## 1. A Sequence of Policy Action and Risk during the Crisis ## Source details **Canonical URL:** [1. A Sequence of Policy Action and Risk during the Crisis](https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2009/_cr09271.pdf) ## Other formats - [Markdown version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2009/_cr09271.pdf.md) - [Structured JSON version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2009/_cr09271.pdf.json) --- ### I. Staff appraisal and executive summary - Chile’s economy is in a significantly better position than most economies to face the global crisis owing to its policy framework and track record of exemplary policies. - Critical strengths cited: - Large fiscal savings over the past several years preserved stability and covered financing needs. - Banking system well-capitalized; supervisory framework strong; domestic capital markets well-developed. - Policy response described as vigorous, well balanced, and coordinated. - Near-term macro perspectives and risks: - Real GDP growth in Chile in 2009–10 expected to be less favorable than prior to the crisis owing to high global uncertainty, a potentially sluggish global recovery, and marked-down global trend growth prospects. - Risks to inflation appear balanced and highly dependent on external developments. - Real effective peso appreciation observed in recent months following a sharp depreciation in late 2008; staff estimates the real exchange rate to be broadly in line with fundamentals. - If downside risks materialize, further countercyclical measures would be required—monetary policy should lead given limited fiscal scope in 2009 and potential fiscal challenges in 2010. ### II. Monetary policy: actions, options, and considerations - Actions taken: - BCCh suspended international reserve accumulation after foreign exchange purchases of US$6 billion between May and mid-September 2008. - Policy interest rate cut from 8¼ percent in January 2009 to ¾ percent by June 2009, and to ½ percent by July 2009 (cumulative reduction of 775 basis points since early 2009). - Introduced repos and swap lines; collateral requirements eased; liquidity instruments extended through end-2009. - Suspended issuance of long-term BCCh securities (5-year and up maturities) for remainder of 2009 (about US$0.7 billion due) and announced buybacks up to US$1 billion of similar securities outstanding. - Inflation and policy stance: - 12-month inflation peaked at 9.9 percent in October and decelerated to 1.9 percent by June 2009; core measures hovering around 3–4 percent (y/y). - Long-term inflation expectations anchored at the 3 percent target. - 12-month inflation expected to remain below the lower bound of the target range in 2009. - Additional easing options discussed: - Announce a more explicit contingent commitment to maintain a low policy interest rate for an extended period. - Extend the tenor of new liquidity instruments and incorporate them permanently into the policy framework. - Additional buybacks of BCCh securities to affect long-term interest rates. - Caution: any “quantitative easing” limited to operations involving central bank securities; purchases of private instruments would be significant departures and could add credit risks given the central bank’s weak capitalization levels. - Legal/operational note: - BCCh Organic Law (article 36) allows purchase of banks’ loans or investments for up to 90 days; extension requires full majority of the BCCh Board and prior assessment by the SBIF. ### III. Fiscal policy: countercyclical stance, financing, and framework - Stimulus and measures: - Government announced stimulus package of US$4 billion in January 2009, representing about 2.9 percent of GDP. - Included increased public investment, transitory reduction in stamp taxes and other taxes (almost 1 percent of GDP), higher transfers and subsidies for low-income families, housing, and transportation (about ½ percent of GDP). - Recapitalizations and capital increases (Banco Estado, CODELCO, CORFO, FOGAPE) amounted to about 1 percent of GDP. - Structural surplus target of ½ percent of GDP reduced to zero for 2009. - Mid-June 2009 Budget update projected an overall deficit of 4.1 percent of GDP by end-year (compared with deficit of 2.9 percent of GDP expected in January). - Authorities announced a structural fiscal deficit of 0.4 percent of GDP expected in 2009; staff estimated a fiscal impulse of about 5 percent of nonmining GDP. - Financing: - About US$10.7 billion in gross financing needs to be covered by US$8 billion from past savings under the Economic and Social Stabilization Fund (FEES/ESSF) and by issuing bonds domestically. - Funding of stimulus: initial ESSF withdrawal of USD 4 billion — USD 1 billion to finance investment/expenditure in USD and USD 3 billion to finance investment/expenditure in local currency (pesos); mid-June strategy included additional USD 4 billion sales and issuance of USD 1.7 billion in 5-year and 10-year domestic bonds. - Fiscal outlook and guidance: - Staff views that fiscal stimulus should not be withdrawn too soon given global downside risks; consider extending several measures implemented in 2009 through end-2010 while ensuring a balanced structural target is reinstated. - Once recovery is well entrenched, most measures should be unwound and consideration given to specifying a structural target. - Preserve the structural rule framework while ensuring countercyclical support does not compromise it. - Fiscal stance selected figures (verbatim): - Central government balance (percent of GDP): 2008: 5.3; 2009: -4.1; 2010: -2.1. - Total revenue (percent of GDP): 2008: 26.4; 2009: 21.6; 2010: 22.3. - Total expenditure (percent of GDP): 2008: 21.1; 2009: 25.7; 2010: 24.5. - Non-Mining Balance (percent of GDP): 2008: -0.8; 2009: -6.7; 2010: -4.8. - Net Assets of the Public Sector (percent of GDP): 2008: 20.4; 2009: 14.4; 2010: 13.2. - Gross Debt (percent of GDP): 2008: 5.2; 2009: 5.1; 2010: 4.9. ### IV. Financial sector, liquidity, and regulatory response - Banking system strengths and vulnerabilities: - Well-capitalized banks; supervisory framework strong; domestic financial intermediation largely on-balance-sheet. - Retail deposits about one-third of liabilities; limited exposure to structured products (about 10 percent of assets and mostly in BCCh securities). - Foreign-owned banks represent more than half of banking assets and liabilities; largest foreign-owned bank required to keep capital-to-asset ratio in excess of 11 percent (vs 8 percent for most other banks). - Credit conditions and market response: - Banks’ credit conditions tightened severely due to increased reliance on external and domestic wholesale markets and pension funds’ portfolio shifts abroad. - Bank credit growth to the private sector, particularly consumers, slowed markedly in real terms by April 2009. - Domestic market improvements: market interest rates declined, USD liquidity eased, yield curve steepened; peso appreciated by almost 20 percent by early July from its lows in late October 2008. - Were global conditions to deteriorate, high external rollover needs of banks and corporates (about US$30 billion) in 2009 could bring renewed pressures. - Prudential indicators and stress tests (selected values and results; verbatim where shown): - Bank regulatory capital to risk-weighted assets: 2006: 12.5; 2007: 12.2; 2008: 12.5; 2009 1/: 13.6. - Bank capital to assets: 2006: 6.8; 2007: 6.7; 2008: 6.9; 2009 1/: 7.4. - Bank nonperforming loans to total loans: 2006: 0.8; 2007: 0.8; 2008: 1.0; 2009 1/: 1.2. - Bank provisions to nonperforming loans 2/: 2006: 199; 2007: 210; 2008: 179; 2009 1/: 74. (Note: 2009 data reflects IFRS; excluding Banco Estado, ratio was 94 percent in [text truncated].) - Bank return on assets: 2006: 1.3; 2007: 1.1; 2008: 1.2; 2009 1/: 1.3. - Staff/BCCh stress-test results: credit-risk losses in range of 1-8 percent of capital; market-risk losses about 2 percent of capital. Authorities’ July 2009 Financial Stability Report: losses within 2¾-8¼ percent of capital when disentangling increased provisions and lower earnings. - Regulatory and supervisory actions: - Full adoption of IFRS from January 2009; draft amendment to the General Banking Law expected to proceed in 2009-10. - Committee of Superintendents preparing an MOU to strengthen coordination, risk-based and consolidated supervision. - Agreement to consider broadening perimeter of regulation to nonbank entities; potential assessment during an FSAP update in 2010. - Staff encouraged continued assessment of provisioning models and exploration of options to reduce procyclicality (e.g., dynamic provisioning). ### V. External accounts, capital flows, and market indicators - External and trade developments: - External current account shifted from a surplus of 4½ percent of GDP in 2007 to a deficit of 2 percent of GDP in 2008. - Trade balance in 2008 fell to roughly one-third of the US$23½ billion surplus in 2007. - Balance of payments posted a US$6½ billion surplus in 2008, due to strong net FDI. - Trade deficit about US$600 million in Q4 2008 driven by a 21 percent decline in export value. - Trade and current account balances shifted to surpluses in Q1 2009 consistent with sharp contraction in domestic demand. - External financing needs and composition (excerpted figures verbatim): - External financing needs table excerpt: Total needs29.321.8; Current account4.64.7; Debt amortization24.817.1; Public sector0.50.2; Private sector24.216.9; Banks7.93.4; Non-banks16.313.5; FDI, net: in percent of needs16.426.4; Reserves and FEES assets: in percent of needs 121.8163.7. - Projections and selected external figures (verbatim where reported): - Current account (percent of GDP): 2008: -2.0; 2009: -3.0; 2010: -2.9; 2011: -2.3; 2012: -2.1; 2013: -2.0; 2014: -2.0. - Exports of goods (US bn): 2008: 66.5; 2009: 45.9; 2010: 48.6; 2011: 53.4. - Imports of goods (US bn): 2008: 57.6; 2009: 43.6; 2010: 47.1; 2011: 51.5. - Gross external debt (percent of GDP): 2008: 38.2; 2009: 40.6; 2010: 38.0; projected medium-term decline to 31.9 by 2014. - Gross international reserves (US bn): 2008: 23.2; 2009: 24.0 (data as of May 2009). ### VI. Growth dynamics, output gap, and medium-term prospects - Near-term growth dynamics: - Real GDP grew at 4¼ percent on average (y/y) during the first three quarters of 2008; slowed to 0.2 percent (y/y) in Q4 2008; declined by 2.1 percent (y/y) in Q1 2009. - Macroeconomic conditions began to stabilize in Q2 2009, supporting early recovery prospects. - Staff expects real GDP growth within a -0.5 to -1 percent range for 2009 and within a 3–4 percent range in 2010. - Medium-term potential: - Staff estimated potential growth of 4 percent for the medium term (staff assumption). - BCCh production-function estimates suggested potential growth rates at 4½–5 percent prior to the crisis. - Box 2 SVAR/Hodrick-Prescott results: positive output gap opened in 2006 appears to have closed during 2008Q4; HP filter shows a negative output gap at end-2008; negative output gap expected over next couple of years with economy growing below potential in 2009–10. - Productivity and labor: - Productivity contribution to per capita growth has been lackluster since 1998; sample values (Contribution of Productivity to Per Capita Growth) — Chile: 1960-2003: 0.42; 1990-97: 0.60; 1998-2003: -2.52. - Labor participation rates (Chile): Male: 1998 = 81.1; 2003 = 75.8; 2008 = 75.7. Female: 1998 = 38.5; 2003 = 38.4; 2008 = 44.1. ### VII. Reforms, structural recommendations, and