 percent of GDP and debt-creating “below-the-line” operations stayed at about 1 percent of GDP per year, debt-to-GDP would exceed 45 percent in 2026. - Long-term demographic and healthcare pressures projected to increase annual fiscal spending on PGU and healthcare by 4 percent of GDP. - Fiscal Responsibility Law (July 2024): - Formalizes 2022 debt anchor; requires annual structural fiscal targets; adds escape clause; requires government to outline corrective actions for deviations. - Expands Fiscal Council role: assess targets, evaluate compliance, propose mitigation measures. - Areas for further improvement: - Enhance transparency around “below-the-line items” (e.g., capitalization of SOEs) which contributed about two-fifths of total debt increase over past 15 years. - Review revenue forecasting methods in light of economic and policy shifts. - Rebuild Economic and Social Stabilization Fund (ESSF) within a medium-term strategy, including saving windfall revenues to strengthen fiscal buffers. - Clarify presentation of fiscal targets and budget execution in the Public Finance Report to enhance understanding of fiscal rule framework and outcomes. *Source: 1chlea2025001-print-pdf - 1. Policy priorities are mainly of structural nature. With the economy broadly balanced,* ### 21. The authorities reaffirmed their strong commitment to the medium-term fiscal ### 21. The authorities reaffirmed their strong commitment to the medium-term fiscal consolidation path ### Fiscal Policy: Revenue performance, expenditure, and reforms - Authorities’ assessment of 2024 revenue underperformance: - Primary causes: lower lithium prices and weaknesses in corporate income tax collection in the context of structural economic shifts. - Expenditure stance: - Authorities highlighted significant efforts to curb expenditure in 2024 and stressed the need for spending discipline going forward. - Agreed necessity to preserve spending flexibility and prioritize the fiscal deficit target over new spending initiatives, unless additional revenue mobilization is approved. - Technical assistance and projection improvements: - Authorities requested IMF technical assistance to review and update their projection models and processes. - Revenue outlook for 2025-26: - Anticipated significant increase in revenue from the full implementation of the new mining royalties and the recently approved tax compliance law, contributing to the targeted deficit reduction. - Political and tax reform intentions: - Determination to reach a political agreement on the pension reform in early 2025. - Plan for revenue-neutral changes to the CIT and dividend taxation to foster investment. ### Monetary Policy: Converging to the neutral rate and policy guidance - Recommended approach: - A cautious data dependent approach to the pace of future monetary policy rate cuts is recommended. - Recent monetary context and drivers of inflation: - BCCh’s adjustments aligned with its inflation-targeting framework. - Rise in inflation since June primarily driven by hikes in electricity tariffs, and to a less extent, the rise in core inflation attributed to external factors and higher real wages rather than domestic demand. - Real policy rate and neutral range: - Nominal rate: 5.0 percent. - Estimated neutral range: 0.5-1.5 percent. - Real monetary policy rate is close to the upper bound of the estimated neutral range (text chart). - Inflation projection and monetary assumption: - Staff expects inflation to gradually return to the 3-percent target by early 2026. - Technical assumption: the nominal policy rate would remain between 4.5 and 5 percent throughout 2025 and the baseline economic scenario materializes. - Risks to inflation (skew): - Upside risks: peso depreciation due to a strong dollar or lower-than-expected copper prices; stronger-than-expected second-round effects of wage and electricity price increases. - Downside pressure: slower-than-expected recovery in domestic demand, possibly related to a continued sluggish construction sector and weak employment growth. ### International Reserves: Rebuilding buffers and strategy - Gross international reserves (GIR) status: - GIR declined slightly in 2024 in U.S. dollar terms. - GIR stood at US$44.4 billion at-end December 2024. - GIR equals 79.0 percent of the Fund’s ARA metric, below the recommended range of 100-150 percent. - Mitigating factors: - Government’s usable liquid FX assets amounted to US$4.6 billion as of November (equivalent to 8.1 percent of the ARA metric). - Flexible exchange rate acts as a shock absorber. - Policy implication and recommendation: - Rebuilding international reserve buffers is essential for enhancing resilience. - Priority to integrate reserve accumulation into the BCCh’s longer-term financial stability strategy. - One option: allow reserve accumulation to be more gradual and continuous over the longer term to curtail the risk of unintended spillovers on the foreign exchange market. - Strategy and operational design should follow high transparency standards, be persistent and robust to changes in external risks, and minimize distortions in the foreign exchange market. ### Safeguards and external audit - Safeguards procedures: - Staff completed safeguards procedures as part of Chile’s Flexible Credit Line arrangement. - No significant issues noted from staff’s review of the 2023 audit results or discussions with the BCCh and external auditor, EY Chile. - External audit outcome: - EY Chile issued an unmodified (clean) audit opinion on the BCCh’s 2023 financial statements. - Financial statements are prepared in accordance with International Financial Reporting Standards (IFRS) and are publicly available. ### Authorities’ views on monetary and reserve policy - Monetary easing contingent on data: - BCCh stressed that the pace of future monetary policy easing will continue to depend on macroeconomic developments. - Consideration will include the outlook for medium-term inflation given high long-term U.S. interest rates and their contribution to tight financial conditions in Chile. - Commitment to exchange rate flexibility and reserve accumulation: - BCCh remains strongly committed to the flexible exchange rate as a critical shock absorber. - When market conditions are conducive, BCCh aims to start adjusting the composition of international reserves and other external liquidity buffers by resuming the reserve accumulation program. ### Financial Sector: Resilience, risks, and ongoing reforms - System soundness and main risks: - Financial system overall sound and resilient, with risks mainly related to the real estate sector. - Banks are well-capitalized and maintain sufficient liquidity; loans adequately provisioned and collateralized. - Household and corporate financial health is overall sound. - Real estate sector specifics: - Banks and life insurers have significant exposure to real estate (Figure 9). - Residential real estate: staff analysis suggests a modest recovery in the baseline as past policy rate cuts transmit. - Commercial real estate: office vacancy rates remain elevated compared to pre-pandemic levels but have stabilized and started to decline modestly. - Stress scenario risk: higher-for-longer long-term interest rates or slower economic growth could stagnate the real estate sector and increase losses for banks and life insurers. - Supervisory and analytical priorities: - Monitor the quality of banks’ and insurers’ portfolios. - Address data gaps in commercial real estate price indices. - Continue to improve stress tests to assess real estate sector risks effectively. - Implementation of resilience-enhancing measures: - Deployment of the Basel III framework by CMF and BCCh. - BCCh updated CCyB framework, set a neutral level at 1 percent of risk-weighted assets, and established a gradual, state-contingent implementation plan for private banks (Annex VII). - Ongoing implementation of the Financial Market Resilience Law to develop the interbank repo market, enhance BCCh’s ability to respond to financial distress, and strengthen mutual fund liquidity management. - Authorities finalizing a bill on industry-funded deposit insurance and a new bank resolution framework. - Work underway on a Consolidated Debt Registry (to begin in 2026) to strengthen credit risk management, enhance supervision, and support monitoring of indebtedness. - Planned regulations on banks’ corporate governance and risk management to enhance governance in financial sector oversight. - Institutional recommendation: - Granting budgetary independence to the CMF would help ensure its budget remains adequate, aligning with expanding responsibilities in areas such as fintech and cybersecurity. ### AML/CFT progress - Measures implemented: - Updated AML/CFT regulations for banks, cooperatives, and payment card issuers, and a new AML/CFT framework for insurers. - Execution of 2023-2027 National AML/CFT Strategy to address deficiencies identified in the 2021 AML/CFT Mutual Evaluation Report (Annex IX). ### Market structure changes since the pandemic - Pension fund withdrawals and public debt effects: - Two major effects identified by staff analysis (Selected Issues Paper): - Lower size of pension funds reduced capital market depth and weakened the cushioning mechanism in the forex market, making markets more sensitive to external financial stress. - Reduced demand for local bonds and higher public debt issuance led non-financial corporations and the government to rely more on offshore markets for issuance during the pandemic (text chart). - Policy implication: raising the pension contribution rate would increase the pool of investable savings and further deepen local capital markets. - Implementing the Financial Market Resilience Law and other resilience measures will be beneficial. ### Structural Reforms: Productivity, interconnectedness, and growth strategy - Trend growth and productivity: - Trend growth has decelerated, mainly due to stalled productivity growth across both the mining and non-mining sectors. - For the entire economy, total factor productivity (TFP) contributed about 2.5 percentage points to annual GDP growth in the 1990s but was close to zero in the pre-pandemic decade. - Labor and capital contributions remained relatively steady; labor added a bit more to growth in the last decade, reflecting migrant inflows and higher female labor force participation. - Role of economic structure and interconnectedness: - Chilean producers use intermediate inputs less intensively (are less connected) than OECD peers such as the Czech Republic and Korea. - The gap in intermediate input use between Chile and Korea is associated with a difference of up to a 1.5 percentage points in annual real GDP growth. - Increasing interconnectedness could raise long-term aggregate productivity growth for non-mining sectors. - Policy options to enhance interconnectedness and productivity: - Diversify exports away from raw mining products (potentially through easing regulatory burden on investment and fostering standardization and certificates). - Reduce trade costs through trade agreements and regulatory changes to maritime concessions and coastal shipping. - Improve contract enforcement. ### Government growth strategy: Regulatory reform, emerging industries, and R&D - Regulatory environment: - Bills under discussion to expedite sectoral investment permit applications and environmental evaluations. - Proposed changes: more risk-based approach for sectoral permits to reduce processing time and provide greater certainty; potential centralized agency discretion and prioritization for environmental evaluations. - Emerging industries: - Focus on lithium, green hydrogen, and data centers, building on achievements in renewable energy. - Codelco and SQM agreement in May 2024 to form a public-private-partnership (PPP) expected to increase production and fiscal revenues and pave the way for PPP negotiations in other salt flats. - Authorities project annual lithium production to increase by about 70 percent by 2030. - R&D and innovation: - Bill to ease restrictions on university researchers to enable participation in technology companies and claim proceeds from research outcomes. - Goal: increase incentives for innovation and address low collaboration between firms and universities on R&D compared to other OECD countries (text chart). - Infrastructure and implementation priority: - Swift and consistent implementation of growth-enhancing measures is key, especially a more efficient regulatory environment that cuts across all sectors. - Enhancing supportive infrastructure (e.g., electricity transmission lines for renewable energy) is important to foster emerging industries. ### New development bank (AFIDE): Design considerations and risks - Purpose and capitalization: - Authorities plan to create AFIDE (Agencia de Financiamiento e Inversión para el Desarrollo) to enhance financing access to new and higher-risk industries with positive externalities but limited access to traditional financing. - Initial capital would be provided by CORFO, the Ministry of Finance, and possibly international financial institutions. - Governance and risk management priorities: - AFIDE should have a targeted mandate, sound risk management practices, and robust corporate governance. - Preliminary proposal envisages CMF supervision and adherence to OECD corporate governance principles. - Importance of limiting fiscal contingent liabilities and ensuring financially sustainable operations. - Relation to existing institutions: - A financially sustainable development bank could advance the current development financing system that relies on CORFO, which is managed and financed by the government. *Source: IMF staff report excerpt (section 21–36).