## _cr08240 ## Source details **Canonical URL:** [_cr08240](https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2008/_cr08240.pdf) ## Other formats - [Markdown version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2008/_cr08240.pdf.md) - [Structured JSON version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2008/_cr08240.pdf.json) --- ### Inflation and Exchange Rate Developments in Perspective - Chile’s macro framework and outcomes: - Real per capita incomes increased by 3 percent on average over the past 12 years. - Poverty rate more than halved over the same period. - Public sector became a net creditor. - Chile has begun membership discussions with the OECD. - Recent shocks and impact: - No general subsidies on food and energy; domestic prices increased sharply with global price spikes. - Severe drought raised local food prices and affected hydroelectricity production. - Natural gas imports from Argentina diminished; electricity producers shifted to diesel at high marginal cost. - Inflation increased to close to 9 percent in May, well beyond the central bank’s 3-percent target. - Tight energy situation estimated to have reduced growth by about 1 percentage point. - Staff estimates energy supply problems temporarily lowered potential output growth to around ½ percentage point below its 5-percent trend. - Emergency measures and outlook: - Government extended daylight saving time and reduced network voltage by 10 percent; recent rainfall and these measures secured electricity supply. - Relief expected only from new power plants and an LNG import terminal becoming operational in late 2009. - Staff and authorities expect inflation to fall in the second half of 2008 and decline gradually toward the 3-percent target by mid-2010. - Despite a 50 basis point interest rate increase in June, upside risks include oil price momentum, a weaker peso, rising short-term inflation expectations, and still high core inflation. ### Monetary and Exchange Rate Policy - BCC objectives and actions: - Focus: returning inflation to target over the 24-month policy horizon. - Raised interest rates by 125 basis points between August 2007 and February 2008. - Adopted a neutral policy bias in April 2008. - Raised interest rates by an additional 50 basis points on June 10, 2008. - Monetary policy interest rate raised by 175 basis points since mid-2007, bringing it to 6.75 percent in June 2008. - Inflation dynamics: - Monthly inflation accelerating; core inflation measures remain outside the bank’s tolerance range. - CPI inflation: 7.8 percent year-on-year in December 2007; 9.5 percent in June 2008. - Inflation target: 3 percent (reference to a 3 ± 1 percent target range). - Central bank should stand ready with additional policy measures to keep inflation expectations anchored. - Exchange rate and reserves: - In 2007 the peso strengthened; since April interventions the peso has depreciated by 10 percent against the U.S. dollar and is now estimated to be about 0-10 percent above a level consistent with fundamentals. - Central bank decided in April to raise international reserves by US$8 billion (5 percent of GDP) by year’s end through pre-announced purchases of US$50 million a day. - Foreign exchange purchases are being sterilized at an estimated 10-year cost of ¾ percent of GDP. - Reserves projected to reach about 15 percent of GDP by end-2008, equivalent to about 90 percent of imports plus short-term debt. - As of July 8, 2008 total purchased under the program: USD 3 billion; average bid to cover ratio: 2.28. - CLP accumulated a 12.2 percent nominal appreciation in Q1 2008, reaching a high of CLP 429 in mid-March 2008. - Communication: - Central bank earns high marks for transparency. - Recommendation: provide additional information on the BCC’s inflation forecast in the Monetary Policy Report, including on propagation of shocks and policy lags. ### Fiscal Policy and Sovereign Wealth Funds - Fiscal outcomes and targets: - Government registered a record surplus of 8¾ percent of GDP in 2007. - 2008 structural surplus target reduced to ½ percent of GDP; real expenditure budgeted to grow by 9 percent. - 2008 fiscal surplus likely to again reach close to 8 percent of GDP. - Fiscal surplus expected to reach 4.8 percent of GDP in 2008 (alternate reporting within text). - As of Q1 2008, government achieved a surplus of 3 percent of GDP. - Fuel and targeted transfers: - One-off cash transfers of $45 to the poorest 40 percent and an additional $42 to low-income pensioners (legislation pending). - Two-year 25-percent reduction in the excise tax on gasoline. - $200 million (0.1 percent of GDP) injection into the fuel stabilization fund; a further $1 billion injection announced on June 2 (after mission). - Staff estimates on current oil price projections: US$500 million (0.3 percent of GDP) in subsidies would be spent in 2008. - Sovereign Wealth Funds (SWFs): - Combined SWF foreign assets in two funds equal 15 percent of GDP (earlier) and combined 12 percent of GDP in assets all invested abroad (later statements). - By end-2008, FESS likely to contain $21 billion in assets (13 percent of GDP); another 1½ percent of GDP held in the Pension Reserve Fund (PRF). - FESS income from asset returns projected to rise from ¾ percent of GDP to close to 1½ percent of GDP over the next few years. - President announced $6 billion transfer from the FESS to a new Bicentennial Fund to finance scholarships for up to 30,000 students over 10 years. - Management: central bank manages both funds; bulk of SWF assets to be kept in highly-rated fixed-income securities with more diversified portfolio including variable and longer duration instruments. - 2007 returns from the FESS: USD 933 million (0.6 percent of GDP and 2.1 percent of total revenues). - Staff recommendations: include only funds’ structural asset income in structural revenue calculations; embed FESS investment objectives in a long-term fiscal framework; conduct comprehensive analysis of long-term public assets and liabilities. ### Capital Market Development and Financial Sector - Pension fund liberalization: - Pension funds allowed to invest up to 80 percent of portfolios abroad by October 2009 (up from 30 percent until last year). - Central bank authorized to increase the limit from 45 percent at present to 60 percent in September 2008 and 80 percent in September 2009. - Market reforms and issuance: - Financial reform package expected in 2009 to encourage non-residents to issue peso-denominated debt, facilitate derivatives trading, provide framework for SME loan securitization, and establish a central counterparty. - Central Bank will sterilize the US$8 billion reserve accumulation by issuing indexed benchmark bonds. - Treasury to issue US$2 billion in 10-year nominal and 20- and 30-year inflation-indexed bonds (increase from US$700 million issued in 2007). - Government will issue up to USD 2 billion in domestic bonds in 2008 to provide liquidity and establish benchmark securities; first-time Chilean Treasury issuing a 30-year bond. - Financial stability and supervision: - Domestic financial markets continued to function normally during global turmoil. - Chilean banks’ low exposure to subprime mortgages limited overnight spread increases. - Banks tightened lending standards; bank balance sheets remain strong. - Foreign-owned banks account for about 40 percent of total outstanding credit in Chile. - Cross-border claims of foreign banks on Chile rose to $34 billion (21 percent of GDP) over the past two years. - Subsidiaries of foreign banks hold $50 billion in credit on local counterparts. - Overall share of foreign bank liabilities low at 7 percent. - Geographical concentration: European institutions account for about 80 percent of consolidated claims on Chile. - Recommendation: consider an FSAP Update in 2009 to identify vulnerabilities and reform priorities; enhance market integrity by granting supervisory/regulatory bodies operational and budgetary independence. ### Public Sector Reform, Labor, and Social Measures - Government agenda and competitiveness: - Objective: Attain GDP per capita of $20,000 (on PPP basis) by 2020. - Measures include raising AFP foreign investment limits, allowing tax payments for exporters in dollars, recapitalizing the central bank with 0.5 percent of GDP in foreign currency in 2009. - Public sector reform: - Strengthen expenditure management and public procurement. - Staff encouraged adoption of a formal medium-term expenditure framework (MTEF). - Completion of a public transparency bill encouraged. - Legislation to modernize governance of public enterprises aligning with OECD Public Enterprise Code; bring public enterprises under securities regulator. - Presidential (Meller) Commission recommendations (selected): - Provide a 30 percent subsidy to employed workers with monthly income up to 7.5 UF (US$ 320), split 2-1 between workers and employer. - Provide cash transfer of US$20 per child per month to families in the first income quintile. - Introduce severance pay improvements and replace unemployment system based on individual accounts with a general fund. - Establish post-natal subsidies to women's salaries; finance national day care centers through general fiscal revenues. - Support vocational training, adult education, and measures to help young people and SMEs (many detailed items listed in source). - Pension reform: - Government’s pension reform approved by Congress; net cost about one percent of GDP per year. ### Debt Sustainability Analysis (ANNEX 1) - Public sector net position: - Public sector became a net creditor in 2006. - Gross public sector debt fell to 9 percent of GDP at end-2007; public sector assets rose above 10 percent of GDP. - "The sustainability of public debt is not an issue." - Fund for Economic and Social Stabilization projected to hold around 13 percent of GDP at end-2008 to cover potential financing needs. - External debt dynamics (selected table entries, percent of GDP): - External debt: 58.2 (2003), 45.5 (2004), 38.0 (2005), 32.5 (2006), 31.5 (2007), 30.5 (2008), 30.0 (2009), 29.2 (2010), 28.5 (2011), 26.9 (2012), 25.1 (2013). - External debt-to-exports ratio (percent): 161.1 (2003), 112.9 (2004), 93.0 (2005), 72.5 (2006), 67.4 (2007), 66.5 (2008), 68.9 (2009), 71.6 (2010), 74.7 (2011), 71.7 (2012), 67.6 (2013). - Gross external financing need (US$ billions): 9.9 (2003), 9.8 (2004), 9.0 (2005), 12.0 (2006), 4.2 (2007), 12.1 (2008), 11.9 (2009), 9.9 (2010), 11.7 (2011), 11.9 (2012), 11.1 (2013). - Public sector debt (gross) (percent of GDP, Table DSA1): - 13.0 (2003), 10.7 (2004), 7.3 (2005), 5.3 (2006), 8.6 (2007), 7.4 (2008), 6.9 (2009), 6.5 (2010), 6.2 (2011), 5.4 (2012), 4.6 (2013). - Stress tests and sensitivity: - External debt relatively stable against growth and interest-rate shocks but more sensitive to a real depreciation as all external debt is denominated in foreign currency. - Bound tests (selected): one-time 30 percent real depreciation and combinations of interest/growth shocks produce materially higher debt-stabilizing requirements in some scenarios (table entries reproduced in source). ### Statistical Issues (APPENDIX II) - Monetary statistics: - Broadly in line with MFSM, but deviations include treatment of nonbank financial intermediaries and accounting valuation criteria. - Change in chart of accounts for other depository corporations (ODCs) at beginning of 2008 disrupted data transmission; latest available ODC data correspond to December 2007; periodicity and timeliness expected to comply with SDDS by mid-2008. - National accounts and source data: - Benchmark and base year changed to 2003; annual and quarterly GDP series for 1986–2003 released in 2007. - Household budget survey (HBS) conducted every 10 years instead of five. - Areas for improvement: mineral exploration, agricultural work in progress, own-account software production, classification of copper derivatives, functions of government, individual consumption by purpose. - Prices, labor, and government finance statistics: - CPI coverage should be widened; updating weights to 2006-2007 HBS recommended. - New household labor survey introduced in 2006 consistent with ILO standards. - Progress in government finance statistics since 2002; plans to produce opening and closing balance sheets for central government, municipalities, and public corporations. - Balance of payments and external debt: - Central bank publishes quarterly balance of payments and external debt; International Investment Position consistent with BPM5 published since 2002. - Coverage of military sector in external statistics incomplete; possible under-recording of military external credits. ### Key Figures, Scenarios, and Model Results - Inflation and CPI shares: - Chile’s headline inflation rate was 8.9 percent in May 2008. - Inflation target: 3 percent. - Shares in CPI: food 27 percent and fuel 4 percent. - Contributions of food and fuel prices to the rise in inflation in 2007 were more than three times as large as in other Latin American countries. - Alternative global (BVAR) scenario (selected assumptions and outcomes): - Baseline model path produces growth similar to staff’s baseline forecast of 4½ percent growth in 2008 and 2009. - Severe downside REO assumptions: - World GDP in 2008 assumed to grow by only 2½ percent. - Copper prices would drop 30 percent. - Interest in high-yield debt would rise 250 basis points above the baseline. - Under such severe scenario, growth in Chile could drop to below 3 percent in 2008–09 before returning gradually to trend. - Banking system foreign participation (Box 3 key figures): - Foreign-owned banks account for about 40 percent of total outstanding credit in Chile. - Cross-border claims of foreign banks on Chile rose to $34 billion (21 percent of GDP). - Subsidiaries of foreign banks hold $50 billion in credit on local counterparts. - Origin of foreign claims on Chile (percent): Spain 48.0 (2002), 59.4 (2007); United States 17.4 (2002), 12.0 (2007); Germany 9.6 (2002), 7.2 (2007); Netherlands 4.2 (2002), 6.1 (2007); United Kingdom 3.8 (2002), 3.1 (2007); Other 17.1 (2002), 12.1 (2007); Total 100.0 (2002), 100.0 (2007). - WARP and exchange rate assessment (Box 4): - WARP indicates the peso appreciated around 19 percent since early 2002. - WARP-based equilibrium exchange rate estimate: as of May 2008, the peso valued about 8 percent above the level predicted by fundamentals. - IMF multilateral CGER approach finds the peso valued at about equilibrium; other models estimate the peso about 0-10 percent above fundamentals. ### Key Policy Recommendations (summarized) - Maintain inflation targeting with a floating exchange rate and structural fiscal surplus rule as the optimal framework. - Central bank: remain ready to tighten monetary policy further to anchor inflation expectations. - Fiscal policy: - Keep fiscal measures targeted at the most vulnerable; maintain the structural surplus rule. - Consider recapitalization of the central bank given sterilization costs from reserve accumulation equal to 5 percent of GDP. - Adopt a formal medium-term expenditure framework (MTEF) to improve public spending quality and governance. - SWFs: - Strengthen SWF management and embed FESS objectives within a long-term fiscal framework; include only structural asset income in budget calculations; evaluate long-term copper wealth. - Capital markets: - Consolidate public debt issuance into fewer benchmark issues; lower regulatory and tax barriers to attract foreign investors; promote internationalization of the peso. - Encourage issuance of peso-denominated debt by non-residents and further develop derivatives markets. - Financial sector resilience: - Step up monitoring of asset quality, liquidity, and risk management; consider an FSAP Update to identify vulnerabilities and reform priorities. - Structural and labor reforms: - Pursue public sector governance reforms, corporate governance improvements, and labor market reforms building on the Meller Commission while preserving labor market flexibility. - Statistical improvements: - Broaden CPI coverage, update CPI weights, improve timeliness of ODC data, and strengthen national accounts source data and classifications. *Source: IMF staff report content from chapter “Inflation and Exchange Rate Developments in Perspective” and related annexes and boxes in the supplied PDF excerpt.* ### 1. Inflation and Exchange Rate Developments in Perspective ............................................21 ### 1. Inflation and Exchange Rate Developments in Perspective ### Recent global shocks and macroeconomic context - Chile’s prudent, rules-based macroeconomic framework, trade openness, and institutional reforms have delivered: - Real per capita incomes increased by 3 percent on average over the past 12 years. - Poverty rate more than halved over the same period. - Public sector became a net creditor. - Chile has begun membership discussions with the OECD. - The policy framework has helped preserve stability through the copper boom: - Most domestic mining revenues are accumulated abroad, de-linking domestic spending from rising copper prices. - Combined foreign assets in two sovereign wealth funds (SWFs) equal 15 percent of GDP. - Recent confluence of shocks has been difficult to absorb: - No general subsidies on food and energy; domestic prices increased sharply with global price spikes. - Severe drought raised local food prices and affected hydroelectricity production. - Natural gas imports from Argentina diminished; electricity producers shifted to diesel at high marginal cost. - Inflation increased to close to 9 percent in May, well beyond the central bank’s 3-percent target. - Impact on growth and outlook: - Tight energy situation is estimated to have reduced growth by about 1 percentage point. - Much of the slowdown since mid-2007 due to a drop in value-added in the electricity sector. - Demand growth expected to slow given past interest rate increases, tighter credit conditions, and a drop in consumer confidence despite higher fiscal transfers. - Investment has benefited from lower prices for imported capital goods and a recent rise in FDI, helping growth to stay above 4 percent in 2008. - Given Chile’s diversified trade structure, a U.S. recession impact would likely be moderate; broader global slowdown and difficult energy situation weigh on the outlook. - Emergency energy measures: - Government extended daylight saving time and reduced network voltage by 10 percent; together with recent rainfall these measures secured electricity supply. - Cost of electricity generation remains at a record high. - Relief expected only from new power generation plants and an LNG import terminal becoming operational in late 2009. - Inflation expectations and monetary stance: - Long-term inflation expectations remain anchored by the monetary framework. - Staff and authorities expect inflation to fall in the second half of 2008 and decline gradually toward the 3-percent target by mid-2010. - Despite a 50 basis point interest rate increase in June, risks remain on the upside due to oil price momentum, a weaker peso, rising short-term inflation expectations, and still high core inflation. - Nominal wages have kept pace with inflation, partly due to indexation; unit labor cost increases have remained moderate—consistent with staff estimates that output remains currently below potential. - Staff estimates that energy supply problems have temporarily lowered potential output growth to around ½ percentage point below its 5-percent trend. ### Financial markets, banking, and external position - Domestic financial markets continued to function normally during global turmoil: - Chilean banks’ low exposure to subprime mortgages limited overnight spread increases. - Surveys indicate most banks tightened lending standards, but bank balance sheets remain strong amid ample funding sources. - Strong presence of foreign bank subsidiaries could pose spillover risks if credit conditions in developed markets deteriorate further. - External and external-finance related developments: - Trade balance receded from recent highs despite favorable terms of trade; current account surplus expected to fall into deficit in 2008 due partly to strong import growth. - Exports to the United States slowed but non-copper export volumes remained positive. - Chile increased its share of the Asian market by about 80 percent over the past 5 years. - Underlying medium-term current account deficit projected around 2½ percent of GDP—close to the CGER norm of about 3 percent of GDP. - Such a deficit