policy priorities - Fiscal framework and long-term view: - Recommendation to extend the existing 2–3 year horizon for planning and executing fiscal policy to better integrate long-term contingent spending and demographic/productivity factors. - Preserve the structural surplus rule while bringing more of a longer-term view to short-term fiscal policy formulation. - Contingent liabilities and public sector risks: - Staff welcomed commitment to conduct long-term assessments of pension-related and central bank-related liabilities. - BCCh capitalization: net worth rose to about ½ percent of GDP at end-2008 from -2.8 percent of GDP at end-2007; staff noted value-at-risk approach could justify a capital base of about 1–2 percent of 2008 GDP on a permanent basis. - FRL constraints on recapitalization transfers: annual transfers to BCCh cannot exceed ½ percent of the previous year GDP (after subtracting Pension Reserve Fund contribution, which should be no less than 0.2 percent and up to ½ percent); recapitalization transfers can be done for five years. - Several large PSEs face deteriorating financial conditions (e.g., TranSantiago); staff encouraged strengthening governance and transparency and evaluating options for improving PSE financial condition. - Labor and business environment reforms: - Administrative/regulatory burden higher than OECD average; recommended review and annual agenda for “red-tape” reduction. - Scope to improve balance between security and flexibility in the labor market; implement Meller Commission proposals (in-work benefits, child benefits, job-related training, extension of unemployment insurance coverage). - Promote formal employment via reforms to unemployment insurance, lower severance payments, and easing some restrictions on contracts. - Capital markets and pension reform: - Progress on pension reform to increase investment flexibility and strengthen oversight (investment limits relaxed; pension funds to submit investment guidelines; Technical Investment Board (CIT) established). - Authorities postponed shifting SWF portfolios toward equities and corporate fixed-income due to global conditions; recommendation to expand SWF investments to domestic bank deposits under evaluation. - Market-deepening measures enacted or proposed (selected): - New tax rules to facilitate foreign investor participation in local fixed-income markets. - Allowing high-yield investments by pension funds; extension of CORFO partial guarantees for SME securitization. - Insurance companies allowed to lend to individuals/corporations and participate in syndicated bank lending up to specified limits; increased credit capacity to 3% of capital requirement (from 2%). - Measures to promote SME loan securitization, pension funds’ participation in repo operations, and homologation of tax treatment for foreign investors. ### VIII. Debt sustainability, stress tests, and contingency scenarios - Public sector debt and buffers: - Gross public sector debt fell to 5 percent of GDP in 2008. - Public sector assets held in wealth funds increased to 16 percent of GDP. - Due to large public sector assets, “the sustainability of public sector debt is not an issue.” - Structural surplus rule produced large fiscal savings that helped build buffers. - External debt dynamics and vulnerabilities: - Total external debt increased to 38 percent of GDP in 2008 from 34 percent in 2007; all external debt denominated in foreign currency, implying sensitivity to peso depreciation. - Stress tests and scenario specifications (as presented): - Individual shocks: permanent one-half standard deviation shocks. - Combined scenario: permanent 1/4 standard deviation shocks applied to real interest rate, growth rate, and current account balance. - Real depreciation scenario: one-time real depreciation of 30 percent occurring in 2009. - Public debt alternative shock: one-time real depreciation of 30 percent combined with a 10 percent of GDP shock to contingent liabilities in 2009. - Selected projected series (verbatim where reported): - External debt (percent of GDP): 2004: 45.5; 2005: 39.0; 2006: 33.7; 2007: 33.9; 2008: 38.2; 2009: 40.6; 2010: 38.0; 2011: 37.6; 2012: 36.3; 2013: 33.3; 2014: 31.9. - Gross external financing need (US$ bn): 2008: 39.7; 2009: 44.2; 2010: 33.1; 2011: 34.0; 2012: 39.0; 2013: 40.9; 2014: 41.9. - Public sector debt (percent of GDP): 2008: 5.2; 2009: 5.1; 2010: 4.9; 2011: 4.5; 2012: 3.8; 2013: 3.0; 2014: 2.9. - Policy implication emphasized: - Fiscal buffers from structural rule and wealth funds provide room to finance transitory measures and reform-accelerating expenditures without creating sustainability issues, but vulnerabilities remain to large real depreciations and contingent liability shocks. ### IX. Outlook, projections, and key macro figures (selected forecast figures verbatim) - Real GDP (growth in percent): 2008: 3.2; 2009: -0.7; 2010: 3.6; 2011: 3.9; 2012: 4.8; 2013: 5.0; 2014: 5.0. - Total domestic demand (growth in percent): 2008: 7.4; 2009: -3.0; 2010: 2.6; 2011: 5.0. - Consumer prices (end of period): 2008: 7.1; 2009: 0.8; 2010: 2.5; 2011–2014: 3.0 each year. - Current account (percent of GDP): 2008: -2.0; 2009: -3.0; 2010: -2.9. - Trade Balance (US bn): 2008: 8.8; 2009: 2.3; 2010: 1.5; 2011: 1.9. - Exports of goods (US bn): 2008: 66.5; 2009: 45.9; 2010: 48.6; 2011: 53.4. - Imports of goods (US bn): 2008: 57.6; 2009: 43.6; 2010: 47.1; 2011: 51.5. - Gross international reserves (US bn): 2008: 23.2; 2009: 24.0 (data as of May 2009). ### X. Executive Board and programmatic notes - Executive Board (Public Information Notice No. 09/111, July 22, 2009) conclusions: - Directors commended Chile’s sound policy framework and vigorous, well balanced, and coordinated policy response. - Directors endorsed BCCh’s alternative monetary easing measures and noted staff assessment that the exchange rate is broadly in line with fundamentals. - Directors welcomed countercyclical fiscal stimulus and recommended caution in withdrawing stimulus; encouraged extension of several revenue measures through end-2010 if needed. - Directors encouraged extending the horizon for fiscal policy formulation, dealing with contingent liabilities, sustaining reforms to lower cost of doing business, promoting formal employment, and continuing prudential/supervisory improvements. - Next consultation: Article IV Consultation expected on standard 12-month cycle. *Source: IMF staff report (2009 Article IV Consultation), content unit _cr09271.* ### 1. A Sequence of Policy Action and Risk during the Crisis ...............................................15 ### 1. A Sequence of Policy Action and Risk during the Crisis ### I. Staff appraisal and executive summary - Chile’s economy is in a significantly better position than most economies to face the global crisis owing to its policy framework and track record of exemplary policies. - Large fiscal savings over the past several years have been critical to preserve stability and cover financing needs. - Imbalances seen elsewhere have been absent: the banking system is well-capitalized, the supervisory framework is strong, and domestic capital markets are well-developed. - The policy response has been vigorous, well balanced, and coordinated. - Macroeconomic conditions have begun to stabilize in the second quarter of 2009, supporting early recovery prospects, though: - Real GDP growth in Chile in 2009–10 is expected to be less favorable than prior to the crisis due to high global uncertainty, a potentially sluggish global recovery, and marked-down global trend growth prospects. - Risks to inflation appear balanced and highly dependent on external developments. - Real effective peso appreciation has occurred in recent months following a sharp depreciation in late 2008; staff estimates the real exchange rate to be broadly in line with fundamentals. - If downside risks materialize, further countercyclical measures would be required—monetary policy should lead given limited fiscal scope in 2009 and potential fiscal challenges in 2010. - Monetary policy easing considerations: - Inflation expectations anchored around the 3 percent target. - Reduction in policy interest rates plus measures to facilitate credit access and promote competition should support demand and bring inflation back to target. - Options to impart more countercyclical monetary impulse include announcing a more explicit contingent commitment to maintain a low policy interest rate for an extended period and extending the tenor of new liquidity instruments. - Any “quantitative easing” should be limited to operations involving central bank securities; operations involving private instruments would entail significant departures and could add credit risks given the central bank’s weak capitalization levels. - Fiscal policy stance: - The extraordinary circumstances have contributed to a structural deficit in 2009. - Staff views that fiscal stimulus should not be withdrawn too soon given global downside risks. - Authorities could consider extending several measures implemented in 2009 through end-2010 while ensuring a balanced structural target is reinstated. - Once recovery is well entrenched, most measures should be unwound and consideration given to specifying a structural target. - Preserve the structural rule framework while ensuring countercyclical support does not compromise it. - Fiscal framework improvements: - Bring more of a longer-term view to short-term fiscal policy formulation; the structural rule embeds a medium-term perspective, predictability, transparency, and credibility, and should be preserved. - Contingent liabilities and public sector risks: - Staff welcomes commitment to conduct long-term assessments of pension-related and central bank-related liabilities. - Prospective budget deficits would limit the likelihood of fully recapitalizing the BCCh. - Financial condition of some companies providing public services has deteriorated and risks a potential call on public finances; staff commends strengthening of governance and transparency and encourages continuation. - Structural reforms to boost per capita income growth: - Cost of doing business in Chile compares unfavorably with the average for OECD countries. - Scope to improve the balance between security and flexibility in the labor market. - Financial sector and regulation: - Large presence of foreign-owned banks does not pose systemic risks, though severe global distress could affect domestic banks’ creditworthiness. - Keep some of the new liquidity instruments that have preserved orderly conditions if warranted. - Implementing the Financial Advisory Committee recommendation to permanently expand the menu of SWF investments to deposits in the domestic financial system seems less urgent. - Credit risks suggest contemplating reforms including broadening the perimeter of regulation to nonbank entities outside the Superintendency of Banks and Financial Institutions’ direct purview. - Staff’s stress tests confirm capital levels are adequate to withstand potential credit losses. - With full adoption of IFRS in January 2009, some banks with lower provisioning relative to nonperforming loans are more dependent on external financing and could be more exposed to credit risks; continuously assess provisioning models and explore options to reduce procyclicality. - Next Article IV Consultation expected on the standard 12-month cycle. ### II. The global crisis and the policy response - Chile entered the global financial crisis in a fundamentally robust position, helped by