* ### 37. The advent of digital technologies and artificial intelligence (AI) offers an opportunity ### Productivity, Labor Market, and Policy Priorities ### Digital technologies, AI exposure, and productivity - Chile is among the most exposed to AI in Latin America because of its larger formal sector and could benefit significantly from its adoption (Annex VIII). - Despite relatively low informality by regional standards, Chile's labor force remains more informal than in the U.S. and United Kingdom, explaining its intermediate level of AI exposure. - Productivity gains from AI are particularly promising in the private and public service sectors, which have historically low productivity but high potential for AI-driven improvements. - Displacement risks are concentrated in certain labor segments, in particular individuals with secondary school education and an undergraduate degree. - Policy recommendations: - Promote technology diffusion. - Address skill gaps to facilitate workers’ transition into more productive sectors. - Ensure AI adoption benefits the economy broadly and equitably. ### Female labor participation and demographic challenges - Labor’s contribution to GDP growth is expected to decline due to demographic changes unless labor participation and skill levels improve further. - Female participation in the labor market increased by 15 percentage points since 2000, while male participation remained broadly unchanged (Annex V). - Closing the remaining labor participation gender gap (about 20-percentage points) by further integrating women into the labor force is crucial to mitigate negative demographic effects. - Analysis shows a sharp drop in women’s labor participation around motherhood and that many women enter the informal labor market upon return to employment despite higher average education attainment than men. - Policy recommendations: - Improve access to quality childcare. - Replace the distortionary size-dependent childcare policy with a more universal program that is sufficiently financed to raise female labor participation, boost potential growth, and reduce gender inequality. ### Minimum wage developments and labor market caution - Between January 2023 and July 2024, real minimum wages rose by approximately 15 percent, while the unemployment rate remained above pre-pandemic levels. - Employment growth was slowest in industries that paid wages close to the minimum wage level, a trend not seen before the pandemic. - The rapid increase in the real minimum wage amid a still-weak labor market may have had unintended negative effects on employment. - Measurement complication: - It is difficult to determine and internationally compare Chile’s current minimum wage-to-median wage ratio due to complications in accurately measuring median wage levels (De Gregorio and Taboada, 2023). - Policy recommendation: - Create a minimum wage setting mechanism to insulate future decisions from the political cycle and align decisions with economic developments. ### Authorities’ views on growth and AI - Authorities prioritize legislative initiatives to streamline permitting and environmental approval processes, stepped-up coordination across agencies, and preparation of related secondary regulations. - Authorities view the creation of AFIDE as filling a financing gap and commit to sound corporate governance and risk management practices. - Authorities emphasize: - Importance of boosting research and development activity (R&D). - AI as an opportunity for raising service sector productivity and achievements on the AI ethics framework. - Ongoing efforts to establish Chile as a data center hub. - Merit in enhancing interconnectedness of Chilean producers and growth opportunities from greater dynamism and trade in the region. - On childcare policy: - Authorities acknowledge current size-dependent childcare policy may distort labor demand for female workers. - They recognize achieving broader political consensus is essential for moving to a universal childcare system financed by higher payroll taxes. ### Staff appraisal — macro position and external risks - The economy is broadly balanced but external risks are elevated. - Real GDP is growing around its potential and inflation is expected to reach the 3-percent target in early 2026. - The current account deficit has continued to narrow; the 2024 external position is assessed as moderately weaker than implied by medium-term fundamentals. - Public debt is still relatively low and sustainable with high probability. - Policy implication: - Strengthen economic buffers to provide additional policy space for future shocks given an unstable and uncertain external environment. ### Lifting growth potential and structural reforms - Growth initiatives highlighted: - Expediting investment permit applications and environmental evaluations to encourage investment. - Fostering development of emerging industries, particularly those related to renewable energy to maximize benefits from the global green transition. - Facilitating R&D. - Implementation priorities: - Swift and consistent implementation, rationalizing regulatory burden, and improving essential infrastructure. - Better integrating women into the labor market to partially offset unfavorable demographic trends. - The proposed new development bank requires a targeted mandate, sound risk management practices, and robust corporate governance. ### Fiscal outlook and recommendations - The goal of a broadly balanced fiscal position by 2027 remains appropriate but has become more challenging. - To achieve a balanced fiscal position over the next three years, a gap of at least 1 percent of GDP needs to be filled. - Potential fiscal adjustment source: - Important tax compliance law, if implementation yields planned additional revenue and is not used for new spending initiatives. - Policy recommendations: - Carefully monitor tax compliance developments. - Remain flexible to adjust current spending if revenue mobilization falls short, while aiming to preserve public investment outlays in support of medium-term growth. - Ensure structural spending increases align with higher structural revenues. - Unify fragmented social programs to enhance access and effectiveness for the most vulnerable. ### Fiscal framework enhancements - Recommended enhancements: - Provide more details on debt-creating flows outside the fiscal deficit (“below-the-line” items) to strengthen monitoring of fiscal pressures. - Update fiscal forecasting methods to improve revenue projections. - Adopt a medium-term strategy to rebuild the size of the Economic and Social Stabilization Fund (ESSF) to respond to future shocks. - Simplify presentation of fiscal targets and budget execution in the Public Finance Report to deepen understanding of the fiscal balance rule framework. ### Pension reform priorities - A pension reform is essential to ensure adequate pensions and address fiscal costs of population aging. - Key reform directions: - Raise contribution rates and the number of contribution periods to sustainably self-finance old-age pensions. - The minimum guaranteed pension (PGU) has increased replacement ratios and reduced old-age poverty but incurs high fiscal costs. - With the ratio of pensioners to the working-age population set to nearly double in two decades, manage public spending pressures while maintaining a solid safety net. - Consider targeting the PGU to the most vulnerable elderly, linking the retirement age to life expectancy, and implementing the proposed unemployment insurance for pension contributions. ### Monetary policy stance - A cautious data-dependent approach to the pace of monetary policy easing is warranted. - The BCCh’s monetary policy adjustments have been in line with its inflation-targeting framework. - The real monetary policy rate is close to its estimated neutral range. - With near-term inflation risks tilted to the upside, future cuts to the policy rate should remain contingent on evidence that inflation is heading decisively back to its target. ### International reserves and liquidity framework - Rebuilding international reserve buffers is important for enhancing resilience. - While the flexible exchange rate is a shock absorber, the Central Bank of Chile’s access to international liquidity adds protection against external shocks. - Recommendation: - Incorporate a comprehensive international liquidity framework into the central bank’s longer-term financial stability strategy, following high transparency standards, persistence, robustness to external risks, and minimizing foreign exchange market distortions. ### Financial system resilience and sectoral policies - The financial system remains resilient despite rising vulnerabilities related to the real estate sector and lower financial market depth. - Outlook and mitigation: - Real estate sector expected to recover modestly as long-term interest rates gradually decline. - Supervisors should monitor banks and insurers’ portfolio quality and buffers, close commercial real estate data gaps, and enhance stress test models. - Rebuilding local financial market depth by increasing pension contributions would increase the pool of investable savings and help reduce market volatility and sensitivity to shocks. - Financial sector policy priorities: - Continue implementation of a positive neutral level counter-cyclical capital buffer with gradual, state-contingent implementation. - Complete ongoing implementation of Basel III capital and liquidity requirements. - Promptly implement the Financial Market Resilience Law to enhance the BCCh’s ability to respond to financial distress. - Adopt an industry-funded deposit insurance and a bank resolution framework. - Provide budget independence to the CMF. - Further enhance bank corporate governance and implement the Consolidated Debt Registry. *Source: IMF staff report excerpt.* ### 50. Staff recommends that the next Article IV consultation take place on the standard 12- ### 1chlea2025001-print-pdf - 50. Staff recommends that the next Article IV consultation take place on the standard 12-month cycle. ### Economic Activity - Growth picked up in 2024; most growth contributions came from net exports, while private consumption growth remained moderate. - Total investment remained weak despite the trend recovery of mining investment; weak investment growth appears to be a regional phenomenon except in Mexico. - Economic uncertainty has declined from its peak during 2021-22 but has remained volatile. - Business confidence remains weak but is on a moderate upward trend. - Sources cited: Central Bank of Chile, Ministry of Finance, INE, Haver Analytics, and IMF staff calculations. ### Labor Market - The employment rate has not yet returned to its pre-pandemic level; the recovery leveled off in 2024. - Mining and utilities, the leading sectors for GDP growth in 2024, have limited impact on total employment growth. - Real wages continued to rise, outpacing labor productivity growth, possibly explained by higher minimum wages. - Low-wage industries experienced faster wage growth in 2022-24 than higher-wage industries. - Sources cited: Central Bank of Chile, INE, Haver Analytics, and IMF staff calculations. ### External Sector - The current account deficit continued to narrow in 2024, largely owing to sluggish imports consistent with normalization of consumption from 2021-22, and slightly more favorable terms-of-trade. - Volatility of non-FDI capital flows has normalized to pre-2020 levels. - Gross international reserves are higher than the trough in 2022 but still below 100% of the ARA metric. - FX buffers held by the government (not counted as international reserves) have declined. - Sources cited: Central Bank of Chile, DIPRES, Haver Analytics, and IMF staff calculations. ### Inflation and Monetary Policy - After a sharp decline in 2023, headline inflation picked up in 2024H2 largely due to the rise in non-core inflation; non-core inflation was driven by regulated electricity tariff hikes. - Core inflation rebounded in H2, driven by sticky service inflation, exchange rate passthrough and shipping costs. - Recent trends of commodity prices were favorable to Chile’s inflation convergence. - Short-term real rates fell as the policy rate eased, while long-term real rates remained elevated. - One-year inflation expectations rose due to the electricity price adjustment, but two-year inflation expectations remain close to the inflation target. - Note on CPI baskets: inflation rates during 2014-2023 are calculated based on the 2018 CPI basket; inflation rates after January 2024 are calculated based on the 2023 CPI basket. - Sources cited: Central Bank of Chile, Haver Analytics, U.S. Bureau of Labor Statistics, and IMF staff calculations. ### Public Finances - The fiscal deficit is expected to widen a bit in 2024 mainly due to a weaker-than-expected revenue performance. - Fall in lithium prices translated into lower revenues. - Part of the revenue shortfall is likely to be offset by continued low capital spending execution. - Chile’s gross debt-to-GDP ratio remains relatively low by international standards; the government continues to borrow at favorable rates, while Treasury assets have fallen. - Sources cited: Ministry of Finance, Dipres, Central Bank of Chile, Bloomberg, and IMF staff calculations and projections. - Note: "*2024 IMF staff projections.