is expected to be easily financed, aided by forthcoming capital market reforms. - Widening of the current account deficit would be largely offset by a decline in portfolio outflows corresponding to lower government asset accumulation abroad. - Outward portfolio investment has increased with fiscal surpluses and higher pension fund investment limits; inward portfolio investment has declined as domestic debt issuance has shrunk. - Inward FDI picked up strongly, mostly in mining; outward FDI abroad also rose. ### Exchange rate valuation and reserves - Peso valuation and movement: - In 2007 the peso strengthened in line with other emerging market commodity exporters; pace of appreciation accelerated in Q1 2008 reflecting widening interest rate differentials with the United States. - Since the central bank’s decision in April to intervene and acquire reserves, the peso has depreciated by 10 percent against the U.S. dollar and is now estimated to be about 0-10 percent above a level consistent with fundamentals. - Central bank reserve accumulation: - Central bank decided in April to raise international reserves by US$8 billion (5 percent of GDP) by year’s end. - Intervention implemented in a transparent, pre-announced manner (US$50 million a day), preserving the floating exchange rate regime and monetary policy flexibility. - Foreign exchange purchases are being sterilized at an estimated 10-year cost of ¾ percent of GDP. - Reserves projected to reach about 15 percent of GDP by end-2008, equivalent to about 90 percent of imports plus short-term debt. - Authorities view assets in the Fund for Economic and Social Stabilization (FESS) as not fully comparable to reserves due to different objectives. ### Fiscal position and public finances - Fiscal outcomes and policy: - Government registered a record surplus of 8¾ percent of GDP in 2007 due to record-high copper prices and domestic tax revenue growth. - 2008 structural surplus target reduced to ½ percent of GDP; real expenditure budgeted to grow by 9 percent. - 2008 fiscal surplus likely to again reach close to 8 percent of GDP. - A drop in copper revenues would diminish both the fiscal surplus and the amount of foreign assets acquired by the government. - Net assets and fiscal memorandum items shown in staff projections (revenue, mining revenue, expenditure, investment, surplus, net assets) indicate a large fiscal position; specific series are presented in the staff tables. ### Policy discussions and recommendations - Main policy issues discussed: - Managing supply shocks: optimal policy response to supply shocks within the rules-based framework. - SWFs and macroeconomic policy: implications of SWF buildup for economic policy and SWF management. - Capital market development: measures needed to increase depth and competition in financial markets as pension funds invest more abroad. - Managing supply shocks: - The combination of inflation targeting, a floating exchange rate, and rules-based fiscal policies remains the optimal policy framework for Chile. - Sovereign wealth funds and macro policy: - SWF buildup: accumulation of foreign assets in SWFs (15 percent of GDP) has helped stabilize fiscal policy during the copper boom; policy implications and management of SWFs were a central discussion point. - Capital market development: - With liberalization of foreign investment limits for pension funds, medium-term outbound portfolio flows are expected; measures to deepen and increase competition in domestic financial markets are needed to absorb increased internationalization of pension fund investments. *Source: IMF staff report content from chapter “Inflation and Exchange Rate Developments in Perspective.”* ### Chapter 3 of the Selected Issues paper confirms the framework’s welfare-maximizing properties. Chapter 4 ### Chapter 3 of the Selected Issues paper confirms the framework’s welfare-maximizing properties. Chapter 4 highlights the stabilizing impact of inflation targeting in response to global liquidity shocks. ### Monetary and Exchange Rate Policy - Banco Central de Chile (BCC) focus: returning inflation to target over the 24-month policy horizon. - Interest rate actions: - Raised interest rates by 125 basis points between August 2007 and February 2008. - Adopted a neutral policy bias in April 2008. - Raised interest rates by an additional 50 basis points on June 10, 2008. - Inflation dynamics and risks: - Monthly inflation accelerating; most core inflation measures remain outside the bank’s tolerance range. - Inflation remains largely driven by global commodity prices; recent jump in oil prices noted. - Authorities and staff agreed that decline in inflation over the coming months could be more gradual than anticipated in the last Monetary Policy Report, possibly raising the risks of second-round effects. - Central bank should stand ready with additional policy measures, if necessary, to keep inflation expectations anchored firmly to the 3-percent target. - Communication and transparency: - Central bank earns high marks for transparency. - Recommendation: provide additional information on the BCC’s inflation forecast in the Monetary Policy Report, including on the propagation of shocks and monetary policy lags, to strengthen policy effectiveness. - Inflation expectations: - Recent increase in both market and survey-based inflation expectations may partly reflect the lagged impact of past inflation (see Chapter 1 of the Selected Issues paper). ### Fiscal Policy - Surplus target and spending: - Reduction in the surplus target to ½ percent of GDP in the referenced year provided a moderate stimulus to economic activity. - Main use: boost spending on education. - Pickup in nominal revenues has provided room for ½ percent of GDP in additional spending. - Targeted assistance and transfers: - Targeted assistance provided to workers in certain export sectors. - Legislation pending to provide one-off cash transfers of $45 to the poorest 40 percent of the population and an additional $42 to low-income pensioners. - Fuel price measures: - Two-year 25-percent reduction in the excise tax on gasoline. - $200 million (0.1 percent of GDP) injection into the fuel stabilization fund temporarily reduced retail gasoline price by 10 percent since the beginning of the year. - The fund absorbed some high costs of substituting diesel for gas and hydro-energy as the marginal source for electricity generation. - A further $1 billion injection was announced on June 2 (after the end of the mission). - Staff estimates: on current oil price projections, US$500 million (0.3 percent of GDP) in subsidies would be spent in 2008. - Note: the fund is set up so that retail prices fully adjust to world market parity over a period of 12 months. - Fiscal rule and future spending: - Fiscal expenditure will continue to grow in line with the surplus rule, consistent with macroeconomic stability. - Authorities communicated that growth of public spending beyond the limit implied by the rule risks renewed upward pressure on the exchange rate. - Focus: quality and efficient implementation of spending programs. - Contingency for worse global economy: - Central bank reserves and the FESS provide room to respond to a financial sector crisis or abrupt decline in government revenues. - Fiscal rule designed to stabilize public investment and social spending in case of volatile copper revenues. - Regular coordination among government, central bank, and financial supervisors; close contact with foreign supervisors. - Central bank recapitalization: - Central bank currently undercapitalized by 2½ percent of GDP. - Authorities committed to a five-year plan approved by Congress: ½ percent of GDP a year, two years remaining. ### Sovereign Wealth Funds and Macroeconomic Policy - Asset accumulation and sizes: - By end-2008, the FESS will likely contain $21 billion in assets (13 percent of GDP). - Another 1½ percent of GDP are held in the Pension Reserve Fund (PRF). - Fund management and strategy: - Central bank manages both funds since inception, following best-practice guidelines for reserves management. - Bulk of SWF assets to be kept in highly-rated fixed-income securities; more diversified portfolio to include instruments with variable and longer duration. - All investments limited to marketable instruments, managed subject to high professional standards and full transparency. - Fund projections and uses: - FESS income from asset returns—considered structural revenue under the surplus rule—is projected to rise from ¾ percent of GDP to close to 1½ percent of GDP over the next few years. - President announced in May that $6 billion are to be transferred from the FESS to a new Bicentennial Fund, with the revenue used to finance scholarships to study abroad for up to 30,000 students in the next 10 years. - Eventually, the FRP will contribute about one quarter of the costs of the new pension system. - Staff recommendations: - Include only the funds’ structural asset income in the structural revenue calculations for the budget to avoid volatility from cyclicality of asset returns, especially exchange rate fluctuations. - Suggest embedding the FESS’ investment objectives in a long-term fiscal framework to determine whether the FESS should primarily be a stabilization or a saving fund. - Recommend a comprehensive analysis of the structure of long-term public assets and liabilities; helpful to assess the size of Chile’s mineral deposits (no official estimates available). - Technical assistance and governance: - Fund technical assistance focused on strategic asset allocation, taking into account assumed asset and liability structures. - Significant progress on the risk management framework; need to improve performance measurement and risk management infrastructure. ### Capital Market Development - Pension fund liberalization and market implications: - Ongoing liberalization of foreign investment limits for pension funds provides impetus for financial sector reform. - Pension funds allowed to invest up to 80 percent of their portfolios abroad by October 2009 (up from 30 percent until last year); central bank authorized to increase the limit from 45 percent at present to 60 percent in September 2008 and 80 percent in September 2009. - Authorities’ measures to attract foreign investors: - Reviewing options to reduce registration and tax requirements for foreign investors. - Staff noted permitting the use of the peso in settling capital account transactions with nonresidents would be key for developing Chile’s small derivatives markets. - Financial reform package (expected implementation during 2009): - Encourage non-residents to issue peso-denominated debt in Chile. - Further facilitate derivatives trading. - Provide a framework for the securitization of SME loans. - Bill pending in Congress to establish a central counterparty for clearing and settlement purposes. - Debt management and market structure: - Importance of strengthening public debt management, including consolidating sovereign paper into fewer benchmark issues. - Central bank and government coordinating closely on debt management. - Debt issuance still relatively fragmented to maintain both a nominal and inflation-indexed yield curve and provide long-duration assets for institutional investors. - Central Bank will sterilize the accumulation of US$8 billion in additional reserves by issuing indexed benchmark bonds. The Treasury will issue US$2 billion in 10-year nominal and 20- and 30-year inflation indexed bonds, an increase on the US$700 million issued in 2007. - Supervisory stance and resilience: - Banks tightened lending standards; capital adequacy remained strong. - Supervisors stepped up monitoring of asset quality, liquidity, and risk management; working toward strengthening bank resolution framework. - Authorities agreed scope for further market reforms and implications for financial sector stability could be discussed in an FSAP Update. - Recommendation: enhance market integrity by providing supervisory and regulatory bodies with operational and budgetary independence. ### The Government's Policy Agenda - Objective: Attain GDP per capita of $20,000 (on PPP basis) by 2020. - Competitiveness measures: - Raise AFP foreign investment limits. Approved in January 2008. Central bank authorized to increase the limit from 45 percent at present to 60 percent in September 2008 and 80 percent in September 2009. - Allow tax payments for exporters in dollars. Approved in October 2007. - Recapitalize the central bank. Government committed to transfer 0.5 percent of GDP in foreign currency in 2009. - Financial development: - Financial reform measures in the pension reform bill. Approved in January 2008. - Corporate governance reform. Bill pending in Congress. - Clearing and settlement. Bill pending in Congress. - Internationalization of the peso and market deepening. Pending. - Increase public debt benchmark issuance to improve liquidity. - Reform of derivatives taxation. Legislation to be sent to Congress in 2008. - Stamp tax reduction (to 1.2 percent) brought forward to Approved in March 2008. - Central Bank and Treasury issuance: see Capital Market Development bullets. - Competition and SMEs: - Introduce tax and tariff tribunals for dispute simplification. Bill pending in Congress. - Simplify tax regime and reporting requirements. Approved in 2007. - Creation of Mutual Guarantee Funds for SMEs. Approved in May 2007. - Establish a Small Enterprise Statute. Bill pending in Congress. - Tax credit for SME acquisition of capital goods. Bill pending in Congress. - Elimination of tariffs on imports of capital goods. Approved in June 2008. Expected cost around US$100 million. - Strengthening the anti-trust institutions and framework. Bill pending in Congress. - Elimination of stamp tax for SMEs via VAT compensation mechanism. Approved in March 2008. - Innovation and human capital: - Increase in Innovation Fund. A 50 percent increase included in the 2008 Budget Law. - Tax credit (35 percent) for R&D investment. Approved in January 2008. - Tax reduction (50 percent) for knowledge imports. Approved in early 2007. - Tax credit for capital gains in venture capital. Approved in June 2007. - Extension of tax credit for trading of newly listed stocks. Approved in June 2007. - US$900 million for investment in human capital included in 2008 budget. - Bicentennial Fund of US$6 billion announced on May 21, 2008, to provide scholarships for foreign study to up to 30,000 students over the next decade. - Public sector reform: - Corporate governance of public enterprises. Bills pending in Congress. - Reduction of number of public sector employees. Incentives for retirement provided for up to 26,000 public sector employees. - Evaluation of public sector programs. Number of audited programs increased to cover 4 percent of current spending in 2007. - Fund for the Modernization of Public Management. Pending. - Modernization of the notary public and real estate. Bill pending in Congress. ### Other Structural Issues - Pension reform: - Government’s pension reform has been approved by Congress (see Country Report No. 07/333). - The reform passed broadly unchanged, with a net cost of about one percent of GDP per year. *Source: _cr08240 - Chapter 3 of the Selected Issues paper confirms the framework’s welfare-maximizing properties. Chapter 4* ### 37. An ambitious public sector reform agenda is moving forward. The agenda includes ### _cr08240 - 37. An ambitious public sector reform agenda is moving forward. The agenda includes ### Public sector reform and expenditure management - Plans to strengthen expenditure management and reform public procurement. - Staff encouraged the authorities to move toward a formal medium-term expenditure framework (MTEF) to further improve treasury management and expenditure control. - Completion of passage of a public transparency bill is encouraged. ### Governance of public enterprises and corporate governance - Legislation initiated to modernize governance of public enterprises in line with the OECD’s Public Enterprise Code. - The bill brings most public enterprises under the umbrella of the securities regulator, subjecting them to private sector accounting and transparency standards. - Legislation introduced to strengthen corporate governance of private enterprises, including by mandating the presence of independent board members. ### Labor and social reform: Presidential (Meller) Commission roadmap - The high-level commission established by President Bachelet in 2007 proposed a roadmap for labor and social reform; several proposals appear to enjoy relatively broad political consensus (e.g., a subsidy for low-income workers and suggested unemployment insurance reform). - Policy recommendations by the Presidential Commission on Labor and Social Equity (Meller Commission): - Provide a 30 percent subsidy to employed workers with monthly income up to 7.5 UF (US$ 320), split 2-1 between workers and employer. - Provide cash transfer of US$20 per child per month to families in the first income quintile. - Support civil society organizations that fight extreme poverty through public donations. - Develop a strategy for social policies at the municipal level, and reform the system used to measure poverty and social vulnerability. - Establish a body responsible for the monitoring of the consistency of social policies and in charge of performance evaluation. - Workers: - Provide enhanced access to vocational training. - Reinforce programs to level adult education and strengthen development plans to train the most vulnerable fraction of the population. - Introduce measures to improve severance pay system. - Replace unemployment system based on individual accounts with a general fund. - Provide pecuniary incentives to private and public job agencies to match workers from vulnerable social strata with employers. - Establish post-natal subsidies to women's salaries. - Finance national day care centers through general fiscal revenues. - Labor relations: - Create a dedicated Labor Defense Administration. - Increase the resources of the Labor Ministry. - Train trade union and industry representatives to foster a more technical interaction between these parties. - Establish a Good Practice Code for labor relations. - Young people and students: - Award prizes for best students in the public school system, including scholarships, training, and assistance in obtaining access to college. - Establish a system of grants to foster entrepreneurial skills among young students. - Buttress policies that support the employment of young people, giving priority to those from low income households. - Foster the development of goods fairs to launch and market goods produced by SMEs. - Refocus existing microfinance instruments like the subsidy to transaction costs. - Advance development of credit scoring system. - Develop a simplified financial statement requirement to account for constrains on SMEs' human capital. - Accelerate adoption of Basel II capital requirements that reduce capital requirements for SME loans. - Accelerate reform of the notary system to speed up the reform of the guarantors system. - Women and Labor Market, Low Income Households, Small and Medium Enterprises: commission recommendations include targeted training, social supports, and regulatory reforms (see detailed items above). ### Staff appraisal: macroeconomic framework and outlook - Chile’s prudent, rules-based macroeconomic policy framework has delivered important social and economic rewards and helped manage the copper boom and recent supply shocks. - Growth and inflation outlook: - Output growth is projected at about 4¼ percent in 2008, and then to recover in 2009 toward potential. - Inflation is projected to decline in the second half of the year, but upward momentum in global oil prices suggests supply shocks could prove longer-lasting and risks have shifted to the upside. - Monetary policy is geared toward meeting the 3-percent target over the 2-year policy horizon. - Monetary policy stance and recommendations: - Near-term inflation expectations have risen and core inflation measures are outside the bank’s tolerance range. - The central bank’s recent increase in interest rates underscores its commitment to minimize second-round inflation effects; it should stand ready to tighten monetary policy further, if necessary, to keep inflation expectations firmly anchored to the target. - Exchange rate and reserves: - The peso is estimated to be moderately overvalued, but domestic policies remain consistent with external stability. - The