the structural fiscal rule and accumulated savings from terms of trade windfalls, lowering government liabilities. - The 2009 Article IV Consultation reviewed policies implemented to safeguard the economy and ensure sustained success. - Comparisons with 1998: - The economy faced a more severe terms of trade shock in 2008 than in 1998, but was less exposed to a sudden stop of capital. - A current account surplus rather than a rising deficit provided resilience in 2008 relative to 1998. - Front-loaded monetary easing under inflation targeting and rising official reserves helped buffer the external shock. ### III. The impact on external accounts and financial conditions - External current account and trade: - External current account shifted from a surplus of 4½ percent of GDP in 2007 to a deficit of 2 percent of GDP in 2008. - The trade balance in 2008 fell to roughly one-third of the US$23½ billion surplus in 2007. - Balance of payments posted a US$6½ billion surplus in 2008, due to continued strong net foreign direct investment. - Trade deficit about US$600 million in Q4 2008 driven by a 21 percent decline in the value of exports. - Trade and current account balances shifted to surpluses in Q1 2009 consistent with a sharp contraction in domestic demand. - External asset positions and flows: - Institutional investors’ assets (mostly private pension funds) declined by about 50 percent during 2008, mostly from lower equity prices. - Public sector (including the central bank) creditor status improved to US$50 billion, about 30 percent of GDP. - Chile’s net international investment position shifted to a debtor status of US$33½ billion by end-2008, equivalent to 20 percent of GDP. - Financial account: Chile remains a capital exporter though financial flows declined from high levels. - Foreign direct investment inflows declined somewhat from 2006–08 highs. - Outward portfolio investment has declined despite higher pension fund investment limits; portfolio investment in Chile has risen with booming domestic debt issuance. - Banking and credit conditions: - Banks’ credit conditions tightened severely due to increased reliance on external and domestic wholesale markets and shifts in pension funds’ portfolios to foreign assets. - Default probabilities for banks increased reflecting foreign-owned institutions’ presence, rising cross-border claims of creditor countries, and expected rise in non-performing loans. - Bank credit growth to the private sector, particularly consumers, slowed markedly in real terms by April 2009. - External bank financing indicators showed external debt levels, fixed-rate and variable-rate compositions, and trends in external financing pressures as reflected in figures. ### IV. Growth dynamics and near-term outlook - Growth slowdown: - Real GDP grew at 4¼ percent on average (year-on-year) during the first three quarters of 2008. - Real GDP slowed to 0.2 percent (y/y) in Q4 2008. - Real GDP declined by 2.1 percent (y/y) in Q1 2009, led by an abrupt decline in inventories and private fixed investment. - Recovery conditions: - Macroeconomic conditions began to stabilize in Q2 2009, providing some support for early recovery prospects. - However, global uncertainty, the possibility of a sluggish global recovery, and reduced global trend growth could drag Chile’s growth in 2009–10. *Source: IMF staff report (2009 Article IV Consultation) — "1. A Sequence of Policy Action and Risk during the Crisis."* ### 15. Global disinflation pressures spilled rapidly onto domestic inflation. After ### _cr09271 - 15. Global disinflation pressures spilled rapidly onto domestic inflation. After ### Inflation developments and transmission - 12-month inflation peaked at 9.9 percent in October and decelerated to 1.9 percent by June 2009. - Global disinflation in major commodity prices accelerated the passthrough from international to domestic prices, aided by reforms to the Fuel-Price Stabilization Fund (FEPC). - Core inflation measures are hovering around 3–4 percent (y/y). - Long-term inflation expectations have been firmly re-anchored at the 3 percent target. - 12-month inflation has declined sharply and is expected to remain below the lower bound of the target range in 2009. ### Labor market and cost pressures - Seasonally-adjusted unemployment rate increased to 9.9 percent in May 2009. - Wage growth and other cost pressures have begun to subside as employment growth has decelerated sharply. - Unit labor costs and wage growth indicators show signs of weaker labor markets. ### Monetary policy actions - The Central Bank of Chile (BCCh) suspended international reserve accumulation after foreign exchange purchases of US$6 billion between May and mid-September 2008. - The BCCh shifted from an “easing bias” in Q4 2008 to cutting the policy interest rate from 8¼ percent in January 2009 to a historic low of ¾ percent by June 2009. - Measures to support peso and U.S. dollar liquidity included repos and swap lines; collateral requirements were eased and liquidity instruments extended through end-2009. - The BCCh suspended the issuance of long-term securities (5-year and up maturities) for the remainder of 2009 (about US$0.7 billion are due) and would buyback up to US$1 billion of similar securities currently outstanding; it would also conduct open market operations to compensate the monetary impact. ### Fiscal and countercyclical measures - The government announced a stimulus package of US$4 billion in January 2009, representing about 2.9 percent of GDP. - Measures included an increase in public investment, a transitory reduction in stamp taxes and other taxes (of almost 1 percent of GDP), and higher direct transfers and subsidies for low-income families, housing, and transportation (for about ½ percent of GDP). - Recapitalizations and capital increases (Banco Estado, CODELCO, CORFO, FOGAPE) amounted to about 1 percent of GDP to support credit to exporters and small corporations, through guarantees. - The structural surplus target of ½ percent of GDP was reduced to zero for 2009. - In mid-June the authorities updated the 2009 Budget, projecting an overall deficit of 4.1 percent of GDP by end-year (compared with a deficit of 2.9 percent of GDP expected in January). - The authorities announced a structural fiscal deficit of 0.4 percent of GDP would be expected in 2009, with staff estimating a fiscal impulse of about 5 percent of nonmining GDP. - About US$10.7 billion in gross financing needs would be covered by US$8 billion from past savings under the Economic and Social Stabilization Fund (FEES) and from issuing bonds domestically. - The January 2009 fiscal package and subsequent measures included initiatives to stimulate credit and competition in the financial system, employment, and further direct support to low-income groups. ### Regulatory and liquidity support measures - The Superintendency of Pensions (SP) extended the period to reduce pension funds’ position in foreign currency forwards in the domestic market from 10 to 90 working days. - The Ministry of Finance shifted US$1 billion in deposits held abroad to domestic banks in October to support domestic liquidity conditions. - In mid-November the Ministry established bank deposit auctions of its U.S. dollar cash flow, conducted by the BCCh. - The Ministry of Finance suspended the diversification of financial assets under sovereign wealth funds (SWFs) into corporate fixed-income and equity in November; in January 2009 the Financial Advisory Committee recommended incorporating domestic banks’ deposits into the menu of SWFs investment options. ### Financial conditions and market response - Domestic financial market conditions improved: market interest rates declined, liquidity—particularly in U.S. dollars—eased, and the yield curve steepened. - Chilean banks and corporates rolled over most of their maturing external debt with domestic debt; issuance of fixed-income instruments by highly-rated corporates in domestic markets increased since October 2008. - Moody’s upgraded the sovereign’s long-term foreign currency rating by one notch in late March. - The peso appreciated by almost 20 percent by early July from its lows in late October 2008. - Were global financial conditions to deteriorate, the high external rollover needs of banks and corporates (about US$30 billion) in 2009 could bring renewed pressures on credit, balance sheets, and investment. ### External financing and investment - Current account deficit projected to deteriorate to around 3 percent of GDP in 2009 owing to lower copper exports and a sharp contraction in trading partner demand. - Net foreign direct investment would decline from recent highs but would still represent a high share of the current account deficit. - External financing needs table excerpt (as presented): - Total needs29.321.8 - Current account4.64.7 - Debt amortization24.817.1 - Public sector0.50.2 - Private sector24.216.9 - Banks7.93.4 - Non-banks16.313.5 - FDI, net: in percent of needs16.426.4 - Reserves and FEES assets: in percent of needs 121.8163.7 ### Economic outlook and risks - The short-term outlook remains uncertain, with risks largely external. - Staff expects real GDP growth within a -0.5 to -1 percent range for 2009 and within a 3–4 percent range in 2010. - The outlook for 2009–10 is highly dependent on the strength and speed of the global recovery and how this affects asset and commodity prices. *Source: IMF staff report excerpt contained in the provided content unit.* ### 21. Medium-term prospects remain favorable and warrant sustaining the reform ### 21. Medium-term prospects remain favorable and warrant sustaining the reform momentum ### Medium-term prospects and productivity - Significant private investment in recent years has enhanced potential output. - Global trend growth prospects have been marked down considerably, likely constraining investment and potential growth in the next few years. - Productivity has been lackluster since 1998, notwithstanding the impact of energy shortages on overall productivity growth in recent years. - Policy implication: It is imperative to advance reforms to enhance the business environment and flexibilize labor markets to improve the contribution of productivity to medium-term per capita growth. - Labor participation rates (Chile): - Male: 1998 = 81.1; 2003 = 75.8; 2008 = 75.7 - Female: 1998 = 38.5; 2003 = 38.4; 2008 = 44.1 - Source: Estudio de Hacienda Publica, 2008. - Contribution of Productivity to Per Capita Growth (based on Bosworth & Collyns (2003), Brookings Papers on Economic Activity): - Periods and values: - 1960-2003 / 1990-97 / 1998-2003 - Chile: 0.42 / 0.60 / -2.52 - Australia: 0.50 / 0.46 / 0.27 - Ireland: 0.57 / 0.88 / 0.67 - New Zealand: 0.41 / 0.38 / 0.45 - East Asia (excludes China): 0.27 / 0.34 / -0.54 - Average: 0.43 / 0.53 / -0.33 ### Box 2 — The Global Crisis and Potential Output in Chile: key results - The global crisis negatively affected copper prices, investment, and export prospects—factors important for potential growth and the output gap. - Output gap estimation method: - Structural vector autoregression (SVAR) including real GDP growth, unemployment rate, and real copper prices. - Identification procedure similar to Blanchard and Quah (1989). - Levels anchored by assuming effective and potential output were similar in 1994Q1 (also used by the BCCh). - Main empirical results: - The positive output gap (output above potential) that had opened in 2006 seems to have closed during 2008Q4. - Applying the Hodrick-Prescott filter results