*" ### Financial Sector (system-wide) - Major banks' capital ratios and liquidity ratios are comfortably above regulatory requirement. - NPL provision coverage ratio is around the pre-pandemic level. - FCIC (COVID-related central bank liquidity program) withdrawal was completed in April and July 2024. - Assets of money market funds have rebounded since 2022, driven by fixed income funds. - Insurers’ solvency ratios have been stable, and asset-to-GDP ratios have almost recovered to pre-pandemic levels. - Since the pension fund withdrawals, the total funds’ asset-to-GDP ratio has been well below its pre-pandemic level. - Sources cited: Banks' disclosures, CMF, CEIC, BCCh, Haver Analytics, Superintendencia de Pensiones, and IMF staff calculations. ### Bank Lending - Credit growth moderated, with a growth rate of 3.7 percent in November 2024. - Commercial and consumer loan rates continued to fall while housing loan rates remained broadly unchanged. - The credit gap is estimated to have turned negative. - Banks’ commercial lending standards tightened when the macroeconomic environment weakened; demand for bank commercial loans was weak for several years. - Real estate and construction firms continue to face tight lending standards and weak loan demand. - Sources cited: BCCh, CMF, CEIC, Haver Analytics, and IMF staff calculations. ### Financial Markets - Equity indices rose to historical levels in 2024 despite fluctuations. - Long-term rates remain elevated compared to pre-pandemic levels; the sovereign spread has stayed low. - Short-term peso funding costs declined following monetary policy rate cuts; long-term costs largely unchanged. - Dollar funding premium has continued to decline. - In 2024, the USD/CLP exchange rate fluctuated between 900 and 1,000. - Equity and bond funds experienced capital outflows since 2023. - Sources cited: BCCh, CEIC, EPFR Global, JP Morgan, S&P Global, and IMF staff calculations. ### Real Estate Sector - Banks have significant exposures to the residential real estate sector; life insurers have substantial exposures to both residential and commercial real estate. - With declining sales (demand) and increasing supply, house prices have remained stagnant. - Recent decline in house prices and investment appears to align with past shocks on mortgage rates. - Office vacancy rates surged during the pandemic; rates remain high but appear to have stabilized. - Bank loans, particularly to SMEs and housing, are mostly collateralized with real estate properties. - Sources cited: ACAFI, Banco de Chile’s IR, BCCh, CBRE, CEIC, Colliers, Chilean Construction Chamber, CMF, GPS, Haver, Internal Revenue Service, and IMF staff calculations. ### Changes in Local Financial Markets - On a stock basis, banks rely less on pension funds and MMFs and more on retail deposits. - Non-financial firms rely less on banks, insurers, and pension funds, and more on foreign investors. - The government relies less on pension funds and more on banks and foreign investors. - Since the pension withdrawals, the presence of pension funds in the forex derivative market declined. - Chilean financial markets appear more sensitive to external stress than prior to the Covid-19 pandemic; non-financial firms and the government relied more on offshore markets for debt issuances during the pandemic. - Sources cited: CEIC, BCCh, JP Morgan, S&P Global, OFR, and IMF staff calculations. ### Key Statistics: Selected Social and Economic Indicators (Table 1 highlights) - GDP (2023), in trillions of pesos: 282 - GDP (2023), in billions of U.S. dollars: 336 - GDP (2023), in millions of SDRs: 1,744 - Per capita (2023), U.S. dollars: 16,815 - Population (2023), in millions: 19.96 - Poverty rate (2022): 6.5 - Gini coefficient (2022): 0.448 - Main products and exports: Copper - Key export markets: China, U.S., Euro Area - Literacy rate (2022): 97.2 - Real GDP growth (selected years): 2021: 11.3; 2022: 2.1; 2023: 0.2; 2024: 2.2; 2025: 2.2 - Unemployment rate (annual average): 2021: 8.9; 2022: 7.9; 2023: 8.7; 2024: 8.5; 2025: 8.2 - Change of CPI (end of period): 2021: 7.2; 2022: 12.8; 2023: 3.9; 2024: 4.5; 2025: 3.5 - Central government fiscal balance (percent of GDP): 2023: -2.4; 2024: -2.7; 2025: -1.8 - Central government gross debt (percent of GDP): 2023: 39.4; 2024: 42.7; 2025: 43.7 - Current account (% of GDP): 2023: -3.5; 2024: -2.3; 2025: -2.5 - Gross international reserves (in bn of USD): 2023: 46.4; 2024: 44.4; 2025: 46.1 - Nominal GDP (trillions of pesos) (memorandum): 2023: 282; 2024: 306; 2025: 325 - Sources: Central Bank of Chile, Ministry of Finance, Haver Analytics, and IMF staff calculations and projections. ### Central Government: Summary Operations (Table 2 highlights) - Revenues (percent of GDP): 2023: 26.0; 2024: 22.9; 2025: 22.1; 2026: 23.0 - Taxes (percent of GDP): 2023: 21.0; 2024: 17.6; 2025: 18.0 - Lithium (rental income) included starting 2022; 2023 value (percent of GDP) shown as 0.9 in one row and detailed treatments in notes. - Expenditures (percent of GDP): 2023: 24.9; 2024: 25.3; 2025: 24.8 - Net acquisition of nonfinancial assets / Investment: 2023: 1.8 (percent of GDP) - Net lending/borrowing (central government): 2023: 1.1; 2024: -2.4; 2025: -2.7; 2026: -1.8 - Central government gross debt (percent of GDP): 2023: 37.8; 2024: 39.4; 2025: 42.7 - Structural fiscal balance (percent of GDP): 2023: -1.6; 2024: -3.4; 2025: -3.1 - Fiscal impulse (percent of GDP): 2023: -9.8; 2024: 2.0; 2025: -0.4 - Sources: Ministry of Finance and IMF staff calculations and projections. ### Balance of Payments (Table 3 highlights) - Current Account (US$ billions): 2023: -11.9; 2024: -7.6; 2025: -8.4; 2026: -9.0 - Trade balance (US$ billions): 2023: 15.3; 2024: 22.1; 2025: 21.8 - Exports (US$ billions): 2023: 94.6; 2024: 100.2; 2025: 104.2 - Copper exports (US$ billions): 2023: 43.3; 2024: 51.4; 2025: 52.4 - Imports (US$ billions): 2023: 79.2; 2024: 78.0; 2025: 82.4 - Net income (US$ billions): 2023: -17.0; 2024: -20.2; 2025: -20.3 - Financial Account balance (US$ billions): 2023: -17.1; 2024: -5.3; 2025: -8.4 - Foreign direct investment in Chile (US$ billions): 2023: 21.7; 2024: 16.7; 2025: 18.2 - Change in Reserves Assets (US$ billions): 2023: 6.8; 2024: -2.3; 2025: 0.0 (proj.) - Gross international reserves (US$ billions): 2023: 46.4; 2024: 44.4; 2025: 46.1 - Copper price (WEO; U.S. cents per pound): 2023: 385; 2024: 415; 2025: 418 - Sources: Central Bank of Chile, Haver Analytics, and IMF staff calculations and projections. ### Monetary Survey (Table 4 highlights) - Central Bank international reserves (billions of pesos): 2023: 41,003 - Monetary liabilities (billions of pesos): 2023: 57,641 - Monetary base (billions of pesos): 2023: 16,791 - Banking system: Money and private quasi-money (billions of pesos): 2023: 229,230 - Banking system's credit to the private sector (annual percent change): 2023: 3.3 - Sources: Central Bank of Chile, Haver, and IMF staff calculations. ### Medium-Term Macroeconomic Framework (Table 5 highlights) - Real GDP growth (percent): 2023: 0.2; 2024: 2.2; 2025: 2.2; 2026: 2.3 - GDP deflator (percent): 2023: 7.9; 2024: 6.6; 2025: 6.0; 2026: 4.1 - Change of CPI, end of period (percent): 2023: 12.8; 2024: 3.9; 2025: 4.5; 2026: 3.5 - Output gap (percent of potential GDP): 2023: 0.0; 2024: -0.1; 2025: -0.1; 2026: 0.0 - Current account (percent of GDP): 2023: -3.5; 2024: -2.3; 2025: -2.5 - Gross int. reserves (in billions of U.S. dollars): 2023: 46.4; 2024: 44.4; 2025: 46.1 - Central government gross debt (percent of GDP): 2023: 37.8; 2024: 39.4; 2025: 42.7 - Sources: Central Bank of Chile, Ministry of Finance, National Statistics Institute, Haver Analytics, and IMF staff projections. ### Financial Soundness Indicators (Table 6 highlights) - Total assets (billions of Chilean pesos): 2023: 399,046 - Total loans (billions of Chilean pesos): 2023: 258,101 - Regulatory capital to risk-weighted assets (percent): 2023: 15.6; 2024/ (as of June 2024): 16.2 - Provisions to NPLs (percent): 2023: 146.0; 2024/ (June 2024): 120.4 - NPLs to gross loans (percent): 2023: 2.1; 2024/: 2.3 - Return on assets (after tax) (percent): 2023: 1.4 - Liquid assets to total assets (percent): 2023: 16.1; 2024/: 13.4 - FX loans to total loans (percent): 2023: 18.7; 2024/: 20.3 - Real loan growth (yoy): total (as of November 2024): 0.0 - Real estate indicators: general residential property price index (2008=100) 2023: 210; 2024/: 209 - Private sector debt indicators: Household debt to GDP (percent): 2023: 49.0 - Pension fund assets to GDP (percent): 2023: 65.4; 2024/: 59.2 - Sources: IMF Financial Soundness Indicators (for memorandum items, Central Bank of Chile), and IMF staff calculations. ### Indicators of External Vulnerabilities (Table 7 highlights) - M3 (percent change): 2023: 6.4 - Private sector credit to GDP (percent): 2023: 79.8 - Share of foreign currency deposits in total deposits (percent): 2023: 16.5 - Current account balance (percent of GDP): 2023: -3.5 - Financial account less reserves accumulation (percent of GDP): 2023: -5.1 - Gross official reserves (US$ billions): 2023: 46.4 - Gross official reserves (percent of ARA metric): 2023: 84.5 - Government liquid FX assets (US$ billions): 2023: 6.6 - Total external debt (percent of GDP): 2023: 71.1 - External amortization payments to exports of goods and services (percent): 2023: 56.9 - Sovereign long-term foreign currency debt ratings (end of period): Moody's: A2; S&P: A; Fitch: A- - Sources: Central Bank of Chile, Haver Analytics, WEO, and IMF staff calculations. *Sources: Central Bank of Chile, Ministry of Finance, INE, DIPRES, CMF, Haver Analytics, Bloomberg, EPFR Global, JP Morgan, S&P Global, Superintendencia de Pensiones, and IMF staff calculations and projections.* ### Annex I. Recommendations of the 2023 Article IV Consultation ### Annex I. Recommendations of the 2023 Article IV Consultation and Authorities’ Actions ### Monetary Policy - Fund recommendation: The pace of further monetary easing should continue to be data-dependent. - Policy action: - In line with declining inflation in 2023, the BCCh lowered its policy rate from 11.25 percent in July 2023 to 5.0 percent in December 2024. - Fund recommendation: The exchange rate should continue to play its role as a shock absorber. - Policy action: - Chile has maintained the floating exchange rate regime. - Fund recommendation: Resume the accumulation of international reserves to strengthen external buffers when market conditions are conducive. - Policy action: - The BCCh reiterated its commitment to resume reserve accumulation when market conditions are conducive but has yet to announce a new strategy following the suspension of the reserve accumulation program in October 2023. ### Fiscal Policy - Fund recommendation: Continue with the multi-year fiscal consolidation with a somewhat more frontloaded deficit reduction that could facilitate meeting the government’s medium-term fiscal target. - Policy action: - In the context of revenue underperformance, the authorities committed to fiscal restraint by cutting spending in 2024 (compared to the budget) and adjusting spending plans in 2025. - The government remains committed to reaching the medium-term objective of a broadly balanced fiscal position by 2027. - The structural primary non-mining balance is projected to narrow somewhat in 2024. - Fund recommendation: Permanent spending measures should be conditioned on structural revenue performance to preserve fiscal sustainability. - Policy action: - The authorities remain committed to fiscal sustainability and condition new spending on revenue performance. - Fund recommendation: Refine the already strong fiscal framework to enhance the resilience of fiscal policy. - Policy action: - Congress legislated enhancements to the Fiscal Responsibility Law, including the introduction of multi-year structural fiscal targets, a debt anchor, an escape clause, and new monitoring requirements. - The law also revised the withdrawal rules of the Pension Reserve Fund aiming to establish greater predictability. ### Structural Reforms - Fund recommendation: Raising pension contribution rates remains critical to ensure adequate self-financed pensions and the sustainability of the pension system. - Policy action: - The authorities’ proposed pension reform, which envisages an increase in pension contributions and adjustments to the pension system’s industrial organization, is being discussed by Congress. - Fund recommendation: Streamline the investment permit process. - Policy action: - Two bills were submitted to Congress to streamline the sectoral permit applications and modernize the environmental evaluation process. - Fund recommendation: Develop renewable energy and lithium industries in the context of clear and balanced institutional frameworks to benefit from the global green transition. - Policy action: - The government made progress in clarifying the elements of the National Lithium Strategy, including the strategic and non-strategic salt flats. - The PPP agreement of an existing lithium extraction