Chile: Staff Concluding Statement of the 2024 Article IV Mission
IMF News, November 26, 2024
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- Published: November 26, 2024
Macroeconomic assessment and near-term outlook
- The economy’s imbalances have been largely resolved; economic activity is growing around its potential and the current account position has continued to strengthen.
- Real GDP is expected to expand by 2.3 percent in 2024 and by 2-2.5 percent in 2025, driven by strong mining and service exports in 2024 and an expected recovery in domestic demand in 2025.
- Inflation is set to remain above the 3 percent target until early 2026, primarily due to the cumulative 60 percent increase in electricity tariffs between June 2024 and February 2025.
- Core inflation has picked up in recent months driven by higher shipping costs and sticky service inflation.
- The current account deficit is on a path to narrow to 2.1 percent in 2024 and to widen slightly in 2025/26 due to an expected recovery of investment.
- The unemployment rate remains high, reflecting cyclical weakness in labor-intensive sectors such as construction and potential effects from real minimum wage increases, uncertain business outlook, and new regulations.
- Risks have risen: commodity price volatility, uncertainty around advanced economies’ monetary and fiscal policies, and domestic concerns about crime, migration, inequality, and political polarization.
Structural growth and productivity priorities
- Chile’s convergence to higher-income economies has stalled over the past decade; modest potential growth may reflect weaker inter-industry linkages, especially limited ties between mining and other domestic sectors.
- Government growth strategy contains important aspects that can yield meaningful dividends if implemented swiftly and consistently.
- Priority reforms and measures highlighted:
- Expediting investment permit applications and environmental evaluations to make processes faster and more predictable (highest priority; cut across all sectors).
- Attracting investment, increasing production, and deepening the value chain related to the global green transition, notably renewable energy and the lithium industry.
- Facilitating R&D and propagating benefits of technological progress; proposed legislation on technology transfer could stimulate research by easing restrictions on researchers at state universities and allowing participation in technology companies and claims on research proceeds (e.g., patents).
- Better integrating women into the labor market: women’s participation has fallen behind men’s by 20 percentage points despite a 15 percentage point reduction in the gender labor force participation gap over the past decade. Policy support includes flexible work arrangements and improved access to quality childcare, replacing the current distortionary childcare policy with a broader and sustainably financed program.
- Promoting technology diffusion and addressing skill gaps to harness AI and digital technologies, while mitigating distributional impacts and supporting worker transitions.
- Pacing further increases in the minimum wage cautiously given potential impacts on formal employment; consider creating a minimum wage setting mechanism to insulate decisions from the political cycle and account for economic developments.
Fiscal policy, buffers, and pension reforms
- The government’s medium-term goal of reaching a broadly balanced fiscal position by 2027 remains appropriate but more challenging; the 2024 fiscal deficit will likely exceed its target due to sizeable revenue underperformance.
- To achieve a broadly balanced fiscal position over the next three years, additional policy measures of at least 1 percent of GDP are needed.
- The major tax compliance reform could fill part of that gap if yields materialize and additional revenues are not allocated to new spending.
- Commitment to align any structural spending increases with higher structural revenues is critical.
- Plans to unify fragmented social programs could improve access, coverage, and efficacy to better protect the most vulnerable.
- Fiscal framework improvements and recommendations:
- Adoption of the Fiscal Responsibility Law formalizes the debt anchor and annual structural fiscal targets.
- Further enhance transparency of “below-the-line items” that are estimated to have contributed to about two fifths of the total debt increase over the past 15 years.
- Review forecasting methods given recent revenue volatility and large economic shifts.
- Preserve and rebuild the size of the Economic and Social Stabilization Fund (ESSF) in a medium-term strategy, including by saving windfall revenues.
- Simplify presentation of fiscal targets and budget execution in the Public Finance Report to deepen understanding of the fiscal balance rule framework.
- Pension reform priorities:
- Raise pension contribution rates and the number of contribution periods to ensure sufficient old-age pensions sustainably financed.
- Consider making the PGU (minimum guaranteed pension) more targeted to the most vulnerable elderly persons and limit PGU increases to inflation to contain fiscal costs.