in a negative output gap at end-2008. - With the economy growing below potential in 2009–10, a negative output gap is suggested over the next couple of years. - The estimated potential growth rate was 4 percent, on average, since 1998, consistent with a structural break in that year. - Recent BCCh production-function estimates suggest potential growth rates at 4½–5 percent prior to the crisis. - Staff assumption: potential growth of 4 percent for the medium term. - Real copper prices appear to only affect the potential growth rate marginally, consistent with the structural fiscal rule insulating the economy from copper price shocks. - Demand shocks primarily affect output during the year after impact, with an impact lasting about 3 years. - The variance of output forecast errors is mainly explained by domestic factors. - Reference: Fuentes et al. in Economia chilena, vol. 11, August 2008. ### A. The Role for Macroeconomic Policies #### Monetary policy and the exchange rate: response to a sudden reversal of risks - Monetary policy response: - Swift front-loading of policy rate cuts to below-neutral levels given anchored inflation expectations and a widening output gap. - Justified by sharp tightening of bank lending conditions reflecting heightened risk aversion. - Authorities noted transmission from the policy rate and other “nonmonetary measures” to stabilize inflation, promote competition, and stimulate credit; expected these trends to intensify and credit growth to pick up. - Exchange rate: - The floating exchange rate helped absorb global risk aversion and deterioration of terms of trade. - Pre-emptive buildup of foreign exchange reserves in 2008 and use of new liquidity instruments preserved orderly market conditions. - Authorities viewed the large depreciation of the peso since the onset of the crisis as mostly reflecting terms of trade deterioration and global risk aversion. - Inflation and policy constraints: - Authorities expected sustained disinflation for the next six months, with 12-month inflation envisaged to approach zero by end-year. - With the policy rate close to its effective lower bound and continued external risks, ensuring inflation returns to the 3 percent target over the 24-month horizon could prove potentially challenging. - Risk: Additional budgetary financing needs could impart further disinflationary pressures, including through an exchange rate appreciation. - Authorities confident that a well-functioning credit market, strong preemptive policy response, and credibility of the inflation target would support return to the 3 percent inflation target over the 2-year horizon. #### Contingent easing measures discussed - Authorities considered alternative easing if disinflationary pressures were more severe and protracted: - Announce a more explicit contingent commitment to maintain a path for the policy interest rate for an extended period. - Extend the tenor of new liquidity instruments and incorporate them permanently into the policy framework. - Additional buybacks involving BCCh securities to affect long-term interest rates. - Staff cautioned that broadening instruments for outright purchase would be a significant departure and could add credit risks to the BCCh’s weak capitalization levels. - Legal note: BCCh Organic Law (article 36) allows purchase of banks’ loans or investments for up to 90 days; extension requires full majority of the BCCh Board and prior assessment by the SBIF. #### Box 3 — Bank lending conditions and monetary policy: findings - The tightening of global financial conditions raised the bank lending spread (BLS) in Chile, increasing funding costs and affecting aggregate demand and inflation. - The Global Projection Model (GPM) was extended to include the BLS as an information variable affecting the output gap; models with BLS show better forecast accuracy. - Simulation results: - Incorporating BLS allows monetary policy to anticipate and buffer shocks on inflation and output more effectively; in response to a negative demand shock, expected inflation declines more pronouncedly when BLS is included. - As the economy recovers and slack vanishes, risks on inflation may intensify—especially when policy rate changes are proportional to the BLS shock, which could bias adjustments toward demand shocks versus supply shocks induced by the higher BLS. ### Fiscal policy: imparting a stronger countercyclical stance - Authorities’ stance: - Fiscal policy should take a leading role in stabilizing the economy in 2009. - Public spending planned to rise by 14½ percent in real terms in 2009. - Stimulus comprised of transitory measures to minimize long-term fiscal costs. - Financing provided by past savings under the FEES; low public sector debt and a broad mix of spending and tax measures supported confidence in effectiveness. - Structural balance and revenues: - A larger-than-expected decline in nonmining tax revenue expected to bring the structural balance into deficit. - Authorities noted that maintaining a structural balance would have undermined automatic stabilizers and the need for a stronger countercyclical response. - Authorities updating elasticities of nonmining tax revenues to GDP provided an additional ½ percent of GDP in structural revenues for 2009. - Other methodological changes, including adding a cyclical component to public spending, likely to be introduced with the 2010 budget. - Policy guidance and limits: - Authorities did not envisage further fiscal measures beyond those already calibrated for implementation later in 2009 and through 2010. - Potential constraints in 2010: - Structural revenues could be constrained by a lower long-term price of copper. - Temporary tax reductions made in 2009 could constrain public spending and force a more permanent reduction in the structural surplus target. - Importance of preserving the structural rule as an anchor, given strengthened credibility and acceptance with the downturn. - Staff recommendation: consider not withdrawing fiscal stimulus too soon; extend some transitory measures (notably the reduction in the stamp tax) while bringing the structural target back to balance. - Staff stressed importance that the 2010 Budget be presented with a balanced target and that reinstating the ½ percent of GDP surplus target be reassessed as conditions normalize. - Fiscal impulse indicators (chart reported): change in overall balance and change in non-mining overall structural balance (in percent of GDP / percent of non-mining GDP) projected through 2014. ### B. Reforms to solidify the policy framework, the financial system and capital markets #### Fiscal framework: extending the horizon of policy formulation - Opportunity to adopt a more medium- to long-term view for fiscal policy formulation in line with international practice. - Structural surplus rule has embedded a medium-term perspective based on long-term copper price and trend output assumptions provided by an external committee of experts—yielding high predictability and transparency. - Authorities have presented long-term assessments on contingent liabilities and pension reform in recent years. - Recommendation: extend the existing 2–3 year horizon for planning and executing fiscal policy to better integrate long-term contingent spending and demographic/productivity factors, assessing growth in public per capita spending relative to income per capita and implications for net public assets. - Institutional progress: - Division in the Budget Planning Department (DIPRES) established to examine medium- and long-term fiscal pressures on health, education, and pension-related spending. - Staff caution: under certain plausible long-term scenarios, public spending paths could significantly exceed those associated with different structural rule targets, entailing significant deterioration in the government’s net asset position. #### Specific fiscal and financial risks and reform needs - BCCh capitalization: - By end-2008, government retired all outstanding debt with BCCh and made three capital injections totaling US$2.1 billion during 2006–08. - Net worth rose to about ½ percent of GDP at end-2008, from -2.8 percent of GDP at end-2007. - Staff noted a value-at-risk approach could justify a capital base of about 1–2 percent of 2008 GDP on a permanent basis. - With budget deficits envisaged for 2009-10, prospect for further capital injections unlikely to be met. - Authorities have begun preparations for an analysis of the impact of recapitalization transfers on BCCh’s balance sheet over a 20-year period, in line with the Fiscal Responsibility Law (FRL), with results expected before end-2009. - FRL constraints: annual transfers to BCCh cannot exceed ½ percent of the previous year GDP (after subtracting the Pension Reserve Fund contribution, which should be no less than 0.2 percent of the previous year GDP and up to ½ percent of the previous year GDP). Recapitalization transfers to the BCCh can be done for five years. - Public sector enterprises (PSEs): - PSEs net public debt stood at only 6¼ percent of GDP at end-2008. - Several large PSEs have faced deteriorating financial conditions, risking potential calls on public finances for recapitalization or debt guarantees. - The privately-run public bus system (TranSantiago) has continued to experience losses and could require direct and permanent budget support from 2010 on. - Authorities submitted proposals to Congress in 2008 to strengthen corporate governance of CODELCO and other PSEs. - Staff encouraged authorities to evaluate options for improving PSE financial condition, including presenting current and projected balances in the Informe Anual de Finanzas Publicas. - Authorities cited restructuring plans for several PSEs, replacement of management, and the Transparency Law to support governance strengthening; efforts will continue to align governance with the proposed CODELCO framework and broaden the scope of companies under the SEP. *Source: _cr09271 - 21. Medium-term prospects remain favorable and warrant sustaining the reform (IMF).