operation was concluded, paving the way for PPPs in other lithium mining sites. - The government completed the “expression of interest” process for private investment in 26 salt flats. ### Financial Sector - Fund recommendation: Continue to closely monitor financial system risks, banks’ implementation of Basel III requirements and their preparation for the unwinding of pandemic liquidity measures. - Policy action: - The authorities have continued to closely monitor financial sector vulnerabilities, with a heightened focus on risks from the real estate sector. - The unwinding of the pandemic liquidity facility was completed smoothly in July 2024. - Fund recommendation: Calibrate the neutral level of the countercyclical capital buffer swiftly to provide banks with planning certainty. - Policy action: - The BCCh updated the CCyB framework. It set the neutral level at 1 percent of risk-weighted assets to be implemented gradually and state-contingent. - Fund recommendation: Continue with the implementation of key 2021 FSAP recommendations as well as keeping pace with financial regulation and supervision related to the digitalization of the financial sector to enhance resilience. - Policy action: - The Basel III framework has been deployed. - The authorities are implementing the Financial Market Resilience Law and the Fintech Law. - Work on a bill for an industry-funded deposit insurance and a new bank resolution framework is ongoing. ### Risk Assessment Matrix — Key Risks, Likelihood, Impact, and Policy Advice - External Risks - Commodity price volatility - Likelihood: HIGH - Impact: HIGH - Impact on Chile: Chile would benefit from higher copper and lithium prices but would be negatively impacted by higher oil prices. - Policy advice: Allow the exchange rate to play its role as a shock absorber. In response to negative shocks, provide targeted fiscal support to vulnerable groups. In the event of positive shocks, save stronger-than-projected fiscal revenues. - Monetary policy calibration - Likelihood: MEDIUM - Impact: MEDIUM - Impact on Chile: If major central banks' monetary policy stances are too tight or stay tighter longer than warranted, Chile could experience capital outflows, exchange rate fluctuations, and higher financing costs. - Policy advice: Closely monitor emerging vulnerabilities and early signs of stress. Continue to strengthen the legal and regulatory framework and operational capacity to increase the resilience of the financial system. Resume FX reserve accumulation when market conditions are conducive. - Climate change - Likelihood: MEDIUM - Impact: MEDIUM - Impact on Chile: Chile is highly exposed to climate risks such as floods, storms, and wildfires; global green transition may increase demand for copper, lithium, and renewable energy. - Policy advice: Continue adaptation and mitigation measures. Continue to build fiscal buffers to cope with spending needs related to sudden climate shocks. - Deepening geoeconomic fragmentation - Likelihood: HIGH - Impact: MEDIUM - Impact on Chile: Depending on scenarios, export prices of copper and lithium could be lower if fragmentation deepens. - Policy advice: Continue progress on reducing trade and investment barriers. Diversify trade markets and supply chains. Advance structural reforms to boost productivity growth. - Domestic Risks - Political polarization and fragmentation - Likelihood: HIGH - Impact: MEDIUM - Impact on Chile: Could lead to continued reform gridlock. - Policy advice: Continue dialogue and explore reforms built on broad-based support with a pragmatic approach. - Social discontent - Likelihood: LOW - Impact: MEDIUM - Impact on Chile: Social unrest could negatively affect business confidence and investment, dampening potential growth. - Policy advice: Advance reforms to tackle social needs, anchored on broad political support. Continue policies to achieve the inflation target and maintain fiscal sustainability, while providing support to the most vulnerable. ### External Sector Assessment — Overall Findings and Indicators - Overall assessment: The estimated external position of Chile in 2024 was moderately weaker than the level implied by fundamentals and desirable policies. The current account (CA) deficit continued to narrow in 2024 driven by continued weak growth in imports and improved terms of trade. The net international investment position improved further in 2024. - Potential policy responses: - Macroeconomic imbalances built during the pandemic have been largely resolved, supported by very strong policies. - Authorities responded appropriately to inflation developments, committed to rebuild international reserve buffers, and remain committed to achieving a broadly balanced structural fiscal position over the medium term and raise national savings, including through the planned pension reform. - These policies, alongside exchange rate flexibility, are projected to support external rebalancing over the medium term. - Foreign assets and liabilities — position and trajectory - Background: - After rebounding to -16.4 percent of GDP at end-2024Q1 (from -20 percent at end-2022) Chile’s net international investment position (NIIP) decreased in 2024, registering -19.9 percent of GDP at end 2024Q3. - Improvement in the NIIP until 2024Q1 reflects strong international stock markets performance and depreciation of the peso versus the U.S. dollar; an increase in FDI inflows led to a decrease of the NIIP over the remainder of 2024. - From a sectoral perspective, the NIIP of pension funds increased by 6.3 percent of GDP relative to its low point in 2022Q4, offset by a decrease in the NIIP of the public, non-financial corporations (NFCs), and household sectors. - External debt stood at 78.7 percent of GDP as of 2024Q3, of which 33.3 percent of GDP was owed by NFCs, 17.5 percent of GDP was in the form of FDI, and 15.8 percent of GDP was owed by the general government. - Assessment: - Chile has large gross external liabilities, but these are largely offset by gross foreign assets. - Most sectors (consolidated public sector, pension funds, and other non-bank financial institutions) have positive net positions. - Banks and NFCs have negative net positions of 11 and 45.4 percent of GDP, respectively; over two thirds of NFCs’ liabilities are FDI. - FDI represented 54.8 percent of gross liabilities as of 2024Q3. - Regulatory limits cap banks’ short FX positions due in thirty days relative to long positions by banks’ capital. - Conclusion: External vulnerabilities due to the negative NIIP remain limited. - Key 2024 (Q3) indicators (% GDP): - NIIP: -19.9 - Gross Assets: 147.3 - Reserve Assets: 14.1 - Gross Liab.: 167.2 - Debt Liab.: 78.7 - Current account - Background: - After a sharp decline in 2023 to 3.5 percent of GDP (after 8.7 percent of GDP in 2022), due to improved terms of trade and a broad-based decline in imports, the CA deficit continued to narrow in 2024. - The four-quarter moving average CA deficit stood at 2.7 percent of GDP in 2024Q3 and is projected to narrow to 2.3 percent of GDP at the end of the year, driven by continued weak growth in imports and improved terms of trade. - The CA improvement in 2024 has been driven by an improvement of the private sector balance, while the public sector balance remained broadly constant. - Over the medium term, IMF staff projects that the CA deficit will converge to about 3 percent of GDP, supported by the ongoing structural fiscal consolidation and the flexible exchange rate. - Assessment: - The EBA model estimates a CA norm of -0.4 percent of GDP, compared to a cyclically adjusted CA of -3.3 percent of GDP. - IMF staff estimates CA adjustments of 1.7 percent of GDP to account for measurement biases due to inflation and portfolio equity retained earnings. - The resulting adjusted EBA model CA gap is -1.2 percent of GDP. - On this basis, Chile’s 2024 external position was moderately weaker than the level implied by medium-term fundamentals and desirable policy settings. - Key 2024 indicators (% of GDP): - Actual CA (E): - 2.3 - Cycl.-Adj. CA (E): - 3.3 - EBA CA Norm: - 0.4 - EBA CA gap: - 2.9 - Adjustors: 1.7 - Adj. CA gap: - 1.2 - Real exchange rate (REER) - Background: - Following appreciation over 2022Q4–2023Q2, the REER depreciated in 2023Q3 until 2024Q1, sharply appreciated during 2024Q2 when international copper prices rallied, but as of November 2024 it remains weaker than its long-term (2019–23) average. - Depreciation driven primarily by weakening of the peso amid narrowing interest differential with the U.S. and uncertainty for key trading partners, including China, and copper prices. - Assessment: - EBA REER index and level models suggest REER undervaluation of 18.8 and 27.3 percent, respectively. - EBA CA model implies an overvaluation of 6.4 percent (applying an estimated elasticity of 0.25). - Considering recent REER depreciation and model uncertainties, staff estimates the REER gap is more likely positive than not and between -4 and +6 percent. - Capital and financial accounts - Background: - FDI accounted for the bulk of net inflows to Chile in 2023 (around 4.6 percent of GDP) and in the first three quarters of 2024 (4.9 percent of GDP). - In 2024, Chile experienced net portfolio outflows (around 1.1 percent of GDP), primarily driven by pension funds purchases of foreign portfolio assets. - Assessment: - Chile has demonstrated ample capacity to absorb short-term capital flow volatility. - Mitigating factors include usable liquid FX assets by the government. - FX intervention and reserves level - Background: - The peso is floating; FX interventions have been limited to preventing disorderly market conditions. - In April 2023, the BCCh began to gradually unwind FX forward operations from the 2022 intervention program (with a daily reduction of US$50 million intended over ten months), and in June to rebuild buffers through a reserve accumulation program (with daily purchases of US$40 million intended over twelve months) targeted to lift reserves by US$10 billion to about 14 percent of GDP by 2024 (approximately 80 percent of the ARA metric). - Both programs were suspended on October 26, 2023. - The BCCh communicated its intention to resume reserve accumulation when market conditions are conducive. - At the end of December 2024, gross international reserves stood at US$44.4 billion. - Assessment: - Gross international reserves amounted to 83.7 percent of the IMF’s reserve adequacy metric (ARA) on average over 2020–23 and 79.0 percent in December 2024, below the recommended range of 100-150 percent. - Staff assesses reserves to be adequate due to mitigating factors: - The government has usable liquid FX assets (US$4.5 billion as of end-November), even though they decreased by 30 percent since 2023, including US$3.7 billion in the economic and social stabilization fund, and US$0.9 billion cash (equivalent to an improvement in reserve coverage of up to 8.1 percentage points). - Around a quarter of short-term debt represents intercompany loans for foreign direct investors to local firms (US$13.8 billion as of 2024Q3); these loans are a very stable source of funding. - Close to 80 percent of banks’ short-term external debt (US$17.7 billion at end-2024Q3) is covered by banks’ liquid foreign assets (US$13.9 billion at end-2024Q3). - Reserves are complemented with two FX liquidity lines totaling US$8.05 billion: a credit line with FLAR (US$1.25 billion) and a bilateral 5-year, renewable period swap facility with the PBOC (US$6.8 billion) without restrictions on the use of the RMBs. - The BCCh is also a subscriber of the Fed’s FIMA repo facility, which allows for the temporary exchange of U.S. Treasury securities held with the Fed for U.S. dollars (US$26 billion). - The authorities remain strongly committed to a flexible exchange rate. ### Sovereign Risk and Public Debt Sustainability — Key Conclusions - Overall assessment from DSA and sovereign stress analysis: - The risk of sovereign stress is assessed as low. - The projected debt path is expected to stabilize and GFNs will remain at manageable levels. Therefore, debt is assessed as sustainable with high probability. - Medium-term risks are assessed as low, reflecting the strength of the fiscal framework in guiding fiscal policy and rebuilding buffers. - DSA summary assessment: - Public sector debt is assessed to be sustainable under a wide range of plausible shock scenarios and with high probability, with low medium-term sovereign and financing risks. - Medium-term structural fiscal consolidation plans, guided by the structural fiscal balance rule and the prudent debt ceiling, are fully consistent with fiscal sustainability. - Under the baseline, debt stabilizes below 45 percent of GDP, reflecting a primary balance broadly in line with the debt-stabilizing one under the government's medium-term fiscal commitment. - Aging-related expenditure linked to health and pension are expected to be largely paired to higher revenues, with costs related to solidarity pensions potentially doubling by 2050. - Copper production and revenues are not expected to fall dramatically over the next decades compared to its 2023 level, which was low by historical standards. *Source: Annex I. Recommendations of the 2023 Article IV Consultation and accompanying annexes as provided in the supplied IMF content.