central bank’s decision to augment foreign exchange reserves by 5 percent of GDP has been prudent and is implemented consistent with a floating exchange rate. - Given additional costs of sterilization, the government could consider extending the program to recapitalize the central bank. - Fiscal policy and sovereign wealth funds: - Fiscal policy remains well anchored by the structural surplus rule, helping keep expenditure increases consistent with macroeconomic stability. - Temporary use of fiscal means to alleviate higher food and energy prices is appropriate; staff recommends keeping measures targeted at the most vulnerable segments of the population. - Authorities plan to invest parts of the Pension Reserve Fund and Fund for Economic and Social Stabilization into assets with variable returns; staff welcomes efforts to strengthen management of Chile’s SWFs and suggests an evaluation of Chile’s long-term copper wealth to assist long-term investment strategy formulation. - Capital markets and financial sector: - To enhance efficiency, authorities plan to boost competition and increase attractiveness of local markets to foreign investors. - Consolidating public debt issuance into fewer benchmark issues and lowering regulatory and tax barriers for foreign investors would increase market liquidity. - An FSAP Update could help identify financial vulnerabilities and further reform priorities. - Labor market: - Mission encouraged authorities to consider further labor market reforms, building on presidential commission recommendations, noting that preserving labor market flexibility remains key for adjustment to major changes in relative prices. - Institutional recommendation: - It is recommended that the next Article IV consultation take place on the regular 12-month cycle. ### Inflation and exchange rate developments (Box 1 key figures) - Chile’s headline inflation rate was 8.9 percent in May 2008. - Inflation target: 3 percent. - Shares in CPI: food 27 percent and fuel 4 percent. - Contributions of food and fuel prices to the rise in inflation in 2007 were more than three times as large as in other Latin American countries. - The Central Bank of Chile’s response since June last year was among the most aggressive by inflation-targeting peers, helping keep long-term inflation expectations anchored around the 3 percent target. ### Alternative global scenario (Box 2 key figures and model results) - Staff uses a Bayesian VAR (BVAR) relating domestic growth to world GDP, interest rate on U.S. high-yield debt, copper prices, domestic investment, and the exchange rate. - Baseline model path produces growth similar to staff’s baseline forecast of 4½ percent growth in 2008 and 2009. - Severe downside REO assumptions: - World GDP in 2008 assumed to grow by only 2½ percent. - Copper prices would drop 30 percent. - Interest in high-yield debt would rise 250 basis points above the baseline. - Growth in Chile could drop to below 3 percent in 2008–09 before returning gradually to trend growth. - The probability of a severe recession is judged low given the macroeconomic framework’s capacity for countercyclical stimulus via domestic short-term interest rates, the exchange rate, and fiscal policy. ### Banking system: participation of foreign banks (Box 3 key figures) - Foreign-owned banks account for about 40 percent of total outstanding credit in Chile. - Cross-border claims of foreign banks on Chile rose to $34 billion (21 percent of GDP) over the past two years. - Subsidiaries of foreign banks hold $50 billion in credit on local counterparts. - The overall share of foreign bank liabilities remains low at 7 percent. - Geographical concentration: European institutions account for about 80 percent of consolidated claims on Chile. - Origin of foreign claims on Chile (in percent): - Spain: 48.0 (2002), 59.4 (2007) - United States: 17.4 (2002), 12.0 (2007) - Germany: 9.6 (2002), 7.2 (2007) - Netherlands: 4.2 (2002), 6.1 (2007) - United Kingdom: 3.8 (2002), 3.1 (2007) - Other: 17.1 (2002), 12.1 (2007) - Total: 100.0 (2002), 100.0 (2007) - Claims by foreign banks (percent of GDP; as of Sept. 2007) — selected: - Chile: 18.3 (2002), 42.3 (2007) - South Korea: 19.6 (2002), 32.6 (2007) - South Africa: 12.7 (2002), 39.1 (2007) - (Other country entries listed in source.) ### Key policy recommendations (summarized) - Complete MTEF adoption to improve treasury management and expenditure control. - Pass public transparency bill. - Implement corporate governance reforms for public and private enterprises, including independent board members. - Consider further labor market reforms following the Meller Commission roadmap while preserving labor market flexibility. - Keep fiscal measures targeted at the most vulnerable; maintain structural surplus rule. - Consider recapitalization of the central bank given sterilization costs from reserve accumulation equal to 5 percent of GDP. - Strengthen SWF management, evaluate long-term copper wealth, and consider investing parts of SWFs into variable-return assets. - Consolidate public debt issuance and lower regulatory and tax barriers to attract foreign investors; consider an FSAP Update. - Monetary authorities should remain ready to tighten policy further to firmly anchor inflation expectations. *Source: IMF staff report content provided in the supplied PDF excerpt.* ### Box 4. Assessing Chile’s Exchange Rate ### Box 4. Assessing Chile’s Exchange Rate ### IMF multilateral CGER and other model assessments - The IMF’s multilateral CGER approach finds the peso valued at about equilibrium. - Other models by the authorities and staff estimate the peso to be about 0-10 percent above a level consistent with fundamentals. ### Factors driving real effective appreciation - Two factors have added to the appreciation of the peso in recent months: - The rise in Chile’s inflation differential with its trade partners has made domestic goods relatively more expensive. - Chile’s trade with Asia has increased; with price levels in Asia below those in Chile, the United States, and Europe, the peso has become less competitive. - Both factors are captured in a real effective exchange measure developed by the U.S. Federal Reserve Board. ### The WARP (Weighted Average Relative Price) measure - The Weighted Average Relative Price (“WARP”) is calculated using relative purchasing powers and shifting trade weights—and is thus well suited for a country like Chile. - According to this measure, the peso has appreciated by around 19 percent since early 2002. - Footnote reference in source: Thomas, C.P., J. Marquez, and S. Fahle, “Measuring U.S. International Relative Prices: A Warp View of the World,” FRB International Finance Discussion Paper No. 917, 2008. ### WARP-based equilibrium exchange rate findings - In estimating a WARP-based equilibrium exchange rate approach, using variables similar to those in the CGER model, terms of trade shifts (particularly higher copper prices) account for most of the appreciation in recent years. - As of May 2008, the peso was valued at about 8 percent above the level predicted by fundamentals. - This estimate is within the range of model outcomes obtained of the authorities. *Source: Box 4. Assessing Chile’s Exchange Rate (excerpt).* ### ANNEX 1. CHILE: DEBT SUSTAINABILITY ANALYSIS ### ANNEX 1. CHILE: DEBT SUSTAINABILITY ANALYSIS ### Summary findings - The public sector became a net creditor in 2006. - Gross public sector debt fell to 9 percent of GDP at end-2007, and public sector assets rose above 10 percent of GDP. - Due to Chile’s large public sector assets, "the sustainability of public debt is not an issue." - The structural surplus rule has restrained expenditure growth during the recent period of high copper prices. - The remaining outstanding external debt largely consists of bonds that cannot easily be prepaid. - Additional financing needs stemming from a worse macroeconomic outlook could be covered by the country’s Fund for Economic and Social Stabilization, which at end-2008 will hold around 13 percent of GDP. ### External debt dynamics - Total external debt fell to 32 percent of GDP in 2007. - While the current account is expected to deteriorate over the medium term as copper prices fall, nondebt flows are expected to account for a substantial proportion of necessary financing. - Debt levels are not unduly responsive to growth or interest-rate shocks, but are somewhat sensitive to a depreciation, as all of Chile’s external debt is denominated in foreign currency. - Selected historical and projection highlights (Table 2, External Debt Sustainability Framework, 2003-2013): - External debt: 58.2 (2003), 45.5 (2004), 38.0 (2005), 32.5 (2006), 31.5 (2007), 30.5 (2008), 30.0 (2009), 29.2 (2010), 28.5 (2011), 26.9 (2012), 25.1 (2013) (in percent of GDP). - Change in external debt: -2.0 (2003), -12.7 (2004), -7.5 (2005), -5.5 (2006), -1.0 (2007), -1.0 (2008), -0.5 (2009), -0.8 (2010), -0.7 (2011), -1.6 (2012), -1.9 (2013) (in percent of GDP). - Identified external debt-creating flows (4+8+9): -9.8 (2003), -17.7 (2004), -13.8 (2005), -16.1 (2006), -13.0 (2007), -7.6 (2008), -6.1 (2009), -5.6 (2010), -5.4 (2011), -5.1 (2012), -5.1 (2013) (in percent of GDP). - Current account deficit, excluding interest payments: -0.7 (2003), -3.5 (2004), -2.3 (2005), -4.6 (2006), -4.5 (2007), -0.1 (2008), 0.8 (2009), 1.7 (2010), 2.4 (2011), 2.9 (2012), 2.9 (2013) (in percent of GDP). - Net non-debt creating capital inflows (negative): -5.4 (2003), -2.3 (2004), -4.0 (2005), -5.2 (2006), -5.8 (2007), -6.8 (2008), -6.1 (2009), -6.1 (2010), -6.6 (2011), -6.8 (2012), -6.8 (2013) (in percent of GDP). - Automatic debt dynamics: -3.8 (2003), -11.8 (2004), -7.5 (2005), -6.3 (2006), -2.6 (2007), -0.7 (2008), -0.8 (2009), -1.2 (2010), -1.2 (2011), -1.2 (2012), -1.1 (2013) (in percent of GDP). - Residual, including change in gross foreign assets (2-3): 7.8 (2003), 5.0 (2004), 6.3 (2005), 10.6 (2006), 11.9 (2007), 6.6 (2008), 5.6 (2009), 4.8 (2010), 4.7 (2011), 3.6 (2012), 3.2 (2013) (in percent of GDP). - External debt-to-exports ratio (in percent): 161.1 (2003), 112.9 (2004), 93.0 (2005), 72.5 (2006), 67.4 (2007), 66.5 (2008), 68.9 (2009), 71.6 (2010), 74.7 (2011), 71.7 (2012), 67.6 (2013). - Gross external financing need (in billions of US dollars): 9.9 (2003), 9.8 (2004), 