* ### 33. A longer-term approach to fiscal policy would also help sustain the focus on ### 33. A longer-term approach to fiscal policy would also help sustain the focus on ### Fiscal policy, regulatory burden, and labor-market reforms - Longer-term fiscal strategy recommended to sustain focus on reforms to boost per capita income growth. - Administrative burden on the private sector compares unfavorably with the average for OECD members; indicators for starting and closing businesses highlight this. - Recommended practice: review the burden imposed by regulations on all businesses, potentially producing an annual agenda of “red-tape” reduction. - Authorities reported recent focus on simplifying regulatory procedures for micro and small and medium-sized firms. - Scope to improve the balance between security and flexibility in the labor market. - Implemented Meller Commission proposals include improvements to: - in-work benefits, - child benefits, - job-related training, - extension of coverage and benefits of the unemployment insurance scheme. - Agreed future focus: promote formal employment by: - introducing reforms to the unemployment insurance system that help lower severance payments, - easing some restrictions on contracts. - Indicators and rankings (from Doing Business, World Bank) shown in source: - Strictness of Employment Protection Legislation: Scores 0-6 from lowest to highest. - Overall Ranking 1/4 092...... - Starting a Business (ranking) 5531...... - Number of Procedures 9 2 19.7 5.8 - Duration (days) 27 21 64.5 13.4 - Paying Taxes (ranking) 414812...... - Time 31610770393.5 210.5 - Closing a Business (ranking) 1121417...... - Time (years) 4.5 11.3 3.3 1.7 - Cost (percent of estate) 15 84 15.9 8.4 ### Sovereign Wealth Funds (SWFs) and FEES assets - Global financial turmoil and fiscal risks underscore need to continue strengthening the framework for SWFs. - Chile’s SWFs rank among the most transparent. - Progress made on: - establishing generally accepted principles and practices (the “Santiago principles”), - designing a long-term strategic asset allocation, with MCM technical assistance. - Authorities postponed shifting portfolio structure toward equities and corporate fixed-income securities due to current global conditions; no decision made on timing. - Recommendation considered: expand SWF investments to deposits in domestic banks to rebalance risk-return and financial-stability goals vis-à-vis macroeconomic stability; still under evaluation. - Staff noted diminishing risks in global financial institutions would lessen permanent need to implement that recommendation. - With prospective budget deficits for 2009–10, staff noted government assets could diminish in the years ahead. - Authorities view using FEES assets to finance deficits as critical to legitimize the structural rule framework and believe there is room to finance deficits comfortably, including through debt issuance. - Agreement to continue embedding investment objectives and projected path for the FEES within a long-term fiscal framework. - Chile: Central Government Assets (In percent of GDP) timeline in source shows series by asset category (Other in dollars, Fondo Bicentenario (in US$), FRP (in US$), FCC/FEES (in US$), Pesos) across years 2001 2006 2011 2016 2021 2026 2031 2036 2041 2046 (chart in source). ### Banking system: soundness, credit risks, and external linkages - Authorities: banking system is sound and well-protected from many problems seen in advanced economies. - Financial intermediation characterized by a traditional banking model: - most operations on-balance sheet, - high reliance on retail deposits (about one-third of liabilities), - limited exposure to structured products and investment in financial instruments (about 10 percent of assets and mostly in BCCh securities). - Banks have been gradually increasing foreign borrowing to offset pension funds’ reallocation abroad, including long-term and trade-financing operations. - Foreign-owned banks: - represent more than half of the banking system’s assets and liabilities, - are mainly subsidiaries; the largest foreign-owned bank required to keep a capital-to-asset ratio in excess of 11 percent (instead of 8 percent for most other banks). - share of external funding was, on average, less than 10 percent of liabilities; banks faced limited currency-related risk. - Financial soundness indicators and ratings context: - Long-term debt ratings of Chilean banks range from BBB+ to A+, according to FitchRatings; foreign currency deposits rated A1 by Moody’s. - Fitch’s October 2008 Bank Systemic Risk Report assessed system’s vulnerability to macroeconomic risk as low, with intrinsic quality similar to Canada. ### Financial soundness indicators (selected values and trends) - Bank regulatory capital to risk-weighted assets: - 2006: 12.5 - 2007: 12.2 - 2008: 12.5 - 2009 1/: 13.6 - Bank capital to assets: - 2006: 6.8 - 2007: 6.7 - 2008: 6.9 - 2009 1/: 7.4 - Bank nonperforming loans to total loans: - 2006: 0.8 - 2007: 0.8 - 2008: 1.0 - 2009 1/: 1.2 - Bank provisions to nonperforming loans 2/: - 2006: 199 - 2007: 210 - 2008: 179 - 2009 1/: 74 - Note: For 2009, data reflects new IFRS accounting. Excluding Banco Estado, the ratio was 94 percent in (source text truncated). - Bank return on assets: - 2006: 1.3 - 2007: 1.1 - 2008: 1.2 - 2009 1/: 1.3 - Bank return on equity: - 2006: 18.6 - 2007: 16.2 - 2008: 18.9 - 2009 1/: 17.9 - Liquidity ratio 3/: - 2006: 1.7 - 2007: 1.8 - 2008: 1.7 - 2009 1/: 1.7 - Current ratio 4/: - 2006: 68.4 - 2007: 67.6 - 2008: ...... (data missing in source) - Sources: BCCh and SBIF. 1/ Latest available data April 2009. Data for 2009 reflects new IFRS accounting rules. 3/ Ratio of cash to deposits by end of year, unless otherwise noted. For 2009, data is as of March. 4/ Ratio of assets to liabilities with maturity of 1 year or less. 2/ Data for 2009 reflects new IFRS accounting. Excluding Banco Estado, the ratio was 94 percent in (text truncated in source). ### Credit-risk stress tests and vulnerabilities - Staff noted interconnectedness with global financial institutions and increasing claims by foreign banks on Chile present risks. - Analysis suggests potential deterioration in creditworthiness if difficulties at global and regional financial institutions resurface and become severe. - Potential risk if parent-bank support became more uncertain. - Stress-test results (BCCh): - banking system would face losses associated with credit risk in the range of 1-8 percent of capital, and of 2 percent of capital for market risk. - July 2009 Financial Stability Report (authorities’ estimates): disentangling increased provisions and lower earnings, the sum of these losses remain within a 2¾-8¼ percent of capital. - With full adoption of IFRS in 2009, some domestic banks show lower provisioning levels relative to nonperforming loans; nonperforming loans tend to be more dependent on external financing and could be more exposed to credit risks, with adverse implications for capital requirements. - Authorities view these risks as minimal: no evidence of segmentation in the domestic market; some external borrowing is long-term; state-owned Banco Estado recently recapitalized; many private banks had recapitalized last year’s profits and were increasing provisions relative to nonperforming loans. ### Progress on prudential and supervisory framework - Adoption of IFRS and progress toward Basel II: - Starting in January 2009, IFRS accounting standards are in full force for banks, particularly regarding valuation of assets and liabilities, and the definition of nonperforming loans. - Authorities finalized draft amendment to the General Banking Law and expect to proceed with such reform during 2009-10. - Staff encouraged continued assessment of provisioning levels and effectiveness of underlying models, and exploration of options to reduce procyclicality, such as introducing “dynamic provisioning.” - Improved coordination among supervisory agencies: - Committee of Superintendents agreed to prepare a Memorandum of Understanding to strengthen coordination, risk-based and consolidated supervision, particularly for domestic conglomerates. - Committee has begun discussing implications from work by regulatory agencies (such as the Superintendency of Securities, SVS) to better understand ownership and financial linkages among domestic conglomerates. - SVS finalized a draft framework to implement a risk-based supervision framework for the insurance sector. - Perimeter of regulation: - SBIF senior officials agreed on importance of broadening the perimeter of regulation to bring several nonbank entities expanding lending operations under SBIF’s purview to minimize systemic risks. - Agreed this could be assessed during an FSAP update in 2010. - Staff estimates and charts in source highlight: - Chile: Bank Provisioning and Credit Risk (in percent of bank capital) — provisions to nonperforming loans, nonperforming loans, potential losses in percent of capital (chart based on SBIF data as of end-February 2009). - Chile: External Borrowing and Credit Risk — external borrowing (in percent of deposits) and potential losses (in percent of capital). ### Capital markets and pension reform - Authorities stressed ongoing implementation of pension reform was timely in addressing risks posed by global turmoil. - Pension fund reform increases flexibility for pension funds’ and contributors’ investment decisions while strengthening oversight and accountability. - Investment limits have been relaxed, including for investable securities. - Pension funds required to submit investment guidelines to the Superintendency of Pensions, to be overseen by the newly established Technical Investment Board (CIT). - Contributors can now switch investment funds provided they acknowledge embedded risks; pension funds must provide additional information about funds’ risks. *Source: IMF staff report excerpt (content unit _cr09271 - 33).* ### 42. The authorities advanced important capital market reforms envisaged under the ### _cr09271 - 42. The authorities advanced important capital market reforms envisaged under the ### Capital market and financial-sector reforms - New tax rules facilitate foreign investor participation in local fixed-income markets. - Measures to improve SME access to credit: - Allowing high-yield investments by pension funds. - Extension of CORFO’s partial guarantees for SME-related securitization. - Insurance sector liberalization: - Insurance companies are now allowed to lend to individuals or corporations. - Insurance companies may participate in non-related syndicated bank lending up to certain specified limits. - Increase the credit capacity of the insurance companies to 3% of the capital requirement (up from 2%). - Facilitate the participation of insurance companies in syndicated loans. - Measures to increase domestic liquidity: - Authorities continued to work toward allowing the participation of pension funds in repo operations. - Other market facilitation: - Promote SME loan securitization. - Homologation of tax treatment for foreign investors. - Encourage bond financing through favorable tax treatment and special benefits for issuers and investors. ### Government measures to support the countercyclical response and credit access (selected, with estimated fiscal costs where given) - Capitalization and targeted credit programs: - Capitalization of Banco Estado to boost consumer credit and financing of SMEs. - Increase CORFO's resources to support factoring and guarantees for credit rescheduling operations. - Double the resources of SMEs Promotion Agency (estimated cost Pesos 3600 m). - Lower capital requirements for credits guaranteed by government agencies (CORFO, FOGAPE and others). - Loosen conditions for CORFO's rescheduling program for SMEs; increase the size limit of eligible companies. - Broaden FOGAPE-eligible transactions; reduce guarantee costs; increase the size limit of eligible companies. - Direct household and labor support: - One-time bonus payment of 40000 pesos per household in March and August (estimated cost USD 224 m). - Subsidies to encourage employment among 18-24 years old (estimated cost USD 102 m). - Mortgage insurance for those unemployed for more than two months; extension of unemployment benefits to temporary workers. - Implementation of the Pension Reform in advance to increase coverage to 45% (up from 40%). - Broaden social programs to cover 60% (up from 40%) of children in most vulnerable sectors by 2011. - Tax and liquidity measures for firms and SMEs: - Transitory reduction in monthly tax provision payments for SMEs (estimated cost USD 460 m). - Transitory tax stamp reduction for 2009-10 (estimated cost USD 628 m). - Transitory increase in forestry benefits (estimated cost USD 28 m). - Facilitate participation of insurance companies in syndicated loans; promote SME loan securitization; homologation of tax treatment for foreign investors. - Anticipate (to September 2009) the income tax refund