* ### 1. Debt coverage in the DSA: 1/CGGGNFPSCPSOther ### 1. Debt coverage in the DSA: 1/CGGGNFPSCPSOther ### Debt Coverage and Subsectors Included - 1a. If central government, are non-central government entities insignificant? Yes - Subsectors captured in the baseline (Inclusion): - 1 Budgetary central government: Yes - 2 Extra budgetary funds (EBFs): No - 3 Social security funds (SSFs): No - 4 State governments: No - 5 Local governments: No - 6 Public nonfinancial corporations: No - 7 Central bank: No - 8 Other public financial corporations: No ### Instrument Coverage, Accounting, and Consolidation Notes - Debt issuance: Debt issuance not allowed (listed twice). - Commentary: The authorities continually manage state-contingent debts, which are clearly detailed in a published annual report. The provision of credit guarantees (FOGAPE and CAE) is only expected to result in modest fiscal costs in the medium term. - Reporting conventions and notes: - 1/ CG=Central government; GG=General government; NFPS=Nonfinancial public sector; PS=Public sector. - 2/ Stock of arrears could be used as a proxy in the absence of accrual data on other accounts payable. - 3/ Insurance, Pension, and Standardized Guarantee Schemes, typically including government employee pension liabilities. - 4/ Includes accrual recording, commitment basis, due for payment, etc. - 5/ Nominal value definition described. - 6/ Face value definition described. - 7/ Market value definition described. - Reporting on Intra-Government Debt Holdings: Not applicable (basis of recording / valuation of debt stock shown as Not applicable). ### Public Debt Structure (Central Government perimeter) - Commentary: Chile has a well-diversified investor base with a large presence of domestic creditors. The share of foreign currency debt increased in 2021 due to the pension withdrawals but is still relatively small and expected to return to historical levels. The residual maturity of debt is above 10 years, and most of its debt is traded on secondary markets. - Residual maturity: 11.4 years - Debt composition indicators (not exhaustive lists, figures presented as charts in source): - Debt by Currency (Percent of GDP): series shown for 2014–2032 split into Foreign currency, Local currency, Local-linked (projection series included). - Public Debt by Holder (Percent of GDP): series shown for 2014–2022 with categories including External private creditors, External official creditors, Domestic other creditors, Domestic commercial banks. - Public Debt by Governing Law, 2023 (percent): Domestic law, Foreign law ex. multilateral, Multilateral. - Debt by Instruments (Percent of GDP): Marketable debt vs Nonmarketable debt (series 2019–2032). - Public Debt by Maturity (Percent of GDP): ≤ 1 year, 1-5 years, > 5 years (series 2019–2029). ### Baseline Scenario (Table 4) — Key Projections and Contributions - Public debt (In percent of GDP), Actual 2023 and Projections: - 2023: 39.44 - 2024: 42.74 - 2025: 43.74 - 2026: 44.14 - 2027: 43.54 - 2028: 43.54 - 2029: 43.64 - 2030: 43.74 - 2031: 43.84 - 2032: 43.94 - 2033: 43.9 - Change in public debt: - 2023: 1.6 - 2024: 3.3 - 2025: 1.0 - 2026: 0.4 - 2027: -0.6 - 2028: -0.1 - 2029: 0.1 - 2030: 0.1 - 2031: 0.1 - 2032: 0.1 - 2033: 0.1 - Contribution of identified flows (percent of GDP): - Total identified flows (selected): -1.1 (2023), 1.8 (2024), 1.2 (2025), 0.0 (2026), -1.0 (2027), -0.5 (2028), -0.3 (2029), -0.4 (2030), -0.2 (2031), -0.2 (2032), -0.2 (2033) - Primary deficit: - 2023: 2.0 - 2024: 2.0 - 2025: 1.1 - 2026: 0.0 - 2027: -0.5 - 2028: -0.5 - 2029: -0.5 - 2030: -0.5 - 2031: -0.6 - 2032: -0.6 - 2033: -0.5 - Automatic debt dynamics: - 2023: -1.9 - 2024: -1.4 - 2025: -1.1 - 2026: -0.9 - 2027: -0.7 - 2028: -0.7 - 2029: -0.7 - 2030: -0.8 - 2031: -0.8 - 2032: -0.8 - 2033: -0.8 - Other identified flows: - 2023: -1.2 - 2024: 1.2 - 2025: 1.3 - 2026: 0.8 - 2027: 0.2 - 2028: 0.7 - 2029: 0.9 - 2030: 0.9 - 2031: 1.2 - 2032: 1.2 - 2033: 1.2 - Contingent liabilities: 0.0 for 2023–2033 - (minus) Interest Revenues: -0.7 (2023), -0.5 (2024), -0.4 (2025 onward at -0.4) - Other transactions 1/: -0.6 (2023), 1.7 (2024), 1.7 (2025), 1.2 (2026), 0.6 (2027), 1.1 (2028), 1.3 (2029), 1.3 (2030), 1.6 (2031), 1.6 (2032), 1.6 (2033) - Contribution of residual: - 2023: 2.7 - 2024: 1.4 - 2025: -0.2 - 2026: 0.5 - 2027: 0.5 - 2028: 0.4 - 2029: 0.4 - 2030: 0.4 - 2031: 0.3 - 2032: 0.3 - 2033: 0.3 - Gross financing needs and composition: - Gross financing needs (GFN): 7.2 (2023), 4.0 (2024), 5.7 (2025), 5.7 (2026), 2.7 (2027), 3.8 (2028), 2.3 (2029), 4.3 (2030), 2.4 (2031), 1.5 (2032), 3.7 (2033) - of which: debt service: 5.9 (2023), 2.5 (2024), 5.0 (2025), 6.1 (2026), 3.6 (2027), 4.7 (2028), 3.2 (2029), 5.2 (2030), 3.3 (2031), 2.5 (2032), 4.6 (2033) - Local currency financing needs: 4.8 (2023), 1.6 (2024), 2.8 (2025), 2.1 (2026), 1.5 (2027), 2.1 (2028), 1.5 (2029), 2.3 (2030), 1.5 (2031), 1.3 (2032), 2.1 (2033) - Foreign currency financing needs: 0.8 (2023), 0.6 (2024), 1.2 (2025), 1.0 (2026), 1.3 (2027), 1.1 (2028), 1.1 (2029), 0.9 (2030), 1.4 (2031), 0.8 (2032), 1.0 (2033) - Memo indicators: - Real GDP growth (percent): 0.2 (2023), 2.2 (2024), 2.2 (2025), 2.3 (2026), 2.3 (2027), 2.3 (2028), 2.3 (2029), 2.2 (2030), 2.3 (2031), 2.3 (2032) - Inflation (GDP deflator; percent): 6.6 (2023), 6.0 (2024), 4.1 (2025), 2.9 (2026), 2.7 (2027), 2.8 (2028), 2.9 (2029), 2.9 (2030), 3.0 (2031), 3.0 (2032), 3.0 (2033) - Nominal GDP growth (percent): 6.8 (2023), 8.4 (2024), 6.4 (2025), 5.3 (2026), 5.1 (2027), 5.1 (2028), 5.2 (2029), 5.2 (2030), 5.4 (2031), 5.4 (2032) - Effective interest rate (percent): 3.0 (2023), 3.3 (2024), 2.7 (2025), 2.9 (2026), 3.1 (2027), 3.1 (2028), 3.2 (2029), 3.0 (2030), 3.2 (2031), 3.2 (2032), 3.1 (2033) - Commentary: Public debt is expected to stabilize below 45 percent of GDP under the assumption that the government adheres to its medium-term target of a broadly balanced fiscal position. ### Realism of Baseline Assumptions (Table 5) — Findings - Commentary: The realism analysis does not point to major concerns, and the forecast track record does not reveal any systematic bias. The projected fiscal consolidation is reasonable, when considering Chile’s history and other country experiences. - Residual contribution source: The residual contribution to the projected debt ratio comes from "other flows," including below-the-line operations like SOE recapitalization and payments on government-guaranteed student loans. - Comparative notes and methods: - Comparator group: Emerging markets, Commodity Exporter, Program (projections made in October and April WEO vintage). - Laubach (2009) rule referenced: bond spreads increase by about 4 bps in response to a 1 ppt increase in the projected debt-to-GDP ratio. - Selected percentile metrics (chart-based in source): 3-year debt reduction percentiles, 3-year adjustment in cyclically-adjusted primary balance percentiles, baseline real growth and potential growth comparisons. (Color code and percentile buckets used to assess realism.) ### Medium-Term Risk Analysis (Table 6) — Indices and Risk Signals - Debt fanchart module: - Fanchart width: 33.7 0.5 (percent of GDP) - Probability of debt non-stabilization (percent): 19.3 0.2 - Terminal debt-to-GDP x: 17.1 0.4 - Debt fanchart index (DFI): 1.0 - Risk signal: 3/Low - Gross financing needs (GFN) module: - Average baseline GFN (percent of GDP): 4.0 1.4 - Initial Banks' claims on the gen. govt (pct bank assets): 6.6 2.1 - Change in banks' claims in stress (pct banks' assets): 2.0 0.7 - GFN financeability index (GFI): 4.2 - Risk signal: 4/Low - Medium-term index: Final assessment: Prob. of missed crisis, 2024-2029, if stress not predicted: 0.0 pct. Prob. of false alarms, 2024-2029, if stress predicted: 68.2 pct. - Commentary: The debt fanchart and gross financing needs modules point to a low level of risk, underpinned by the government's commitment of keeping debt below a prudent ceiling of 45 percent of GDP, moderate gross financing needs, and the ability of the banking sector to act as a residual creditor under a stress scenario. The medium-term risk analysis also points to a low level of risk under a stress scenario of a natural disaster shock in the magnitude of 4.5 percent of GDP and a commodity price shock. Under broadly unchanged fiscal policies, i.e. an overall deficit of 2 percent of GDP, the debt-to-GDP ratio is projected to exceed 45 percent in 2026. - Risk signal thresholds (notes): - DFI low risk if below 1.13; high risk if above 2.08. - GFI low risk if below 7.6; high risk if above 17.9. - Medium-term index low/high thresholds referenced. ### Long-Term Risk Analysis (Tables 7–9) — Major Scenarios and Findings - Overall long-run risk indicator: Low (long-run amortization module does not trigger an overall risk indication). - Baseline long-term projection outcomes: - Under the baseline, debt stabilizes and declines to around 32 percent of GDP in 2050, reflecting a primary balance around the debt-stabilizing one. - If historical 10-year averages are used, debt could rise from around 40 percent to almost 100 percent of GDP by 2050 (simulation reflects historically elevated GFN, including COVID-19 impact). - Triggered long-term modules: Pensions, Health; Long-Term Risk Assessment: Large Amortization (modules shown in source). - Demographics and pensions (Table 8): - Demographic dynamics would increase fiscal costs of solidarity pensions (including mainly the PGU) from about 2 to 4 percent of GDP between 2024 and 2053, under the assumption that solidarity pensions increase in real terms in line with real GDP growth. - If available financing through general taxes for solidarity pensions remains at 2 percent of GDP throughout the forecast period, this would imply an increase in debt to about 70 percent of GDP by 2050 (about 30 pp of GDP higher than in the baseline). - Authorities' projections: solidarity pension fiscal costs to increase to 4.1 percent of GDP in 30 years if pensions are adjusted in real terms in line with real wage growth; to 3.0 percent of GDP if value of solidarity pensions is kept constant in real terms. - Health demographics and excess cost growth (Table 9): - Higher health costs due to demographics and excess cost growth would increase debt to about 65 percent of GDP by 2050. - Natural resources (copper) risk: - Authorities' central scenario: copper production increases on average 1.5 percent annually between 2024-2035 and an annual production of 5 million tonnes is assumed thereafter. - Copper revenues were around 1.3 percent of GDP in 2023. - Assumption: copper prices grow in line with US inflation at 2 percent after 2029. - Taking changes in copper revenues into account, debt would be about 60 percent of GDP by 2050, and the GFN-to-GDP ratio would be about 4 percentage points of GDP higher than under the baseline by 2050. ### Annex V — Trends in Female Labor Force Participation (summary) - Key motivation: Raising labor force participation, particularly by integrating women into the labor force, is crucial to mitigate negative demographic effects on economic dynamism. - Main findings: - Demographic factors explain most of labor growth between 2000 and 2019; population growth was the largest contributor, followed by an increase in the share of the working-age population. In Chile, increased labor force participation was also a significant contributor. - Female participation rose substantially: male participation remained roughly at 75 percent between 2000 and 2019, while female participation increased by 15 percentage points to 53 percent in 2019 and was back to that level by the end of 2023. - Post-pandemic (end-2019 to 2023) dynamics: overall participation decreased then recovered from pandemic disruptions; participation rates surpassed end-2019 levels only among prime working-age (25-54) women. - Decomposition snapshots (In percentage points; chart data summarized in source): - 2013-19 changes by age and gender (examples): - Total: Female 3.1, Male -0.4, Total 1.4 - Age 25-54: Female 4.4, Male -0.8, Total 1.9 - Age 55-64: Female 6.0, Male 1.2, Total 3.8 - 2019-23 changes by age and gender (examples): - Total: Female -0.7, Male -2.4, Total -1.6 - Age 15-24: Female -3.1, Male -2.0, Total -2.6 - Age 25-54: Female 1.7, Male -1.3, Total 0.2 - Age 55-64: Female -2.4, Male -4.6, Total -3.4 - Sources: ILOSTAT and IMF staff calculations. *Source: IMF staff estimates and projections as presented in the chapter "1. Debt coverage in the DSA: 1/CGGGNFPSCPSOther" from the provided PDF content.