9.0 (2005), 12.0 (2006), 4.2 (2007), 12.1 (2008), 11.9 (2009), 9.9 (2010), 11.7 (2011), 11.9 (2012), 11.1 (2013). - Gross external financing need (in percent of GDP): 13.4 (2003), 10.3 (2004), 7.6 (2005), 8.2 (2006), 2.6 (2007), 7.1 (historical), 6.9 (standard), projected values shown in table. ### Public debt dynamics and public sector sustainability - Because public sector assets exceed liabilities, public debt sustainability is not a concern according to the analysis. - Public sector debt trajectory and decompositions (Table DSA1, Public Sector Debt Sustainability Framework, 2003-2013): - Public sector debt (gross) 1/: 13.0 (2003), 10.7 (2004), 7.3 (2005), 5.3 (2006), 8.6 (2007), 7.4 (2008), 6.9 (2009), 6.5 (2010), 6.2 (2011), 5.4 (2012), 4.6 (2013) (in percent of GDP). - Of which foreign-currency denominated: 11.8 (2003), 9.0 (2004), 5.2 (2005), 3.6 (2006), 5.5 (2007), 4.5 (2008), 4.1 (2009), 3.9 (2010), 3.6 (2011), 3.0 (2012), 2.4 (2013) (in percent of GDP). - Change in public sector debt: -2.7 (2003), -2.3 (2004), -3.4 (2005), -2.0 (2006), 3.3 (2007), -1.2 (2008), -0.5 (2009), -0.3 (2010), -0.3 (2011), -0.8 (2012), -0.8 (2013) (in percent of GDP). - Identified debt-creating flows (4+7+12): -5.5 (2003), -6.3 (2004), -8.6 (2005), -10.5 (2006), -11.9 (2007), -9.4 (2008), -7.3 (2009), -6.2 (2010), -4.8 (2011), -3.7 (2012), -3.2 (2013) (in percent of GDP). - Primary deficit: -2.4 (2003), -4.4 (2004), -7.1 (2005), -10.0 (2006), -11.4 (2007), -8.9 (2008), -7.3 (2009), -6.1 (2010), -4.8 (2011), -3.6 (2012), -3.0 (2013) (in percent of GDP). - Revenue and grants: 22.8 (2003), 23.9 (2004), 26.0 (2005), 27.8 (2006), 29.8 (2007), 27.9 (2008), 26.6 (2009), 26.0 (2010), 25.3 (2011), 24.1 (2012), 23.5 (2013) (in percent of GDP). - Primary (noninterest) expenditure: 20.5 (2003), 19.5 (2004), 18.9 (2005), 17.8 (2006), 18.4 (2007), 19.0 (2008), 19.3 (2009), 19.9 (2010), 20.5 (2011), 20.6 (2012), 20.4 (2013) (in percent of GDP). - Automatic debt dynamics 2/: -3.1 (2003), -1.9 (2004), -1.6 (2005), -0.6 (2006), -0.5 (2007), -0.5 (2008), -0.1 (2009), -0.1 (2010), -0.1 (2011), -0.2 (2012), -0.1 (2013) (in percent of GDP). - Contribution from interest rate/growth differential 3/: -1.0 (2003), -1.2 (2004), -0.9 (2005), -0.7 (2006), -0.2 (2007), -0.5 (2008), -0.1 (2009), -0.1 (2010), -0.1 (2011), -0.2 (2012), -0.1 (2013) (in percent of GDP). - Contribution from exchange rate depreciation 4/: -2.2 (2003), -0.7 (2004), -0.7 (2005), 0.2 (2006), -0.2 (2007), ... (table continues). - Residual, including asset changes (2-3) 5/: 2.8 (2003), 4.0 (2004), 5.2 (2005), 8.5 (2006), 15.2 (2007), 8.2 (2008), 6.8 (2009), 5.8 (2010), 4.5 (2011), 2.9 (2012), 2.4 (2013) (in percent of GDP). - Public sector debt-to-revenue ratio 1/: 56.9 (2003), 44.7 (2004), 28.0 (2005), 19.0 (2006), 28.8 (2007), 26.6 (2008), 25.9 (2009), 25.2 (2010), 24.5 (2011), 22.4 (2012), 19.5 (2013). - Gross financing need 6/ (in percent of GDP): 1.6 (2003), -0.1 (2004), -1.8 (2005), -6.3 (2006), -7.6 (2007), -5.9 (2008), -4.4 (2009), -3.5 (2010), -2.2 (2011), -0.7 (2012), -0.3 (2013). - Gross financing need (in billions of U.S. dollars): 1.2 (2003), -0.1 (2004), -2.1 (2005), -9.2 (2006), -12.5 (2007), ... (table shows projected values and historical/standard comparisons). ### Projections and key macro-fiscal assumptions - Key macroeconomic and fiscal assumptions (selected): - Real GDP growth (in percent): historical/projection values include 4.0, 6.0, 5.5, 4.3, 5.1, 3.8, 2.0, 4.5, 4.5, 5.5, 5.3, 5.3, 5.0, 5.0 (table entries). - Average nominal interest rate on public debt (in percent) 7/: 3.7, 3.8, 4.1, 5.2, 5.7, 4.0, 0.8, 2.6, 2.7, 3.1, 3.7, 4.4, 5.7, 3.7 (table entries). - Average real interest rate (nominal rate minus change in GDP deflator, in percent): -2.5, -3.7, -3.5, -7.2, 0.8, -1.5, 2.7, -1.2, 3.6, 3.9, 4.3, 2.1, 2.3, 2.5 (table entries). - Inflation rate (GDP deflator, in percent): 6.2, 7.5, 7.6, 12.4, 4.9, 5.5, 3.1, 3.8, -0.9, -0.8, -0.6, 2.3, 3.4, 1.2 (table entries). - Growth of real primary spending (deflated by GDP deflator, in percent): -2.8, 0.9, 2.3, -1.5, 8.2, 3.4, 4.1, 8.0, 6.3, 8.8, 8.6, 5.6, 4.2, 6.9 (table entries). - Primary deficit: -2.4, -4.4, -7.1, -10.0, -11.4, -4.4, 3.8, -8.9, -7.3, -6.1, -4.8, -3.6, -3.0, -5.6 (table entries). ### Stress tests, scenarios, and bounds - Public debt stress tests (Figure 2 and Table DSA1 scenarios): - Alternative scenarios and debt-stabilizing primary balance results (selected entries): - A1. Key variables at historical averages in 2005-10 8/: debt-stabilizing primary balance: 7.4, 9.5, 10.6, 10.3, 8.5, 6.2, -0.3 (table entries). - A2. No policy change (constant primary balance) in 2005-10: 7.4, 5.2, 2.1, -2.4, -8.3, -14.7, 0.4 (table entries). - Bound tests (B1–B6) results for public debt (selected): - B1. Real interest rate at historical average plus two standard deviations in 2005 and 2006: 7.4, 6.9, 6.6, 6.2, 5.4, 4.6, -0.1. - B2. Real GDP growth at historical average minus one standard deviation in 2005 and 2006: 7.4, 8.4, 11.2, 13.5, 15.0, 16.3, -0.4. - B3. Primary balance at historical average minus two standard deviations in 2005 and 2006: 7.4, 17.4, 26.2, 25.8, 24.5, 23.2, -0.6. - B4. Combination of B1–B3 using one standard deviation shocks: 7.4, 13.8, 19.3, 19.2, 18.3, 17.3, -0.5. - B5. One time 30 percent real depreciation in 2005 11/: 7.4, 8.7, 8.3, 8.0, 7.1, 6.3, -0.2. - B6. 10 percent of GDP increase in other debt-creating flows in 2005: 7.4, 16.9, 16.4, 16.1, 15.0, 13.9, -0.4. - External debt bound tests (Figure 1 and Table 2 scenarios): - A1. Key variables at historical averages in 2005-09 5/: debt-stabilizing non-interest current account 7/: 30.5, 24.3, 17.6, 11.2, 4.8, -1.0, -6.2 (table entries). - Bound tests B1–B6 for external debt include shocks such as nominal interest rate at historical average plus two standard deviations, real GDP growth at historical average minus two standard deviations, change in US dollar GDP deflator minus two standard deviations, non-interest current account shocks, combinations of shocks, and one-time 30 percent nominal depreciation. Selected outcomes: - B1. Nominal interest rate at historical average plus two standard deviations in 2005 and 2006: 30.5, 31.1, 31.4, 30.7, 29.0, 27.0, -8.8 (debt-stabilizing non-interest current account entries). - B3. Change in US dollar GDP deflator at historical average minus two standard deviations in 2005 and 2006: 30.5, 35.4, 40.3, 38.3, 35.0, 31.5, -12.0. - B6. One time 30 percent nominal depreciation in 2005: 30.5, 41.9, 40.1, 38.2, 34.9, 31.3, -11.9. ### Policy conclusions and implications (as stated in the text) - Public debt sustainability is not an issue given Chile’s large public sector assets and the country’s net creditor position since 2006. - The structural surplus rule has played a role in restraining expenditure growth during the high copper price period. - The composition of outstanding external debt, largely in non-prepayable bonds, reduces repayment flexibility. - A deterioration in the macroeconomic outlook would increase financing needs, but those could be met from the Fund for Economic and Social Stabilization, which at end-2008 will hold around 13 percent of GDP. - Stress tests indicate external debt is relatively stable against growth and interest-rate shocks but is more sensitive to a real depreciation because all external debt is denominated in foreign currency. *ANNEX 1. CHILE: DEBT SUSTAINABILITY ANALYSIS — Staff Report for the 2008 Article IV Consultation — Informational Annex (June 18, 2008).* ### APPENDIX II. CHILE: STATISTICAL ISSUES ### APPENDIX II. CHILE: STATISTICAL ISSUES ### Monetary statistics - Monetary and financial statistics are broadly in line with the Fund’s Monetary and Financial Statistics Manual (MFSM). - Deviations from MFSM guidelines: - Treatment of nonbank financial intermediaries as part of the private sector. - Use of accounting valuation criteria not always in line with measurements at market prices. - Accounting criterion for expressing in local currency assets and liabilities in foreign currency and indexed units of account is, in general terms, consistent with the MFSM. - Data disruption: - Change in the chart of accounts for other depository corporations (ODCs) at the beginning of 2008 led to the central bank not receiving data from the Superintendency of Banks in an adequate format. - Latest available data for ODCs correspond to December 2007. - Efforts underway to resolve the problem; periodicity and timeliness of the ODC survey are expected to comply with SDDS requirements by mid-2008. ### Real sector (national accounts, business registers, surveys) - National accounts: - Central bank changed benchmark and base year of national accounts to 2003. - Annual and quarterly GDP series for 1986–2003 were released in 2007. - An STA mission (April–May 2007) found legal and institutional frameworks generally adequate but recommended reinforcing the independence of the National Statistics Institute (INE). - No legal precepts empower the central bank to require private non financial institutions to respond to data requests, except for information on foreign exchange transactions. - Business and source data: - Much improved business register available since 2006; updates to INE’s business register are partial and irregular. - Household budget survey (HBS) conducted every 10 years instead of every five years. - Data for agriculture, fishing, some services, and quarterly estimates limited in scope; income tax and VAT records used to fill gaps. - Source data reasonably approximate national accounts’ requirements; coverage satisfactory; timeliness could be further improved. - Areas for improvement in national accounts treatment: - Mineral exploration. - Agricultural work in progress. - Own-account production of computer software, databases, and manufacturing products. - Classification of copper derivatives. - Functions of government. - Individual consumption by purpose. ### Price and labor market statistics - CPI: - Coverage should be widened. - Expanding the survey sample outside Santiago and updating weights to the 2006-2007 HBS would considerably improve the index. - Producer Price Index: - INE compiles a producer price index that contributed to improvement of national accounts estimates at constant 2003 prices. - Labor market statistics: - INE introduced a new household survey in 2006, modeled on U.S. BLS surveys and consistent with ILO standards. - The labor market survey of business establishments could benefit from similar overhaul. ### Government finances - Progress since 2002 and implementation of GFSM 2001: - Statement of central government operations developed with consolidation of extrabudgetary central government units and reclassification of budgetary revenue and spending. - New functional classification of total outlays for the central government aligned with international standards has been disseminated. - Separate sets of accounts compiled for municipalities and for public corporations. - Methodologies, institutional tables on coverage, and public sector data published in October 2004 Estadísticas de las Finanzas Públicas 1987-2003. - Publication and transparency improvements: - Following FAD recommendations, Ministry of Finance increased publication of statistical data beginning with October 2004 Public Finance Report. - The report now includes debt liabilities and financial assets of the central government, contingent liabilities (government guarantees and concessions), and tax expenditures. - In 2006, the government began to publish a report of investments of its assets. - Ongoing and planned progress: - Authorities expect to produce estimates for the consumption of fixed capital and apply accrual and cash accounting using the System of Information for the Financial Management of the Public Sector. - This will permit compilation of opening and closing balance sheets covering the central government, municipalities and public corporations. - Further improvements needed (most urgent): - Disaggregate subsidies and grants by level of government. - Disseminate more detailed data on functional outlays by level of government. - Disseminate data on military debt. - Reconcile the recording of interest across liabilities, especially dollar-denominated bonds versus dollar-indexed bonds. ### Balance of payments and external debt - Compilation and publication: - Central bank compiles balance of payments and external debt statistics on a quarterly basis and publishes selected external sector statistics weekly. - Since 2002, central bank has been publishing the International Investment Position consistent with BPM5. - Coverage gaps and concerns: - Coverage of the military sector in external statistics is incomplete. - Accuracy of data on military imports needs verification; imports that do not go through customs are estimated by the central bank. - If the military receives external credits, information may not be available to the central bank; such financing may not appear in balance of payments or external debt statistics. - Published data on military expenditure are outdated. ### Chile: Table of Common Indicators Required for Surveillance (selected entries as of June 9, 2008) - Exchange Rates - Date of latest observation: June 4 - Date received: June 5, 2008 - Frequency of Data: D - Frequency of Reporting: D - Frequency of Publication: D - Data Quality – Methodological Soundness: (blank) - Data Quality Accuracy and reliability: (blank) - International Reserve Assets and Reserve Liabilities of the Monetary Authorities - Date of latest observation: May 23, 2008 - Date received: June 2, 2008 - Frequency of Data: W - Frequency of Reporting: W - Frequency of Publication: W - Reserve/Base Money; Broad Money; Central Bank Balance Sheet; Consolidated Balance Sheet of the Banking System - Date of latest observation: April 2008 - Date received: May 23, 2008 - Frequency of Data: M - Frequency of Reporting: M - Frequency of Publication: M - Consolidated Balance Sheet of the Banking System — Data Quality entries: O, O, LO, O (Methodological); O, O, O, LO, O (Accuracy) - Interest Rates - Date of latest observation: June 4,2008 - Date received: June 5, 2008 - Frequency of Data/Reporting/Publication: D / D / D - Consumer Price Index - Date of latest observation: May 2008 - Date received: June 5, 2008 - Frequency: M / M / M - Data Quality – Methodological Soundness: LO, LNO, LNO, LO - Data Quality Accuracy and reliability: LO, LO, LO, O, LO - Revenue, Expenditure, Balance and Composition of Financing – General Government - Date of latest observation: Q1 2008 - Date received: April 30, 2008 - Frequency: Q / Q / Q - Data Quality – Methodological Soundness: O, LO, LNO, LO - Data Quality Accuracy and reliability: LO, O, O, LO, O - Revenue, Expenditure, Balance and Composition of Financing – Central Government - Date of latest observation: April 2008 - Date received: May 30, 2008 - Frequency: M / M / M - Stocks of Central Government and Central Government–Guaranteed Debt - Date of latest observation: March 2008 - Date received: March 31, 2008 - Frequency: A Q Q - External Current Account Balance; Exports and Imports of Goods and Services - Date of latest observation: May 23, 2008 - Date received: June 2, 2008 - Frequency: W / W / W - Data Quality – Methodological Soundness (External Current Account Balance): O, O, LO, LO - Data Quality Accuracy and reliability (External Current Account Balance): O, O, O, O, O - GDP/GNP - Date of latest observation: Q1 2008 - Date received: May 23, 2008 - Frequency: Q / Q / Q - Data Quality – Methodological Soundness: O, LO, LO, LO - Data Quality Accuracy and reliability: LO, LO, LO, LO, O - Gross External Debt - Date of latest observation: March 2008 - Date received: May 7, 2008 - Frequency: M / M / M - International Investment Position - Date of latest observation: Q1 2008 - Date received: May 23, 2008 - Frequency: Q / Q / Q *Source: _cr08240 - APPENDIX II. CHILE: STATISTICAL ISSUES* ### 2008. The government’s two sovereign wealth funds, the Pension Reserve Fund and the Fund ### _cr08240 - 2008. The government’s two sovereign wealth funds, the Pension Reserve Fund and the Fund ### Sovereign Wealth Funds and Fiscal Framework - The Pension Reserve Fund and the Fund for Economic and Social Stabilization now hold a combined 12 percent of GDP in assets, all invested abroad. - Directors viewed ongoing efforts to strengthen further the management of Chile’s Sovereign Wealth Funds as well placed. - Plans endorsed to invest parts of the Pension Reserve Fund and the Fund for Economic and Social Stabilization into broader asset classes, including those with variable returns. - Directors considered that an evaluation of Chile’s long-term copper wealth could be useful in formulating a long-term investment strategy. - Directors commended the government’s strict adherence to the structural fiscal surplus rule. - Temporary fiscal measures to alleviate the impact of higher food and energy prices are being applied within the structural fiscal surplus rule. - Recommendation: keep social relief measures targeted at the most vulnerable segments of the population. - Recommendation: adopt a formal medium-term expenditure framework to improve public spending quality, increase efficiency, and strengthen governance. ### Macroeconomic Framework and Resilience - Chile adheres to a rules-based macroeconomic policy framework: inflation targeting, a floating exchange rate, and a structural fiscal surplus rule. - Directors commended the framework’s role in managing the copper boom and several adverse shocks. - Observation: Chilean economy remarkably resilient to global food and energy price shocks, exacerbated by domestic energy shortfalls and a severe drought. - Directors encouraged continuing close monitoring given increased risks to the outlook, particularly from the recent rise of inflation. ### Monetary Policy and Inflation - CPI inflation: 7.8 percent year-on-year in December 2007. - CPI inflation: 9.5 percent in June 2008. - Inflation target: 3-percent (with reference to a 3 ± 1 percent target range). - Core inflation measures and other inflation trend indicators remained above the 3 percent target level. - The Central Bank raised the monetary policy interest rate by 175 basis points since mid-2007, bringing it to 6.75 percent in June 2008. - Directors considered monetary policy appropriately geared toward returning inflation toward the 3-percent target over the two-year policy horizon. - Directors supported the central bank’s readiness to tighten monetary policy further as needed to keep inflation expectations anchored. - Staff/author forecast: CPI inflation expected to remain above the upper limit of the target range during 2008; expected to gradually move down toward the target range in the first half of 2009, converging to 3 percent by 2010. - Government fiscal measures to reduce the impact of high oil prices on domestic gasoline prices have helped mitigate risk of excessive propagation of supply shocks to underlying price pressures. ### Exchange Rate Valuation and External Stability - Directors considered the external value of the peso broadly in line with economic fundamentals. - The central bank augmented foreign exchange reserves; directors welcomed the transparent and pre-announced modality of foreign exchange purchases. - Given sterilization costs, Directors encouraged the government to extend the program to recapitalize the central bank to facilitate a more rapid return to positive net worth. - Staff assessment: at the time of assessment the CLP was currently valued at a level in line with fundamentals or slightly overvalued; authorities concurred. - CLP appreciation: accumulated a 12.2 percent nominal appreciation in the first quarter of 2008, reaching a high of CLP 429 in mid-March of 2008. - CEGR analysis of April 2008 found the peso to be overvalued in real effective terms at that level. ### Financial Sector and Capital Markets - Authorities plan initiatives to enhance market access for small and medium-sized enterprises, increase market depth, and boost internationalization of the peso. - Directors welcomed initiatives to modernize capital markets, making them more efficient, competitive, and attractive to foreign investors. - Recommended steps: advance the internationalization of the peso; enhance market access for small and medium-sized enterprises; increase market depth and liquidity by lowering regulatory and tax barriers for foreign investors; consolidate public debt into fewer benchmark issues. - Chile’s domestic financial markets continued to function normally through the