corresponding to FY2010. - Amendment of tax norms to allow banks to book provisions and write offs as deductible expenses. - Transitory reduction in monthly tax provision payments for SMEs (estimated cost USD 460 m). - Allow the netting of training expenditures in provisional tax payment (PPM) (estimated cost USD 147 m). - Expand from 1 to 3 years the term in which tax related debts can be rescheduled. - Increase in the complementary credit limit for subsided housing to 90% from 80% of the house value. - Education, employment training, and social inclusion: - Tax exemptions to encourage training of prospective workers; allow leave for training at a reduced salary as an alternative to dismissal; assessment of acquired knowledge by technical institutions; increase resources for working women scholarship program. - Extend CORFO guarantees to higher education institutions offering financial aid to students in unemployed families; 15000 new scholarships for low-income students; distribution of 90000 computers in 2009-10. - Increase the size of micro-finance program (estimated cost Pesos 1500 m). - Public investment to support jobs: - New road, irrigation and housing projects targeting 60000 new jobs (estimated cost USD 700 m). - Capitalization of CODELCO (estimated cost USD 1000 m). - Extraordinary contribution to Municipal Fund to support local communities (estimated cost USD 41 m). - Other: - Improve valuation of guaranteed assets; extend period during which guaranteed assets can be transferred. - Implement a country-wide subsidy for public transportation, subject to parliamentary approval. ### Macroeconomic outlook and projections (selected figures preserved verbatim) - Real GDP: - 2008: 3.2 - 2009: -0.7 - 2010: 3.6 - 2011: 3.9 - 2012: 4.8 - 2013: 5.0 - 2014: 5.0 - Total domestic demand: - 2008: 7.4 - 2009: -3.0 - 2010: 2.6 - 2011: 5.0 - Consumer prices (end of period): - 2008: 7.1 - 2009: 0.8 - 2010: 2.5 - 2011–2014: 3.0 (each year) - Current account (percent of GDP): - 2008: -2.0 - 2009: -3.0 - 2010: -2.9 - 2011: -2.3 - 2012: -2.1 - 2013: -2.0 - 2014: -2.0 - Trade Balance (in US bn): - 2008: 8.8 - 2009: 2.3 - 2010: 1.5 - 2011: 1.9 - Exports of goods (in US bn): - 2008: 66.5 - 2009: 45.9 - 2010: 48.6 - 2011: 53.4 - Imports of goods (in US bn): - 2008: 57.6 - 2009: 43.6 - 2010: 47.1 - 2011: 51.5 - Gross external debt (percent of GDP): - 2008: 38.2 - 2009: 40.6 - 2010: 38.0 - Medium-term decline projected to 31.9 by 2014. - Gross international reserves (in US bn): - 2008: 23.2 - 2009: 24.0 - Data as of May 2009: see Table 4 and Table 6 entries. ### Fiscal stance and public sector operations (selected figures preserved verbatim) - Central government balance (percent of GDP): - 2008: 5.3 - 2009: -4.1 - 2010: -2.1 - Total revenue (percent of GDP): - 2008: 26.4 - 2009: 21.6 - 2010: 22.3 - Total expenditure (percent of GDP): - 2008: 21.1 - 2009: 25.7 - 2010: 24.5 - Non-Mining Balance (percent of GDP): - 2008: -0.8 - 2009: -6.7 - 2010: -4.8 - Net Assets of the Public Sector (percent of GDP): - 2008: 20.4 - 2009: 14.4 - 2010: 13.2 - Gross Debt (percent of GDP): - 2008: 5.2 - 2009: 5.1 - 2010: 4.9 ### Financial markets and vulnerabilities (selected indicators) - Private Sector Credit to GDP: - 2002: 66.9 - 2008: 83.8 - Share of foreign currency deposits in total deposits: - 2008: 5.8 - 2009: 9.2 - Share of foreign currency loans in total credit: - 2008: 10.2 - 2009: 13.9 - Current account (percent of GDP) historic: - 2002: -0.9 - 2008: 4.9 - 2009: 4.4 - 2008–2009 swing to a deficit projected: 2009: -3.0 (projection) - Stock market index (in US$; period average): - 2002: 483 - 2008: 1630 - 2009: 1352 - Sovereign long-term foreign-currency debt rating (end of period): - Moody's: A2 (2008) - S&P: A+ (2008) - Fitch: A (2008) - Corporate spreads and issuance: - Corporate spreads increased significantly (Figure 6 commentary). - Corporate borrowing abroad and bond issuance abroad declined (Figure 6 commentary). *Source: IMF staff report content provided in the content unit.* ### ANNEX CHILE—DEBT SUSTAINABILITY ANALYSIS ### ANNEX CHILE—DEBT SUSTAINABILITY ANALYSIS ### Public sector debt position and fiscal buffers - Gross public sector debt fell to 5 percent of GDP in 2008. - Public sector assets held in the wealth funds increased to 16 percent of GDP. - Due to large public sector assets, “the sustainability of public sector debt is not an issue.” - The structural surplus rule produced “large fiscal savings over the past several years of high copper prices” that helped build buffers and ensure financing needs. - Additional financing needs stemming from a worse macroeconomic outlook could be covered by the country’s Fund for Economic and Social Stabilization for measures that are transitory in nature (examples provided: “one-off direct transfers and subsidies to low-income families, and housing”) or that accelerate implementation of reforms (example provided: “pension reform”). - Public debt would be sensitive to a large depreciation of the peso but “is projected level would still remain low.” ### External debt dynamics and vulnerabilities - Total external debt increased to 38 percent of GDP in 2008 from 34 percent of GDP in 2007. - All of Chile’s external debt is denominated in foreign currency, making external debt somewhat sensitive to peso depreciation. - FDI flows and substantial withdrawals from the country’s sovereign wealth fund are expected to account for a substantial proportion of necessary financing of the projected current account deficits in 2009. - “Debt levels are not unduly responsive to growth or interest-rate shocks” but are sensitive to depreciation shocks. ### Stress tests and scenario results (bound tests) - Individual shocks are permanent one-half standard deviation shocks (figures note). - Combined scenario: permanent 1/4 standard deviation shocks applied to real interest rate, growth rate, and current account balance (figure notes). - Real depreciation scenario: one-time real depreciation of 30 percent occurs in 2009 (figure notes). - For public debt, an alternative shock combines a one-time real depreciation of 30 percent and “10 percent of GDP shock to contingent liabilities occur in 2009” (figure notes). - Public debt baseline and scenario box values (excerpted box figures): - Baseline: 2.6; Scenario: 3.1; Historical: 3.7 (context: box for a variable in Figure 1). - Baseline: 4.5; Scenario: 3.5; Historical: 3.8 (context: box for another variable in Figure 1). - Baseline: -1.3; Scenario: -2.4; Historical: 2.2 (context: box for another variable in Figure 1). - Public debt baseline: 2.3; Scenario: 0.5; Historical: 5.4 (context: Figure 2 boxes). - Public debt baseline: 4.5; Scenario: 3.5; Historical: 3.8 (context: Figure 2 boxes). - Public debt baseline: 15.8; Scenario: 17.8; Historical: 4.6 (context: Figure 2 boxes). ### Key projections and numerical indicators (selected series from Tables) - External debt (percent of GDP), actuals and projections: - 2004: 45.5 - 2005: 39.0 - 2006: 33.7 - 2007: 33.9 - 2008: 38.2 - 2009: 40.6 - 2010: 38.0 - 2011: 37.6 - 2012: 36.3 - 2013: 33.3 - 2014: 31.9 - Change in external debt (percent of GDP): - 2004: -12.5 - 2005: -6.5 - 2006: -5.2 - 2007: 0.2 - 2008: 4.3 - 2009: 2.4 - 2010: -2.6 - 2011: -0.4 - 2012: -1.3 - 2013: -3.0 - 2014: -1.4 - Identified external debt-creating flows (percent of GDP): - 2004: -22.8 - 2005: -17.1 - 2006: -17.3 - 2007: -15.8 - 2008: -10.1 - 2009: 0.2 - 2010: -3.4 - 2011: -5.6 - 2012: -7.0 - 2013: -6.8 - 2014: -6.7 - Automatic debt dynamics contribution (percent of GDP): - 2004: -11.8 - 2005: -7.5 - 2006: -6.5 - 2007: -2.6 - 2008: -0.3 - 2009: 1.4 - 2010: -0.5 - 2011: -0.7 - 2012: -0.7 - 2013: -0.7 - 2014: -0.6 - External debt-to-exports ratio (in percent): - 2004: 112.9 - 2005: 95.5 - 2006: 74.4 - 2007: 72.7 - 2008: 83.9 - 2009: 113.9 - 2010: 108.6 - 2011: 99.6 - 2012: 91.6 - 2013: 84.3 - 2014: 78.8 - Gross external financing need (in billions of US dollars): - 2004: 18.5 - 2005: 23.4 - 2006: 15.2 - 2007: 22.9 - 2008: 39.7 - 2009: 44.2 - 2010: 33.1 - 2011: 34.0 - 2012: 39.0 - 2013: 40.9 - 2014: 41.9 - Gross external financing need (in percent of GDP): - 2004: 19.3 - 2005: 19.7 - 2006: 10.4 - 2007: 13.9 - 2008: 23.4 - 2009: 29.2 - 2010: 20.3 - 2011: 20.4 - 2012: 22.5 - 2013: 21.8 - 2014: 21.4 - Key macroeconomic assumptions underlying the baseline (selected rows): - Real GDP growth (in percent): - 2004: 6.0 - 2005: 5.6 - 2006: 4.6 - 2007: 4.7 - 2008: 3.2 - 2009: -0.7 - 2010: 3.6 - 2011: 3.9 - 2012: 4.8 - 2013: 5.0 - 2014: 5.0 - GDP deflator in US dollars (change in percent): - 2004: 21.9 - 2005: 17.1 - 2006: 18.7 - 2007: 6.7 - 2008: 0.2 - 2009: -10.0 - 2010: 4.0 - 2011: -1.6 - 2012: -0.8 - 2013: 3.0 - 2014: -0.4 - Nominal external interest rate (in percent): - 2004: 3.0 - 2005: 3.3 - 2006: 3.4 - 2007: 3.2 - 2008: 2.6 - 2009: 2.5 - 2010: 2.2 - 2011: 2.0 - 2012: 3.0 - 2013: 3.0 - 2014: 3.0 - Growth of exports (US dollar terms, in percent): - 2004: 44.2 - 2005: 25.5 - 2006: 37.4 - 2007: 15.2 - 2008: 0.8 - 2009: -30.2 - 2010: 5.9 - 2011: 10.4 - 2012: 9.0 - 2013: 7.6 - 2014: 7.3 - Growth of imports (US dollar terms, in percent): - 2004: 25.8 - 2005: 28.7 - 2006: 16.0 - 2007: 21.6 - 2008: 27.9 - 2009: -24.5 - 2010: 7.5 - 2011: 10.4 - 2012: 13.6 - 2013: 8.6 - 2014: 8.1 - Current account balance, excluding interest payments (percent of GDP): - 2004: 3.5 - 2005: 2.4 - 2006: 5.9 - 2007: 5.3 - 2008: -1.2 - 2009: -1.9 - 2010: -2.1 - 2011: -1.6 - 2012: -1.0 - 2013: -1.0 - 2014: -1.0 - Net non-debt creating capital inflows (percent of GDP): - 2004: 7.5 - 2005: 7.2 - 2006: 4.9 - 2007: 7.9 - 2008: 11.0 - 2009: 3.1 - 2010: 5.0 - 2011: 6.4 - 2012: 7.3 - 2013: 7.0 - 2014: 7.1 - Public sector debt (percent of GDP), selected years: - 2004: 10.7 - 2005: 7.3 - 2006: 5.3 - 2007: 4.1 - 2008: 5.2 - 2009: 5.1 - 2010: 4.9 - 2011: 4.5 - 2012: 3.8 - 2013: 3.0 - 2014: 2.9 - Public sector foreign-currency denominated (percent of GDP), selected years: - 2004: 9.0 - 2005: 5.2 - 2006: 3.6 - 2007: 2.1 - 2008: 2.1 - 2009: 1.8 - 2010: 1.7 - 2011: 1.5 - 2012: 1.0 - 2013: 0.5 - 2014: 0.4 - Change in public sector debt (percent of GDP): - 2004: -2.3 - 2005: -3.4 - 2006: -2.0 - 2007: -1.2 - 2008: 1.1 - 2009: -0.1 - 2010: -0.2 - 2011: -0.4 - 2012: -0.7 - 2013: -0.8 - 2014: -0.2 - Primary deficit (percent of GDP): - 2004: -5.0 - 2005: -7.5 - 2006: -10.3 - 2007: -11.4 - 2008: -7.8 - 2009: 1.4 - 2010: -0.6 - 2011: -2.1 - 2012: -2.6 - 2013: -2.8 - 2014: -3.4 - Public sector debt-to-revenue ratio (percent): - 2004: 44.7 - 2005: 28.1 - 2006: 19.0 - 2007: 13.9 - 2008: 18.3 - 2009: 21.4 - 2010: 19.8 - 2011: 18.1 - 2012: 15.3 - 2013: 12.4 - 2014: 11.6 - Gross financing need (percent of GDP): - 2004: -0.1 - 2005: -1.8 - 2006: -6.3 - 2007: -7.6 - 2008: -4.4 - 2009: 5.2 - 2010: 2.8 - 2011: 0.8 - 2012: 0.8 - 2013: 0.6 - 2014: -0.2 - Key macro-fiscal assumptions (selected averages and rates): - Average nominal interest rate on public debt (in percent): series shown including 2004: 8.4; 2005: 8.9; 2006: 11.2; 2007: 12.7; 2008: 12.5; 2009: 10.0 (table continues). - Average real interest rate (nominal rate minus change in GDP deflator, in percent): 2004: 1.0; 2005: 1.4; 2006: -1.2; 2007: 7.6; 2008: 12.3; 2009: 4.6; 2010: 4.1 (table continues). - Inflation rate (GDP deflator, in percent): 2004: 7.5; 2005: 7.6; 2006: 12.4; 2007: 5.1; 2008: 0.2; 2009: 5.3; 2010: 3.4; 2011: -2.5; 2012: 0.1; 2013: 3.8; 2014: 1.8; subsequent entries include 3.0 and -0.4 in continued rows. ### Policy implications and contingent considerations (as presented) - The report emphasizes that fiscal buffers built through the structural surplus rule and wealth funds provide room to finance transitory measures and reform-accelerating expenditures without creating sustainability issues. - Coverage for additional financing needs is explicitly tied to using the Fund for Economic and Social Stabilization for transitory measures or reform acceleration (examples: “one-off direct transfers and subsidies to low-income families, and housing”; “pension reform”). - Vulnerabilities remain with currency depreciation because all external debt is in foreign currency; stress scenarios include large real depreciations (one-time real depreciation of 30 percent) and contingent liability shocks (10 percent of GDP) to assess impacts. *International Monetary Fund, Staff Report for the 2009 Article IV Consultation — Informational Annex (ANNEX CHILE—DEBT SUSTAINABILITY ANALYSIS).