* ### 3. Despite significant gains made over ### 3. Despite significant gains made over ### Gender disparities in participation rates - In 2023, female labor force participation in Chile was 53 percent and the participation gender gap was around 20 percentage points, almost half as small as it was in 2000 (lower text chart). - The reduction in the participation gap was the largest in the region and is now in line with averages in emerging market and developing economies from other regions. - The participation gap in Chile remains larger than in some neighboring countries and twice as large as the average gap across advanced economies. ### Youth inactivity, NEETs, and early emergence of gender gaps - In 2023, 17 percent of the youth (between ages 15 and 24) were neither employed, nor enrolled in education or training (the so-called NEETs). - Although a high portion of the youngest remains in school, for those 18 and older inactivity and unemployment are an important concern. - Inactivity rates increase substantially at age 18, and they decrease with age for young men but not for women—resulting in participation gender gaps that start showing and increasing from an early age. - Unemployment rates for those 15-24 are around 3 times as large as the unemployment rate of adults 25 and older, and among the young rates are higher among women (although differences across genders have decreased over time). ### Informality and job flexibility - The share of women with informal jobs has been systematically higher than that of men, and the difference has increased over the last two years. - Job flexibility is an important feature for parents, especially for mothers, and is closely associated with informality—mothers are more likely to take informal jobs as they tend to allow for more flexible hours (Berniell and others 2021; Berniell and others 2023). - Informal jobs imply fewer benefits such as parental leave or childcare. ### Policy levers to increase female participation - Improving the availability and affordability of childcare and allowing for more flexible work arrangements that can adapt to family needs may reduce constraints for some women. - The main obstacle cited by many inactive women impeding them to join the labor force is family responsibilities (IMF 2024), with tending to children playing a crucial role. - Chile has reduced the gender participation gap by 15 percentage points since 2000, the largest decrease among the LA8 countries in the sample. - Further integrating women into the labor force is key for the labor force to keep supporting economic growth going forward. ### Annex VI. Pension Reform: Key Elements of the Latest Proposal and Potential Fiscal Implications — Objectives and main pillar - Key objective: increase contribution density and replacement rates by adding a 6-percentage points employer contribution and improving coverage for self-employed and unemployed workers. - Rationale: elevate pensions to appropriate levels and contain long-term fiscal costs of the minimum guaranteed pension (PGU). - Central proposed reform pillar: a 6-percentage points contribution rate increase (employer funded). Combined with the existing 10 percent employee-funded rate, this would bring Chile’s contribution rate closer to the OECD average of 18.2 percent. - In the government’s latest proposal, the additional 6 percentage points would be divided into 3 percentage points for individual accounts and 3 percentage points for the Social Insurance Fund (SIF). - Notable earmarks: 1 percentage point of the employer contribution would be earmarked for closing the gender life expectancy gap; 2 percentage points would fund current pensions and be a reimbursable contribution with interest, returned to individuals after retirement over 20 years. - The increase in the contribution rate is estimated to boost the total replacement rate by approximately 10 percentage points, raising it above 70 percent for a median salary earner. ### Distributional and fiscal considerations of the contribution increase - Distribution between individual accounts and SIF remains under debate; contributions to the SIF would imply a transfer from current contributors to current pensioners, either directly by reducing their own pension savings or indirectly through fiscal costs. - Authorities’ simulations: distribution of the higher contribution rate has a significant impact only for current pensioners. - Labor market implications are unclear: authorities estimate formal employment and per capita GDP to rise by 2 and 1.1 percentage points, respectively, in the long term. - Fiscal cost estimate: government estimates fiscal costs could reach 0.8 percent of GDP in the medium term, driven by a reduced tax base (0.3 percent of GDP), increased public pension obligations (0.2 percent of GDP), and additional support to the SIF of 0.3 percent of GDP partly related to interest payments on reimbursable contributions. ### Minimum Guaranteed Pension (PGU): achievements and sustainability issues - PGU introduced in 2022; provides benefits to 90 percent of the population, with 96 percent of recipients receiving the full benefit equivalent to 46 percent of the average wage. - The PGU has reduced poverty by 2 percentage points and boosted replacement rates. - Projection: due to ageing, costs of the PGU are projected to rise from 2 percent of GDP to about 4 percent of GDP in 30 years if pensions are adjusted in real terms in line with real wage growth, and to 3.0 percent of GDP if the value of the solidarity pension is kept constant in real terms, as foreseen by law. - Demographics: the share of the population aged 65 and above is expected to rise from 14.4 percent in 2025 to 25.8 percent in 2050. - Proposal to increase the PGU from CLP 214,000 to CLP 250,000 would immediately add annual fiscal costs of about 0.4-0.5 percent of GDP. - Policy considerations: in addition to linking PGU growth to inflation, consider making the PGU more targeted to the most vulnerable elderly persons and analyze interaction of the PGU with other parts of the pension system (labor market formalization, incentive structures, longevity risk protection). ### Taxable income cap and coverage for self-employed and unemployed - Proposed gradual increase in taxable income cap over five years: from 84.3 UF (about CLP 3.2 million) to 126.6 UF (about CLP 4.8 million). - Government estimates annual fiscal cost of this change at about 0.1 percent of GDP. - Unemployed workers: improvement of the Pension Gap Insurance (Seguro de Lagunas) aims to extend pension contribution coverage to those excluded from the Solidarity Unemployment Fund (FCS); estimated to enhance pension contribution density by 2.9 percent for women and 3.2 percent for men. - FCS financial position: financial assets of US$2.9 billion at end-2023 compared to US$4.3 billion at end-2019 in constant 2024 US$; proposed changes expected to further slow this recovery. - Self-employed workers: proposals to simplify payment through automatic systems for annual declarations and monthly contributions to increase participation and boost pension savings; questions remain about PGU’s potential impact on incentives to contribute. ### Reforms to the organization of the pension system - Proposal to introduce a public auction mechanism that regularly assigns 10 percent of all members to the pension manager with the lowest fee, with an opt-out option. - Potential risks: pension industry warns of liquidity pressures from client transfers, possibly requiring liquidation of investment positions. - Authorities are considering mitigations: temporarily relaxing portfolio composition requirements during transition, strengthening regulation to facilitate transfer of instruments between managers, reinforcing use of custodians, and incorporating transfer clauses in bilateral contracts. ### Annex VII. Counter-Cyclical Capital Buffer (CCyB) in Chile — framework and calibration - CCyB included in BCCh’s macroprudential toolkit since 2022; framework allowed maximum level of 2.5 percent of risk-weighted assets (RWAs). - BCCh activated the CCyB at 0.5 percent RWAs in May 2023, with compliance due by May 2024. - In November 2024, BCCh established a positive neutral level of the CCyB at 1 percent of RWAs. - Calibration used five methodologies including historical maximum losses of banks, stress test results, econometric estimates of tail losses, maximum provision spending, and macro-financial model simulations. - Selected neutral levels internationally: examples include 2.0 (Sweden, the Netherlands, Poland, United Kingdom), 1.5 (Armenia, Ireland, New Zealand), 1.0 (Australia, Chile, Czech Republic, Cyprus, Estonia, Georgia, Hong Kong SAR, Hungary, Latvia, Lithuania, Slovenia, South Africa, Spain), 0.5 (Greece). - Examples of methodology outputs: - Historical maximum losses of banks in periods of financial stress: range 0.2-1.6 percent, average/median 0.9 percent. - Stress test results (moderate stress): 1.0 percent. - Econometric estimates of extreme lower tail: range 0.4-0.6 percent, average/median 0.5 percent. - Maximum bank provision spending: range 1.0-1.2 percent, average/median 1.1 percent. - Macro-financial model simulations on welfare: 1.5 percent. - Implementation timing and state-contingency: - Schedule to be determined once Basel III capital requirements fully completed in December 2025. - May 2026 RPF will assess start and timeframe to move toward the 1 percent neutral CCyB, with a minimum implementation period of one year. - Once built, CCyB expected to remain at neutral level while systemic risk is judged neither subdued nor highly elevated. - Release below neutral would remain long enough for banks to internalize additional slack; after at least one year the Board would assess rebuilding to neutral with at least one year for banks to adjust. - In exceptional significant systemic risk, CCyB could be set above neutral. - Decision-making and communication: RPFs twice a year (with possibility of out-of-schedule RPFs), decisions communicated via statement after each RPF, publication of minutes, and analysis in the Financial Stability Report. ### Annex VIII. Artificial Intelligence exposure: opportunities and labor market implications - AI could enhance productivity and drive economic convergence with advanced economies but entails risks of job displacement and increased labor market polarization. - Chile shows relatively high exposure to AI compared to regional peers, although less than advanced economies; this gap is partially explained by workforce structure and informality levels. - Analysis identifies disparities in AI exposure across income, gender, and education, highlighting uneven distribution of potential AI impacts. - Policy implication: balance AI-driven productivity gains with protections for affected worker groups through targeted interventions. *Source: IMF staff compilation from chapter and annexes of the provided PDF content.* ### 1. Much like information technology (IT) in the latter half of the 20th century, AI ### Much like information technology (IT) in the latter half of the 20th century, AI ### AI adoption and labor market exposure in Chile - Key framing: - AI presents potential for increasing productivity across sectors, with significant adoption opportunities in finance, government, trade, IT, education, healthcare, and real estate. - The degree of AI adoption and utilization will be crucial in determining its impact on economic growth. - Measures and definitions: - Exposure measures the degree to which jobs are susceptible to changes as a result of AI (Felten et al., 2021). - Complementarity refers to the likelihood of jobs benefiting from (high complementarity) or being at risk of replacement (low complementarity) by AI (Pizzineli et al., 2023). - Empirical findings for Chile: - Chile shows relatively high exposure to AI compared to regional peers, although less than advanced economies. - Informality: 25.3 percent of total employment in Chile versus 51.1 percent average for other Latin American countries (from the referenced chart). - In the formal sector, AI exposure is higher than in the informal sector. - About 20 percent of workers are in the high exposure–low complementarity group, putting them at risk of displacement by AI. - Data and methodology notes: - Informality data source: Elgin, C., M.A. Kose, F. Ohnsorge, and S. Yu. 2021. "Understanding Informality", CEPR Discussion Paper 16497. - The 2022 CASEN household survey data for Chile is used to calculate AI exposure and complementarity by matching detailed occupational data with respective AI exposure and complementarity indexes. - High (or low) exposure and complementarity indicate an index level above (or below) the average across all occupations. ### Distributional and demographic impacts - By education: - Workers with less than a primary school education comprise 10 percent of the workforce and fall into a low-exposure group (not very susceptible to AI-driven changes). - Those with postgraduate degrees represent 5 percent of the labor force and hold a disproportionally high share of jobs with both high AI exposure and strong complementarity (well positioned to benefit). - The largest share of workers with high exposure and low complementarity is among those with secondary education and an undergraduate degree (most at risk of displacement). - By gender: - A larger share of women than men may gain certain benefits from AI adoption. - At the same time, the share of women facing an elevated risk of job displacement is also higher than that of men. - By income: - AI exposure and complementarity are particularly high among top earners (income deciles I–X chart), creating risks of job polarization that could widen income inequalities and segment the labor market. - Notes: - Charts and percentage breakdowns referenced are based on CASEN and IMF staff calculations. - Definitions reiterated: AI exposure = ability of AI to perform tasks currently done by humans and increase productivity; AI complementarity = whether AI enhances human labor and increases labor productivity. ### Policy and infrastructure recommendations - Technology and innovation: - Strengthen Chile’s technological infrastructure and foster R&D. - Proposed reforms include easing restrictions on educational institutions