recent global financial turmoil. - Authorities stepped up monitoring of banks’ asset quality, liquidity, and risk management, and worked toward strengthening the bank resolution framework. - Suggestion: an IMF Financial Sector Assessment Program (FSAP) Update to review scope for further market reforms and implications for financial sector stability and the supervisory and regulatory setup. ### Labor Market and Structural Reforms - Presidential Commission on Labor and Equity proposed measures including a reform of the unemployment insurance system and the introduction of a low-wage subsidy aimed at increasing labor participation in the formal economy. - Directors encouraged authorities to consider further labor market reforms, building on recent recommendations by the presidential commission. - Well-functioning labor markets considered essential for adjustment and sustaining high growth. ### Selected Key Economic Indicators (highlights from the staff table) - Real GDP growth: 2005: 5.5; 2006: 4.3; 2007: 5.1; 2008 (projection): 4.2; 2009: 4.6; 2010: 5.5; 2011: 5.3; 2012: 5.3; 2013: 5.0. - Total domestic demand (annual % change): 2005: 10.4; 2006: 6.4; 2007: 7.8; 2008: 6.4; 2009: 6.0; 2010: 6.7; 2011: 6.5; 2012: 6.4; 2013: 6.2. - Consumer prices (end of period): 2005: 3.6; 2006: 2.6; 2007: 7.8; 2008: 5.5; 2009: 3.7; 2010: 3.0; 2011: 3.0; 2012: 3.0; 2013: 3.0. - Consumer prices (average): 2005: 3.1; 2006: 3.4; 2007: 4.4; 2008: 7.4; 2009: 4.4; 2010: 3.3; 2011: 3.0; 2012: 3.0; 2013: 3.0. - Current account (Billions U.S. dollars): 2005: 1.4; 2006: 6.8; 2007: 7.2; 2008: -0.8; 2009: -3.5; 2010: -5.1; 2011: -7.7; 2012: -9.7; 2013: -9.9. - Current account (percent of GDP): 2005: 1.2; 2006: 4.7; 2007: 4.4; 2008: -0.5; 2009: -2.0; 2010: -2.8; 2011: -4.1; 2012: -4.8; 2013: -4.6. - Trade Balance (Billions U.S. dollars): 2005: 10.8; 2006: 22.6; 2007: 23.7; 2008: 12.3; 2009: 5.5; 2010: -1.4; 2011: -8.3; 2012: -10.4; 2013: -11.6. - Non-Copper Exports (Billions U.S. dollars): 2005: 22.3; 2006: 25.8; 2007: 30.1; 2008: 35.0; 2009: 37.7; 2010: 39.2; 2011: 41.7; 2012: 45.6; 2013: 49.7. - Gross public debt (percent of GDP): 2005: 34.9; 2006: 25.7; 2007: 24.1; 2008: 21.9; 2009: 20.9; 2010: 20.1; 2011: 19.3; 2012: 17.4; 2013: 15.8. - Central government balance (percent of GDP): 2005: 4.6; 2006: 7.7; 2007: 8.8; 2008: 7.8; 2009: 5.3; 2010: 3.7; 2011: 2.3; 2012: 1.9; 2013: 1.1. - Net public assets (Billions U.S. dollars): 2005: -11.8; 2006: 0.3; 2007: 8.2; 2008: 11.7; 2009: 14.5; 2010: 16.2; 2011: 16.6; 2012: 15.4; 2013: 13.5. - Output gap (defined as potential minus actual output, divided by potential output): 2005: 0.2; 2006: 0.8; 2007: 1.0; 2008: 1.4; 2009: 1.8; 2010: 1.1; 2011: 0.6; 2012: 0.0; 2013: 0.0. - Terms of trade (annual % change): 2005: 11.1; 2006: 31.6; 2007: 3.2; 2008: -27.6; 2009: -13.6; 2010: -10.3; 2011: -10.8; 2012: -4.4; 2013: -1.5. - Gross external debt (percent of GDP): 2005: 38.0; 2006: 32.5; 2007: 32.7; 2008: 30.3; 2009: 30.7; 2010: 29.8; 2011: 28.9; 2012: 27.3; 2013: 25.7. - Net FDI inflows (percent of GDP): 2005: 4.1; 2006: 3.1; 2007: 6.4; 2008: 9.0; 2009: 6.2; 2010: 5.4; 2011: 3.5; 2012: 2.7; 2013: 3.1. *Statement by Javier Silva-Ruete, Executive Director for Chile; Alvaro Rojas, Senior Advisor to Executive Director; July 11, 2008.* ### 7. On April 10, the BCC announced a reserves purchase program of USD 8 billion from ### 7. On April 10, the BCC announced a reserves purchase program of USD 8 billion from ### Reserves purchase program - Program announced: USD 8 billion purchases from April to December 2008 to increase foreign exchange liquidity. - Rationale: Strength of the peso relative to its long term fundamental value provided a financially sound opportunity for intervention. - Implementation details: - Pre-announced daily purchases of USD 50 million through competitive bids. - No target level for the exchange rate. - As of July 8, 2008: - Total purchased: USD 3 billion. - Average bid to cover ratio: 2.28. - Effects and assessment: - Purchases constitute an investment in stability by strengthening the international reserves position of the BCC. - Given the pre-announced nature, the program does not constrain the implementation of monetary policy and avoids discretionary use of exchange rate policy for disinflationary purposes. - Technical Note II of the Selected Issues papers provides evidence supporting the decision to increase reserves to around 15 percent of GDP by end 2008. ### Related Ministry of Finance measures to relieve CLP pressure - Allowances and measures: - Exporters allowed to pay income taxes directly in USD beginning April 2008. - As of June 2008, exporters will be able to pay other taxes in USD, and companies may have accounting done directly in USD. - Issuance announced in early May 2008: additional USD 800 million in domestic bonds in local currency to recapitalize the BCC in USD. - Purpose: The USD 800 million issuance to recapitalize the BCC would provide additional relief to pressure on the CLP, aligning with the BCC reserves purchase program. ### Monetary Policy - Inflation dynamics: - Acceleration in inflation since mid-2007 driven by food and energy components and idiosyncratic supply shocks. - Box 1 of the Staff Report and Technical Note I of the Selected Issues Papers document these developments. - Policy actions: - BCC raised the monetary policy interest rate by 125 basis points between mid-2007 and January 2008, bringing it to 6.25 percent. - Interest rate hikes paused between February and May 2008 to assess impacts of prior increases. - June 2008: BCC raised the monetary policy interest rate by an additional 50 basis points, bringing it to 6.75 percent, to ensure inflation convergence to 3 percent in the policy horizon. - Forward guidance: - Further monetary tightening may be needed if upside risks to inflation materialize. - The BCC stands ready to act further to fulfill its commitment to price stability, as indicated in the June 2008 Monetary Policy Meeting statement. ### Fiscal Policy - 2007 outcomes: - Overall surplus: 8.8 percent of GDP. - Revenues increased 12.1 percent in real terms. - Public expenditure grew 8.3 percent. - 2008 projections and developments: - Fiscal surplus expected to reach 4.8 percent of GDP in 2008. - As of the first quarter of 2008, the government achieved a surplus of 3 percent of GDP. - Continued saving of surpluses into the Economic and Social Stabilization Fund and the Pension Reserve Fund, consistent with the Fiscal Responsibility Law. - Fiscal Responsibility Law allows surplus use to recapitalize the Central Bank; a payment of USD 900 million is expected to be made during 2008, of which USD 800 million will be financed by issuance of domestic bonds. - The 2008 Budget is the first under the new structural surplus target of ½ percent of GDP and prioritizes social spending in health, education, innovation, and social housing. - Measures to mitigate oil price effects: - January 2008: bill submitted to provide an additional injection of USD 200 million to the Fuel Prices Stabilization Fund (FPSF). - March 2008: bill to reduce the excise tax on gasoline by 25 percent for the next 2 years, until March 2010 (Congress approved). - June 2008: bill to inject an additional USD 1 billion to the FPSF and USD 250 million in new capital to ENAP to stabilize domestic prices of gasoline and other fuels such as heating oil and liquefied gas. ### Sovereign Wealth Funds and Macroeconomic Policy - Engagement with IMF staff: - IMF providing technical assistance to assess macrofinancial linkages of Chile’s SWFs. - Selected Issues Paper reviews institutional background and international best practices and offers preliminary suggestions for the Pension Reserve Fund (PRF) and the Fund for Economic and Social Stabilization (FESS). - Institutional developments: - International Working Group of Sovereign Wealth Funds meeting to be held in Santiago in September 2008 (in response to Minister of Finance). - Financial Advisory Committee recommended a new Strategic Asset Allocation (SAA): - Current SAA: sovereign and agencies bonds (66 percent), money market securities and deposits (30 percent), indexed bonds (4 percent). - New SAA includes corporate bonds (20 percent) and stocks (15 percent), and currencies. - Management of new asset classes to be outsourced to external managers by the end of 2008. - Fiscal implications: - Returns from Funds represent an important new source of fiscal structural income. - 2007 returns from the FESS: USD 933 million (0.6 percent of GDP and 2.1 percent of total revenues). - SWFs have helped avoid loss of competitiveness and mitigate Dutch disease risks stemming from positive terms of trade shock. ### Bicentennial Fund - President Bachelet announced establishment of the Bicentennial Fund: USD 6 billion. - Purpose: secure a permanent income flow from investment returns to fund scholarships to study abroad for a total of 30,000 students of professional and technical careers over a 10-year period. - Objective: major investment in human capital to improve productivity over the medium term. ### Capital Market Development - Policy measures: - Ongoing efforts to increase foreign investor participation in domestic markets. - New bill (Capital Markets III - MKIII) to be sent to Congress before year-end to: - Foster use of the CLP as a fully internationally traded currency. - Increase depth and liquidity of domestic financial markets. - Promote market access for Small and Medium Enterprises. - Issuance and market development: - In 2008, the government will issue bonds in the domestic markets up to USD 2 billion to provide additional liquidity and establish benchmark securities. - First time Chilean Treasury issuing a 30-year bond. - FSAP: - Authorities are analyzing the possibility of an FSAP Update in 2009 to check progress on 2004 FSAP recommendations and address new issues. ### Conclusion - Chile’s rules-based policy framework has provided flexibility in monetary and fiscal policy to respond to higher energy and food prices and financial turmoil. - Framework has mitigated impacts to ensure domestic and external stability even under the possibility of a worsening scenario. *IMF staff report excerpt (content unit as provided).* --- _Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2008/_cr08240.pdf_