* ### APPENDIX 3. CHILE: WORLD BANK—FUND COUNTRY-LEVEL WORK PROGRAM ### APPENDIX 3. CHILE: WORLD BANK—FUND COUNTRY-LEVEL WORK PROGRAM ### World Bank work program (under JMAP) - Mutual information on relevant work programs: Bank work program in next 12 months. - A. Lending - Chile Social Protection Technical Assistance Project Additional Financing (P114774) (TTL: Theresa Jones) — Provisional timing of missions: May 2009. - Chile State Modernization (P083866) (TTL: Fernando Rojas) — Expected delivery date: December 2009. - B. ESW - Higher Education Report with OECD (P106874) (TTL: Michael F. Crawford) — Provisional timing of missions: February 2009. - Programmatic DPR - Poverty Country: Chile (P094879) (TTL: Molinas Vega J) — Expected delivery date: June 2009. - C. Technical Assistance (selected items) - Chile Policy Assessment - Lessons from OECD Experience (P115377) (TTL: Fernando Rojas) — Provisional timing: December 2008. - Chile Gender Equity in Private Sector (P111824) (TTL: Castro-Munoz M) — Expected delivery date: December 2008. - Environmental and Compliance Strategy for the Superintendencia in Chile (P111436) (TTL: Belausteguigoi) — Provisional timing: February 2009. - Technical Collaboration for the Implementation and Evaluation of the School Preferential Subsidy in Chile (P111888) (TTL: Vegas Emiliana) — Expected delivery date: February 2009. - Management Models and Development of New Education Institutions in Chile (P111889) (TTL: Vegas Emiliana) — Provisional timing: February 2009. - Chile (FBS) Innovation (P114196) (TTL: Lasagabaster E) — Expected delivery date: April 2009. - Chile Support for the Development of a National Energy Efficiency Program (P112532) (TTL: Lucia Spinelli) — Expected delivery date: July 2009. - CL (FBS) Design of Educ. Institutions - phase 2 (P106750) (TTL: Vegas Emiliana) — Expected delivery date: October 2009. - CL (FBS) School Preferential Subsidy (P115260) (TTL: Vegas Emiliana) — Expected delivery date: December 2009. - CORFO (FFS) Evaluation of Foreign Investment Program for High Technology Sectors (P116019) (TTL: Esperanza Lasagabaster) — Expected delivery date: January 2010. ### IMF work program (in next 12 months) - Technical Assistance - Strategic Asset Allocation for SFWs — Staff visit: June 2008; Expected delivery date: June 2008. - Article IV Consultation - Staff visit: April 2008; Expected delivery date: July 28, 2008. - Article IV Consultation completion: December 2008 (timing indicated). - B. Requests for work program inputs (as needed) - Fund request to Bank (with summary justification): None. - Bank request to Fund (with summary justification): None. - C. Agreement on joint products and missions (as needed) - Joint products in next 12 months: None. ### Statement by the IMF Staff Representative on Chile (July 22, 2009) — Key points - This statement provides additional information since the circulation of the staff report; it does not alter the thrust of the staff appraisal. - Monetary policy and BCCh actions: - On July 9 the Central Bank of Chile (BCCh) lowered its policy interest rate by 25 basis points, to ½ percent. - The BCCh noted it would leave the policy rate at this level for a prolonged period to support inflation returning to the 3 percent target over the policy horizon. - Complementary measures announced to better align market rates with the policy rate included: - Establishment of a short-term liquidity facility allowing borrowing by banks at the policy rate for 90-180 days. - Adjustment of issuance of short-term bank notes to preserve consistency with the new liquidity facility. - Suspension of previously planned issuances of 1-year notes and 2-year nominal bonds for the remainder of 2009. - Result: interbank interest rates for up to 180 days converged to the policy interest rate and yields for BCCh bonds declined. - Corporate governance and supervisory coordination: - Progress advancing the agenda for strengthening corporate governance in public sector enterprises; the reform project for improving CODELCO’s corporate governance is in final stages of approval by the Senate. - On July 7 the Superintendency of Banks and Financial Institutions announced that the Committee of Superintendents signed an MOU to strengthen coordination among supervisory agencies overseeing financial institutions, pension funds, and securities markets. ### Public Information Notice (PIN) No. 09/111 — Executive Board Conclusions on 2009 Article IV Consultation with Chile (July 22, 2009) - Background and economic impact - The Chilean economy showed resilience during the global financial crisis due to a sound policy framework: inflation target regime, structural budget rule, and flexible exchange rate. - Large fiscal savings accumulated in past years were critical to preserve stability and cover financing needs. - Real GDP: slowed markedly in Q4 2008 and contracted in Q1 2009. - Inflation: 12-month inflation rate fell from 9.9 percent in October 2008 to 2 percent by June 2009. - External current account: deficit of 2 percent of GDP in 2008; projected surplus in 2009 due to sharp compression of imports. - Policy response - BCCh cut the policy rate by 775 basis points since early 2009, to ½ percent. - Government announced a stimulus package of 2.9 percent of GDP comprising higher public investment, transitory tax reductions and direct transfers and subsidies to low income households. - In July, BCCh announced complementary measures including: - Liquidity facility at the monetary policy rate with tenors of up to six months. - Adjustments to issuance of short-term central bank notes for consistency with the new facility. - Suspension for the remainder of 2009 of previously-planned issuances of 1-year notes and 2-year nominal bonds. - Fiscal measures to be financed through issuance of new government debt and with resources from the Economic and Social Stabilization Fund. - Central bank adjusted its debt management program for 2009 to offset government’s additional financing needs. - Government advanced structural reforms in the financial sector and domestic capital markets, and brought forward implementation of pension system reform. - Outlook and risks - 2009-10 outlook highly dependent on external environment, notably speed of global recovery and commodity prices. - Further deterioration of global conditions would impinge on pace of domestic recovery and near-term expectations. - Chile is well placed for an early return to sustained growth due to countercyclical measures and expected recovery of main trading partners. - Executive Board assessment and recommendations - Directors commended Chile’s sound policy framework and authorities’ vigorous, well balanced, and coordinated policy response. - Directors endorsed BCCh’s decision to implement alternative means of monetary easing and noted staff assessment that the exchange rate is broadly in line with fundamentals. - Directors welcomed countercyclical fiscal stimulus and recommended caution in withdrawing stimulus; encouraged authorities to consider extending several revenue measures through end-2010 if needed. - Once recovery is entrenched, Directors saw scope for unwinding those measures and specifying a structural target to preserve fiscal credibility and address long-term fiscal pressures. - Directors encouraged extending the horizon for fiscal policy formulation and focusing on level and growth in public per capita spending relative to income per capita and implications for net public assets. - Directors commended progress in dealing with contingent liabilities and commitment to assess fiscal impact of long-term liabilities related to pensions and central bank recapitalization as prescribed by the Fiscal Responsibility Law. - Directors encouraged sustaining reforms to lower cost of doing business and to promote formal employment. - On financial supervision and markets, Directors praised prudential and supervisory framework progress, noted capital markets’ resilience, welcomed efforts to facilitate foreign participation and market access for small and medium-sized firms. - Directors suggested keeping some new liquidity instruments and facilities after turbulence subsides; recommended continued assessment of banks’ provisioning models and exploring options to reduce their procyclicality. - Directors encouraged considering broadening perimeter of regulation to non-bank institutions outside direct purview of supervisory authorities. ### Selected social and economic indicators (key figures from Table 1) - I. Social and Demographic Indicators - GDP (2008): 88,595 U.S. dollars (billions) 172.7 - Per capita (U.S. dollars): 10,308 - Population total (2008): 16.7 (in millions) - Poverty rate (2006): 13.7; Indigent: 3.2; Poor, not indigent: 10.5 - Richest 10% of households: 38.6; Poorest 20% of households: 4.1 - Gini coefficient (2006): 0.54 - II. Economic Indicators — Annual percentage change (selected rows) - Real GDP: 2005: 5.6; 2006: 4.6; 2007: 4.7; 2008: 3.2; 2009: -0.7; 2010: 3.6 - Total domestic demand: 2005: 10.4; 2006: 6.8; 2007: 7.8; 2008: 7.4; 2009: -3.0; 2010: 2.6 - Consumption (total): 2005: 7.1; 2006: 7.0; 2007: 7.1; 2008: 4.2; 2009: 1.7; 2010: 1.3 - Investment (total): 2005: 21.7; 2006: 6.2; 2007: 9.9; 2008: 17.0; 2009: -15.8; 2010: 6.7 - End of period consumer prices: 2005: 3.7; 2006: 2.6; 2007: 7.8; 2008: 7.1; 2009: 0.8; 2010: 2.5 - Average consumer prices: 2005: 3.1; 2006: 3.4; 2007: 4.4; 2008: 8.7; 2009: 2.2; 2010: 2.7 - Unemployment rate (annual average): 2005: 9.3; 2006: 8.0; 2007: 7.0; 2008: 7.8; 2009: ...; 2010: ... - Credit to the private sector (end of period): 2005: 19.9; 2006: 17.7; 2007: 20.8; 2008: 8.2; 2009: ...; 2010: ... - External debt and balance of payments (percent of GDP or US$ where indicated) - Current account: 2005: 1.2; 2006: 4.9; 2007: 4.4; 2008: -2.0; 2009: -3.0; 2010: -2.9 - Trade Balance (in US bn): 2005: 10.8; 2006: 22.8; 2007: 23.6; 2008: 8.8; 2009: 2.3; 2010: 1.5 - Exports of goods (in US bn): 2005: 41.3; 2006: 58.7; 2007: 67.7; 2008: 66.5; 2009: 45.9; 2010: 48.6 - Imports of goods (in US bn): 2005: 30.5; 2006: 35.9; 2007: 44.0; 2008: 57.6; 2009: 43.6; 2010: 47.1 - Gross external debt (percent of GDP): 2005: 39.1; 2006: 33.7; 2007: 34.0; 2008: 38.2; 2009: 40.6; 2010: 38.0 - Public gross external debt: 2005: 8.3; 2006: 7.8; 2007: 7.6; 2008: 7.2; 2009: 8.1; 2010: 7.5 - Private gross external debt: 2005: 30.8; 2006: 25.9; 2007: 26.3; 2008: 31.1; 2009: 32.5; 2010: 30.5 - Gross international reserves (in US bn) 4/: 2005: 17.0; 2006: 19.4; 2007: 16.9; 2008: 23.2; 2009: 24.0; 2010: ... - Savings and investment (percent of GDP) - Gross domestic investment: 2005: 22.2; 2006: 20.2; 2007: 21.2; 2008: 24.7; 2009: 21.3; 2010: 21.7 - National saving: 2005: 23.4; 2006: 25.0; 2007: 25.5; 2008: 22.6; 2009: 18.3; 2010: 18.8 - Public sector finance (percent of GDP) - Net Debt: 2005: 11.8; 2006: 0.2; 2007: -8.3; 2008: -14.7; 2009: -6.2; 2010: -4.8 - Public sector gross debt 3/: 2005: 34.9; 2006: 25.7; 2007: 24.1; 2008: 22.9; 2009: 24.9; 2010: 24.3 - Central government gross debt: 2005: 7.3; 2006: 5.3; 2007: 4.1; 2008: 5.2; 2009: 5.1; 2010: 4.9 - Central government balance: 2005: 4.6; 2006: 7.7; 2007: 8.8; 2008: 5.3; 2009: -4.1; 2010: -2.1 - Notes: - Sources: Central Bank of Chile, Ministry of Finance, Haver Analytics, and Fund staff estimates. - 1/ Contribution to growth. - 2/ Gross saving of the general government sector, including the deficit of the central bank. - 3/ Gross consolidated debt of the public sector (central bank, non-financial public enterprises, and general government). - 4/ Data as of May 2009. ### Statement by Pablo Pereira, Executive Director for Chile and Alvaro Rojas, Advisor to Executive Director (July 22, 2009) — Opening remarks - Authorities thanked staff for the Staff Report and Selected Issues papers and for collaborative dialogue on the impact of the international crisis and policy responses. - Noted Chile’s rules-based policy framework provided high flexibility for significant policy responses to secure domestic and external stability amid the global downturn of late 2008. - Emphasized the direct impact of the global downturn on domestic activity, employment, and inflation, and the importance of the policy responses in mitigating those effects. *Source: _cr09271 - APPENDIX 3. CHILE: WORLD BANK—FUND COUNTRY-LEVEL WORK PROGRAM (IMF PDF content).