and academics to engage in technology ventures and secure intellectual property rights from publicly funded research. - Chile leads Latin America in connectivity but needs to close the digital divide and reach OECD standards for wider access and faster data speeds. - Efforts to establish Chile as a data center hub are outlined under the National Data Center Plan to support advanced AI applications. - Labor market and social protection: - Labor market reforms are essential to harness AI benefits while protecting workers from disruptions. - Address the skills gap through targeted, AI-focused education and training programs to equip the workforce with relevant competencies. - Sufficient unemployment insurance schemes could mitigate AI-driven dislocations and help displaced workers transition to roles aligned with evolving demand. - Regulatory and fiscal neutrality: - Adopt a human-complementary approach to AI to amplify human capabilities (citing Acemoglu, Autor, and Johnson, 2023). - Generally avoid AI taxes that could stifle innovation and productivity. - Reduce policy distortions that favor automation—e.g., unequal tax treatment of human labor versus automated equipment—to balance competition between workers and machines. - Encourage R&D in AI that complements rather than replaces human roles to support job sustainability. - References within the text: Bakker et al. (2024); Brollo et al. (2024); Zaballos et al. (2022); Acemoglu, Autor, and Johnson (2023). ### Annex IX — Anti-Money Laundering and Countering the Financing of Terrorism (AML/CFT) - Strategic context and timelines: - Chile is addressing gaps identified in the latest Financial Action Task Force of Latin America’s (GAFILAT) Mutual Evaluation Report. - Ongoing recommendations from September 2021 include enhancing supervisory capabilities, improving sanctions, and ensuring better access to beneficial ownership data. - The Third Action Plan of the AML/CFT National Strategy was published in January 2024, laying the ground for the work until 2027. - Supervisory scope and gaps: - Progress in supervising the financial sector and some DNFBPs, with the Financial Analysis Unit (UAF) tasked to supervise precious metals and stone traders (PMS) and other non-standard obligated entities. - Critical sectors are not yet included: lawyers, accountants, and corporate service providers—key gatekeepers for client due diligence and suspicious transaction reporting. - The authorities should ensure adequate legal obligations for these gatekeepers and engage the sectors through their regulators to ensure compliance with AML/CFT/CPF requirements. - Concerns about non-standard obligated entities: - Recent additions of obligated reporting entities beyond FATF definitions include vehicle sellers, fishing, hunting and shooting clubs, weapons manufacturers and armorers. - Lack of specific risk studies for these sectors raises questions about effective implementation and resource allocation. - Inclusion of non-standard sectors could overburden supervision and divert resources from more vulnerable sectors. - Resourcing and capacity: - Increase in supervised sectors must be matched by higher resources for the UAF and sectoral supervisors (personnel and other resources). - Political commitment, adequate budget, and technical and human resources are critical to maintain core functions: receipt of suspicious reports, analysis, and dissemination of intelligence reports related to money laundering and terrorism financing. - Reporting quality: - Reporting of suspicious operations from the financial sector has increased due to stronger coordination and supervisory efforts. - Quality of reporting from DNFBPs remains weak and requires further guidance, training, and follow-up. - Beneficial ownership and legal initiatives: - Several initiatives aim to make beneficial ownership information available, accurate, and accessible. - A planned law to create a national, free, and open data format beneficial ownership register to be managed by the Internal Revenue Service (SII) is at the Senate level; the last legislative review session took place in October 2024. - Operationalization of the register will require sustained efforts and resources to verify information and impose dissuasive sanctions for non-compliance. - Another legal initiative aims to create an economic intelligence subsystem to facilitate monitoring and exchange of financial information by the UAF, the Internal Revenue Service, and other public institutions. *Source: CHILE — INTERNATIONAL MONETARY FUND* ### Annex X. Implementation Status of 2021 FSAP ### Annex X. Implementation Status of 2021 FSAP ### A. Bank Solvency and Liquidity - Recommendation 1: Ensure banks transition to Basel III-compliant capital structures and complete announced plans for capital raises in a timely manner. Status: NT - The Basel III solvency requirements have been adopted with full implementation to be completed by 2025. - From March 2021, the capital adequacy ratio considers credit, market, and operational risks with some standards for credit and market risk calculation still under revision for potential inclusion of advanced internal ratings-based (IRB) method, fundamental review of the trading book (FRTB) and market risk internal models. - Capital Conservation buffer, AT1 requirement, and capital discounts (e.g., goodwill, deferred tax assets) are being phased in from December 2021 to December 2025. - Since May 2022, the BCCh has held Financial Policy Meetings twice a year to determine the need to activate the Counter Cyclical Buffer (CCyB). In May 2023, the BCCh activated the CCyB at 0.5 percent of risk-weighted assets (RWA), completed in May 2024. - In November 2023, BCCh announced a review and update of its CCyB framework; in November 2024, BCCh updated the CCyB framework, defining a positive neutral CCyB level of 1 percent of RWA with gradual and state-contingent implementation after full Basel III implementation. - In March 2021, March 2022, March 2023, and March 2024, the CMF identified and defined additional capital charges for systemically important banks (D-SIBs), gradually implemented until December 2025. In February 2024, the CMF lowered threshold scores for determining D-SIBs. - April 2023: banks submitted the third Effective Equity Self-Assessment Report (IAPE) to CMF as part of ICAAP. July 2023: CMF published "Guidelines on Stress Testing in Banking Institutions" for IAPE; January 2024: final version published. October 2024: CMF published proposals to amend regulations about Pillar 2 (e.g., banking book market risks and determination of internal capital target). - April 2023: Pillar 3 information disclosure requirements introduced; February 2024: CMF clarified requirements. - January 2024: CMF imposed additional capital requirements to individual banks under Pillar 2. Banks must constitute 25 percent of additional equity requirements as part of minimum regulatory requirements no later than June 30, 2024. The remaining percentages shall be built up annually as determined by the CMF in accordance with each year’s ICAAP. - Recommendation 2: Improve the collateral valuation and reporting framework. Status: NT - August 2023: CMF published proposal for new reporting framework of foreclosures and liquidation cash flows and complementary instructions for early interventions. - March 2024: CMF issued a standard method for computing loan loss reserves for consumer loans, which came into force in January 2025. With this, a set of standard methodologies for retail, corporate and mortgage loans loan loss reserves is complete. - January 2024: CMF published a new information requirement to capture data on recoveries, expenses, and renegotiations of defaulted loans. First data reports expected in early 2025, containing information as of December 2024. - January 2025: CMF published its proposal for reviewing banks’ collateral valuation regulations, including requirements for collateral accepted as credit risk mitigators, valuation criteria, and collateral management process. - Recommendation 3: Define and communicate clear criteria regarding conditions for the future unwinding of extraordinary liquidity support measures (FCIC and LCL). Status: I - November 2022: BCCh established plan to standardize eligible collateral, replacing pledged credit portfolio with eligible financial instruments in the Central Securities Depository. - April 2023: banks submitted plans for expiration of FCIC/LCL to CMF as first Liquidity Self-Assessment Report (LSAR) of ILAAP. - September 2023: BCCh started offering banks liquidity deposits aimed exclusively at guaranteeing and supporting payment of the FCIC. - April and July 2024: BCCh smoothly unwound the FCIC. - Recommendation 4: Introduce liquidity stress tests for prudential and stability monitoring. Status: NT - April 2023: ILAAP implementation began; banks submitted first LSAR to CMF. - April 2024: private banks submitted second ILAAP, focusing on internal stress testing without CMF scenarios. - Starting in 2025, BCCh liquidity regulation will allow CMF to impose additional High Quality Liquid Assets (HQLA) requirements for specific institutions depending on ILAAP outcomes. Before 2025, LSARs are based exclusively on funding plans for CMF-provided scenarios; for 2024, stress tests are based on banks' internal estimates. - July 2023: CMF published "Guidelines on Stress Testing in Banking Institutions" for LSAR; January 2024: final version published. ### B. Banking Supervision - Recommendation 1: Ensure sufficient budget resources (of the CMF) to attract and retain specialized talent. Status: I - No changes toward CMF’s budget independence. - Since 2019, CMF’s budget has been continuously reduced with increments only to afford new legal changes (e.g., Fintech Law implementation). - Recommendation 2: Strengthen credit risk management and asset classification, including provisioning and treatment of restructured loans. Status: I, NT - January 2023: first proposal for asset classification and treatment of restructured loans presented internally. Public consultation target moved to early 2025 from 2024 due to March 2024 issuance of standard method for loan loss reserves for consumer loans. - Recommendation 3: Establish an integrated risk management framework and enhance corporate governance standards and supervision. Status: NT - Internal proposal under review; public consultation target early 2025. - August 2023: CMF published regulatory proposals on corporate governance and integrated risk management requirements for securities market entities; May 2024: CMF issued the regulations. - July 2024: CMF published regulatory proposals on corporate governance, comprehensive risk management, and operational risk management requirements for securities intermediaries, commodities brokers; December 2024: CMF issued the regulations. - October 2024: CMF published regulatory proposal on requirements to be considered an independent director in public firms and minimum content for general policies on election of directors by parent companies of supervised subsidiaries. - Recommendation 4: Strengthen the legal framework for licensing to ensure banks’ shareholders are fit, proper and financially strong. Status: NT - CMF drafting internal proposal addressing necessary legal/regulatory changes. - Recommendation 5: Improve the corrective actions framework. Status: NT - October 2023: draft bill circulated to Joint working group for banking resolution (CMF, BCCh, Ministry of Finance technical staff). - November 2023: CMF issued new regulation establishing complementary instructions applicable to early regularization and forced liquidation. - Draft regulation to request early recovery plans under internal review in CMF. - Recommendation 6: Improve consolidated supervision by enhancing the legal framework, supervision practices and organizational arrangements. Status: NT - August 2023: CMF published “Guidelines for a Financial Conglomerates Act in Chile,” proposing inclusion of financial conglomerates under CMF supervision and a supervisory legal framework. - CMF continued stakeholder meetings following public consultation comments on the guidelines. ### C. Pension Funds - Recommendation 1: Avoid further pension withdrawals and ensure that the pension system continues to support deep and liquid long-term capital markets. Status: I - No additional pension fund withdrawals approved since April 2021. - CMF, BCCh, and CEF delivered opinions and reports against further withdrawals, including Congress presentations and Financial Stability Reports. - Legal pension reform under review in Congress. CEF created an ad hoc task force to evaluate effects of reform on capital markets and financial stability. - Recommendation 2: Improve pension fund regulation and investment options to promote long-term investment and minimize excessive switching. Status: NT - Legal pension reform under review in Congress. CEF created an ad hoc task force to evaluate effects on capital markets and financial stability. ### D. Insurance - Recommendation 1: Halt any further liquidations of life annuities. Status: I - No additional liquidations of life annuities since April 2021. - CMF, BCCh, and CEF delivered opinions and reports against such measures. - Recommendation 2: Implement a modern risk-based capital framework in insurance with due regard to the impact of introducing IFRS 17 and IFRS 9. Status: NT - Ministry of Finance plans to reactivate debate on adopting a risk-based capital requirements and supervision scheme for insurance during 2024. - November 2024: CMF published regulatory proposal to amend methodology to calculate exposure to counterparty credit risk in financial derivatives, migrating from contract-sized (notional) approach to a risk-based approach measuring exposure through the credit equivalent. ### E. Mutual Funds - Recommendation 1: Strengthen the mutual fund liquidity management framework. Status: NT - October 2023: “Financial Markets Resilience” bill approved by Congress. The law empowers the CMF to establish a minimum investment requirement in liquid assets for funds and to define liquid assets. ### F. Crisis Management and Bank Resolution - Recommendation 1: Establish a statutory bank resolution authority with a comprehensive range of crisis management and resolution tools. Status: I - January 2023: CMF published policy paper "Guidelines for a new bank resolution and deposit insurance framework in Chile" identifying legal/regulatory gaps and proposing measures including deposit insurance mechanism and resolution tools. - August 2023: CMF published proposal establishing complementary instructions on early regularization and compulsory liquidation; November 2023: CMF published the regulation. - November 2023: CMF held closed industry meeting to address comments on the white paper. - Working group (CMF, BCCh, MoF technical staff) drafting new bill on resolution framework, new resolution authority and deposit insurance scheme. First draft expected to relevant authorities by end of 2024 and to Congress in early 2025. - Recommendation 2: Establish and implement recovery and resolution planning and set a loss-absorbing capacity requirement for systemically important banks. Status: I - (See actions under Recommendation 1 and earlier Pillar 2/IAPE actions relevant to loss-absorbing capacity: CMF additional capital charges for D-SIBs; ICAAP/IAPE processes; Pillar 2 impositions.) - Recommendation 3: Establish a new industry funded deposit protection scheme. Status: NT ### G. Systemic Liquidity - Recommendation 1: Facilitate the development of the interbank repo market. Status: NT - January 2023: working group (CMF, BCCh, Pensions Superintendence, MoF) met repo market participants and surveyed supervised entities to identify frictions and development opportunities. - October 2023: “Financial Markets Resilience” bill approved by Congress clarifying eligible repo transactions for special compensation in default and providing framework for BCCh to exceptionally offer repos to market segments in stress. - IMF Technical Assistance mission visited Santiago May 23 to June 4, 2024 to assist on systemic liquidity management (collateral policy, emergency liquidity assistance, system-wide market support measures, repo market development). TA concluded July 2024; BCCh, CMF, and MoF analyzing findings. - CMF undergoing regulatory review of repo market development. - August 2024: CMF created Strategic Market Development Promotion Committee to work on market development agenda including interbank repo market. - Recommendation 2: Enhance the risk management function of the BCCh through higher haircuts and a stricter approach to unsecured bank bonds. Status: I - 2021: BCCh reviewed and updated margin and haircut scheme for liquidity provision operations. - Internal task force reviewing and updating BCCh collateral framework, drawing on IMF TA of May-June 2024. - August 2023: BCCh published regulatory proposal incorporating self-securitized instruments as a collateral alternative. - July 2024: BCCh published final regulation for self-securitized bonds, which may serve as collateral in operations with BCCh and other financial institutions. - Recommendation 3: Finalize the Emergency Liquidity Assistance (ELA) framework. Status: NT - August 2023: BCCh and CMF signed Memorandum of Understanding to enhance coordination and information exchange regarding the liquidity situation and viability of troubled financial institutions for ELA evaluation. - October 2023: “Financial Markets Resilience” bill authorized BCCh, in exceptional circumstances, to extend ELA to banks that temporarily cease to comply with certain capital requirements while implementing a recovery plan based on a CMF viability opinion. Law also allows ELA for systemic credit unions and Central Counter Parties. - IMF TA May 23–June 4, 2024 assisted authorities on ELA-related matters; TA concluded July 2024. Development of a specific ELA framework is ongoing. ### H. Macro-prudential Framework and Tools - Recommendation 1: Increasing CEF secretariat resources and consider annual publication of official CEF views on macroprudential risks. Status: NT - 2023: Members of CEF and BCCh signed interinstitutional MoU to enhance coordination, exchange of information, and address communication issues regarding critical situations affecting financial stability. - Recommendation 2: Enhance interagency coordination on the use of the macroprudential toolkit. Status: NT - Most interagency coordination implemented at the CEF. - Close coordination between BCCh and CMF related to the CCyB. Before each semi-annual BCCh Financial Policy Meeting, BCCh and CMF staff share views on financial stability risks. - CMF and BCCh signed MoU focused on coordination in critical situations in the local banking and financial system. - Recommendation 3: Establish a consolidated and comprehensive public credit registry. Status: NT - July 2024: Law to establish a consolidated debt registry was published. It will be administered by CMF and allow reporting entities to access debtors’ credit information. General regulations must be issued by CMF within 12 months after publication of the Law, and the registry must be operational within 18 months. ### I. AML/CFT - Recommendation 1: Ensure a swift implementation of the 2021 AML/CFT Mutual Evaluation Report (MER) recommendations. Status: NT - November 2022: CMF issued updated regulation on prevention of money laundering, financing of terrorist activities, and non-proliferation of weapons of mass destruction, applying to banks, saving and credit cooperatives, and payment card issuers; focuses on identification of final beneficiaries, customer due diligence under a risk-based approach, and prevention/detection of terrorist financing. Adjustments strengthen definitions related to the 40 FATF recommendations and address some MER recommendations approved in July 2021 by GAFILAT. - February 2024: CMF issued regulations on risk management system for insurance companies to incorporate evaluation of Money Laundering, Financing of Terrorism and Proliferation of Weapons of Mass Destruction within legal risk. - February 2024: CMF issued regulations for fintech sector requirements for corporate governance, risk management and disclosure obligations. According to the 2023-2027 National AML/CFT Strategy, CMF and UAF will evaluate incorporation of ML/TF and proliferation finance prevention measures. - CMF preparing to revise sanctioning framework for banks' AML/CFT violations to ensure greater consistency. *Source: Annex X. Implementation Status of 2021 FSAP* ### Annex XI. Data Issues ### Annex XI. Data Issues ### Data adequacy assessment for surveillance - Overall assessment: The data provided to the Fund are adequate for surveillance. - Staff did not use any data and/or estimates in lieu of official statistics in the staff report. - Other data gaps: - Data provision on emerging issues including climate, gender, digitalization have not represented limitations to conduct surveillance. - Lack of homogeneous standards on these areas prevents assessment of data quality and identification of reasonable improvements. - Changes since the last Article IV consultation: - The statistical agency INE updated the base year of CPI to 2023 and made changes to its categories to better capture the pattern of consumption of Chilean households. - Corrective actions and capacity development priorities: - Discussions with authorities to improve provision of financial sector statistics (FSIs), including identifying series produced by the BCCh and not reported to the Fund; efforts are underway. - Work with authorities on best reporting practices for the Fiscal Policy Report, including granularity on debt driver flows. - Specific areas for improvement highlighted by staff: - Coverage and timeliness in the provision of FSIs. - Transparency and better reporting on below-the-line operations which drive the large residual in the DSA. - Authorities are increasing detail on below-the-line items and committed to further improvements in forthcoming Fiscal Policy Reports. ### Data Standards Initiatives and dissemination - Chile adheres to the Special Data Dissemination Standard (SDDS) Plus since March 2020 and publishes data on its National Summary Data Page. - The latest SDDS Plus Annual Observance Report is available on the Dissemination Standards Bulletin Board. - The country’s participation informs the expected frequency and timeliness entries in the Table of Common Indicators Required for Surveillance. ### Table of Common Indicators (selected metadata and timing) - The Table of Common Indicators is current as of January 10, 2025. - Examples of frequency/timeliness notations used in the table: - ("D") daily; ("W") weekly or with a lag of no more than one week after the reference date; ("M") monthly or with lag of no more than one month; ("Q") quarterly or with lag of no more than one quarter; ("A") annual; ("SA") semiannual; ("I") irregular; ("NA") not available or not applicable; ("NLT") not later than. - Notes included in the table: - Reserve assets include reserve assets pledged or otherwise encumbered, as well as net derivative positions. - Interest rates reported include both market-based and officially determined rates. - Financing categories include foreign, domestic bank, and domestic nonbank financing. - The general government comprises central government (budgetary funds, extra budgetary funds, and social security funds) and state and local governments. - Consolidated balance sheet of the banking system and other standard indicators are tracked with expected frequencies and timeliness informed by SDDS/SDDS Plus guidance. ### Fund relations and relevant financial statistics (selected exact figures) - Quota: 1,744.30 (SDR Million) — 100.00 percent quota. - Fund holdings of currency: 1,297.40 (SDR Million) — 74.38 percent. - Reserve Tranche Position: 446.90 (SDR Million) — 25.62 percent. - SDR Department: - Net cumulative allocation: 2,488.72 (SDR Million) — 100.00 percent of allocation. - Holdings: 2,604.86 (SDR Million) — 104.67 percent. - Latest Financial Arrangements (type, date of expiration, amount approved, amount drawn): - FCL Aug 27, 2024 — Aug 26, 2026 — 10,465.80 — 0.00. - FCL Aug 29, 2022 — Aug 28, 2024 — 13,954.00 — 0.00. - SLL May 20, 2022 — Aug 28, 2022 — 2,529.00 — 0.00. - FCL May 29, 2020 — May 19, 2022 — 17,443.00 — 0.00. - Stand-By Nov 8, 1989 — Nov 7, 1990 — 64.00 — 64.00. - EFF Aug 15, 1985 — Aug 15, 1989 — 825.00 — 806.25. - Stand-By Jan 10, 1983 — Jan 9, 1985 — 500.00 — 500.00. - Projected future payments to Fund (SDR Million) — Charges/Interest: 0.02 in each year 2025, 2026, 2027, 2028, 2029; Total: 0.02 in each year 2025–2029. ### Supplementary information with policy and reform implications (as of January 16–29, 2025) - Pension reform bill developments: - The pension reform bill was approved by the Senate; Congress expected to vote by end-January. - The draft bill increases contribution rates by 7 percentage points (previous proposal: 6 percentage points). - Allocation of the 7 percentage points: - 4.5 percentage points directed to individual accounts (previously proposed 3 percentage points). - 2.5 percentage points allocated to the Social Security Fund (previously 3 percentage points). - Of the 2.5 percentage points, 1.5 percentage points would be used to fund current pensions as a reimbursable contribution with interest (previously 2 percentage points). - 1 percentage point dedicated to addressing the gender life expectancy gap. - Fiscal implications: - Changes raise somewhat the fiscal costs, mainly related to a higher contribution by the public sector on its wage bill and lower corporate income tax revenues. - Future contingent liabilities would be lower in the latest proposal. - Long-term economic simulations updated by authorities: - Projected modest decline in formal employment by 0.7 percent, due to increased labor costs. - Projected increase in the real GDP level by 1.4 percent, attributed to higher investment levels and deeper financial markets fostered by the reform. - Monetary policy update: - At its monetary policy meeting on January 28, the Central Bank of Chile (BCCh) kept its policy rate unchanged at 5 percent. - The BCCh indicated increased inflation risks and reaffirmed that future adjustments of the policy rate would be based on the evolution of the macroeconomic scenario and its implications for convergence of inflation to the target. *Source: Annex XI. Data Issues, 1chlea2025001-print-pdf — Chile: Staff Report for the 2024 Article IV Consultation (Informational Annex and Supplementary Information).* --- _Source: https://www.imf.org/-/media/files/publications/cr/2025/english/1chlea2025001-print-pdf.pdf_