* ### 2. In 2008, Chile’s output grew 3.2 percent, below potential output. The pace over the ### _cr09271 - 2. In 2008, Chile’s output grew 3.2 percent, below potential output. The pace over the ### Economic activity and labor market - 2008 output growth: 3.2 percent, below potential output. - Fourth quarter 2008: sharp slump driven by worsening global conditions; inventory accumulation, house sales, and imports of durables fell sharply. - Sectoral impacts: - Industrial output and construction affected by tightening credit conditions and postponed investment projects (construction less affected than in previous episodes). - Lower oil prices and improved hydrological conditions provided cost relief in energy costs. - 2009 H1: economic activity contracting in Q1 2009; preliminary Q2 data confirm a moderate contraction in output for the first half of 2009. - Unemployment: recently risen slightly above 10 percent, due mostly to a significant contraction in employment since Q4 2008. ### Forecasts and risks - Banco Central de Chile (BCC) output growth forecast for 2009: decreased to a range between -0.75 to 0.25 percent, with balance of risks tilted to the downside. - Main downside risks identified: - Contraction in global growth and spillovers to emerging economies. - Size and extension of the recession in the U.S. and other trading partners. - Possibility of new unfavorable shifts in copper and/or oil prices. - Protracted global uncertainty and lack of confidence. - Output gap / potential output: Central Bank estimates potential output in a range of 4.5 to 5 percent. ### Inflation developments - Annual CPI inflation in 2008: increased steadily, peaking at 9.9 percent in October. - Fourth quarter 2008 downturn triggered rapid and steady decline in inflation. - Inflation expectations and BCC forecasts: - CPI inflation reached the 3 percent target earlier than initially envisaged. - BCC revised downward its inflation forecast to 0.6 percent for year on year inflation by end December 2009. - BCC forecast for average inflation in 2009: 2.3 percent. - Expectation: CPI inflation to remain below the target range in H2 2009, converging back to 3 percent by 2010. ### Monetary policy - Rationale: faster convergence of inflation toward target warranted easing. - Policy rate actions since January 2009: - January: reduction of 100 basis points. - February: reduction of 250 basis points. - March: reduction of 250 basis points. - Subsequent months: more gradual reductions. - July Monetary Policy Meeting: additional 25 basis points reduction. - Cumulative policy rate reduction by July 2009: 775 basis points, bringing policy rate to 0.5 percent in July of 2009. - BCC stance: 0.5 percent considered the lower bound for the policy rate; policy rate expected to remain at this lower bound for an extended period. - New liquidity measures: - Introduction of Term Liquidity Facility (TLF) to provide liquidity to banks at the current policy rate for terms of 90 and 180 days; collateral same as overnight liquidity facility. - Adjustment to issuance of short-term notes with maturity of less than 1 year; suspension of issuance of bonds with maturity of 1 year or more. - Measures to remain in place as long as needed; BCC to evaluate permanently the need for complementary measures. ### Fiscal policy and countercyclical measures - 2008 fiscal position: - Central government overall surplus: 5.2 percent of GDP in 2008. - Real decrease in revenues: 8.1 percent. - Public expenditure growth: 7.8 percent in real terms. - Economic and Social Stabilization Fund (ESSF) balance as of December 2008: USD 20.2 billion. - Pension Reserve Fund balance: USD 2.5 billion. - 2009 budget initially submitted: public expenditure growth of 5.7 percent in real terms; increased social spending in health, education, innovation, and social housing. - Countercyclical fiscal policy implemented on three fronts: - Fiscal Stimulus Plan (early January): size equivalent to 2.8 percent of GDP (USD 4 billion). - Components: direct transfers to families and individuals; increase in public investment of up to USD 700 million; recapitalization of Codelco by USD 1 billion; tax reductions and other incentives for private investment; measures to strengthen SME access to funding; measures to protect employment. - Funding adjustments: temporary reduction in structural surplus target from 0.5 percent of GDP to 0 percent of GDP. - Pro-Credit Plan (announced March 2009): twenty measures to stimulate provision of credit and widen funding alternatives. - Three dimensions: support to micro-entrepreneurs; facilitate access to bank funding; facilitate access to non-bank funding. - Overall impact: generate an additional USD 3.6 billion in new credit to the private sector. - Complementary measures taken earlier: December 2008 capital increase of Banco Estado by USD 500 million to spur lending to SMEs by up to USD 2.6 billion; increase of Small Enterprise Guarantee Fund by USD 130 million to a total of USD 200 million. - Pro-Employment Accord: tri-partite temporary agreement benefiting a total of 130.000 workers through six measures: - Transitory tax incentive for retention and improvement of worker skills. - Establishment of a leave of absence for up to 5 months with 50 percent of salary during leave. - Increase in subsidy for improvement of working skills for firms actively hiring new personnel. - Scholarship for working women who are heads of household to stimulate self-employment via small and micro enterprises. - Program of previous learning recognition certifying worker skill levels through standardized evaluation. - Enhanced access to the Unemployment Solidarity Fund for employees with temporary contracts to protect family income when head of household loses job. - All measures approved by Congress in record time. - Additional May 21 announcements by the President: transfer to four million low-income households, bring forward Pension Reform benefits, mortgage payment insurance for job losers, expansion of New Millennium Scholarship Program — implied additional government spending of USD 330 million in 2009. - Fiscal outcomes and projections for 2009: - Public expenditure expected to grow 14.5 percent in real terms (versus initial Budget Law projection of 5.7 percent). - Breakdown of the 14.5 percent increase: - 5.0 percent due to increased spending committed in the Fiscal Plan of January. - 0.9 percent corresponds to additional spending committed in the Pro-Credit Plan, the Pro-Employment Accord and May 21 announcements. - 2.9 percent due to the drop in average 2009 inflation projected for 2009 (estimated at 5.2 percent in January, now expected 2.3 percent). - Projected fiscal deficit for 2009: 4.1 percent of GDP. - This is 1.2 percentage points higher than projected in January. - Difference breakdown: 0.2 percent of GDP increased spending; 1.0 percent of GDP lower revenues. - Financing and Sovereign Wealth Fund operations: - Funding of the fiscal stimulus plan to come from the Economic and Social Stabilization Fund. - Initial withdrawal announced: USD 4 billion from the ESSF — USD 1 billion to finance investment and expenditure directly in USD and USD 3 billion to finance investment and expenditure in local currency (pesos). - Foreign exchange operation: Ministry of Finance instructed Central Bank as Fiscal Agent to conduct competitive bids for the sale of USD 50 million on a daily basis since March 27, 2009. - Mid-June financing strategy for rest of 2009: - Additional withdrawal of USD 4 billion from the ESSF to be sold through competitive bids for the sale of USD 40 million on a daily basis starting July 1, 2009. - Issuance of USD 1.7 billion in the 5-year and 10-year domestic bond markets; issuance coordinated with Central Bank to avoid disruption in 5- and 10-year segments of the yield curve. - Fiscal rule and medium-term anchor: - Authorities emphasize that the structural fiscal rule enabled the space to conduct countercyclical policy while providing a credible anchor for medium-term fiscal policy. - Government’s financial position expected to remain sound after 2009 stimulus due to legacy of fiscal rule. ### Financial sector and regulation - Overall assessment: Chile’s sound regulatory framework has helped secure financial stability and insulated domestic market from global turmoil. - Banks: continued to perform well and are adequately capitalized to withstand potential credit losses. - Central Bank survey up to June 2009: number of banks reporting more restrictive credit conditions reduced for two consecutive quarters, suggesting sustained improvement in supply of credit and marked rebound in credit demand by businesses and individuals; flow of credit on its way back to pre-crisis levels. - Regulatory improvements: authorities view potential expansions of regulatory perimeter as enhancements rather than necessary modifications; FSAP Update scheduled for 2010 may consider perimeter expansion. - Coordination among regulators: Memorandum of Understanding (MoU) signed in late June by members of the Committee of Superintendents (banking, pensions, securities supervisors) to formalize cooperation and coordination channels. ### Conclusion and external recognition - Authorities took decisive and unprecedented policy measures (monetary easing, fiscal stimulus, credit-flow policies, employment measures) to mitigate the impact of the global downturn. - Growth expected to resume in the second half of 2009 in response to stimulus underway. - Chile’s rules-based macroeconomic framework provided flexibility to respond to shocks and was recognized by credit rating agencies. - Moody’s upgrade: Chile upgraded to A1 from A2, based on solid fiscal fundamentals, low debt, and strong macroeconomic management. *Source: IMF staff report content unit _cr09271* --- _Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2009/_cr09271.pdf_