- Strengthen the individual pension savings scheme: gradually align women’s retirement age to men’s, link retirement age to life expectancy, adopt proposed insurance covering pension contributions during unemployment, and further incentivize labor market formalization.
Monetary policy and reserves
- The 3 percent inflation target is within reach.
- A cautious data-dependent approach to the pace of future monetary policy rate cuts is warranted.
- The real monetary policy rate is currently near its estimated neutral range of 0.5-1.5 percent.
- The rise in inflation since June is largely driven by electricity tariff hikes, but inflation pressures exist in both directions: upward from core inflation and peso depreciation; downward from high U.S. long-term rates, tight domestic financial conditions, labor market weakness, and planned fiscal tightening.
- Rebuilding international reserve buffers is important for resilience:
- Incorporate a comprehensive international liquidity framework into the Central Bank of Chile’s long-term financial stability strategy.
- Restructure the composition of international reserves and other liquidity buffers by resuming the reserve accumulation program when market conditions are conducive.
- Ensure the strategy follows high transparency standards, is persistent and robust to external risks, and minimizes FX market distortions.
Financial sector resilience
- The financial system is overall sound and resilient, though vulnerabilities in the real estate sector have been rising.
- A modest recovery in the sector is expected as past cuts to policy rates transmit to lower longer-term interest rates.
- Mitigants to credit risks include a high share of fixed-real-rate mortgages and strong underwriting standards.
- In risk scenarios (higher-for-longer long-term rates or slower growth), stagnation in real estate could increase losses for banks and insurers.
- Supervisory and structural recommendations:
- Monitor banks’ and insurers’ portfolio quality and provisions, close data gaps on commercial real estate, and enhance stress test models to assess real estate risks comprehensively.
- Continue implementing 2021 FSAP recommendations and resilience-enhancing measures.
- Set the neutral level of the counter-cyclical capital buffer (CCyB) at 1 percent of risk-weighted assets with a gradual, state-contingent deployment path.
- Priorities: complete Basel III capital and liquidity requirement implementation; implement the Financial Market Resilience Law to develop the interbank repo market and strengthen mutual fund liquidity management; progress on industry-funded deposit insurance and a bank resolution framework; strengthen consolidated supervision of financial conglomerates.
- Provide budget independence to the Financial Market Commission (CMF) to match expanding responsibilities including cyber security and fintech oversight.
- Market structure dynamics:
- Pension fund withdrawals and rising public debt have reduced local market depth, increased volatility and sensitivity to shocks, and led non-financial corporations and the government to rely more on offshore markets.
- Increasing the pension contribution rate would enlarge the pool of investable savings and help deepen local capital markets.
Key statistics and projections (selected)
- GDP (2023), in trillions of pesos: 282
- GDP (2023), in billions of U.S. dollars: 336
- Quota, in millions of SDRs: 1,744
- Per capita (2023), U.S. dollars: 16,815
- in % of total: 0.37
- Population (2023), in millions: 19.96
- Main products and exports: Copper
- Key export markets: China, Euro area, U.S.
Selected projections (annual percentage change or percent of GDP as noted)
- Real GDP: 0.2 (2023), 2.3 (2024)
- Total domestic demand: -4.2 (2023), 0.8 (2024), 2.7 (2025), 2.2 (2026)
- Consumption: -3.9 (2023), 1.5 (2024), 2.1 (2025), 2.0 (2026)
- Fixed capital formation: -1.1 (2023), -1.0 (2024), 4.6 (2025), 3.7 (2026)
- Exports of goods and services: -0.3 (2023), 5.5 (2024), 4.4 (2025), 4.7 (2026), 3.9 (2027)
- Imports of goods and services: -12.0 (2023), 0.3 (2024), 5.1 (2025), 4.2 (2026), 3.2 (2027)
- Output gap (in percent): 0.0 (2023), -0.1 (2024)
- Unemployment rate (percent, annual average): 8.7 (2023), 8.6 (2024), 8.2 (2025), 7.8 (2026), 7.7 (2027)
- GDP deflator: 6.6 (2023), 6.1 (2024), 4.0 (2025), 2.9 (2026)
- Change of CPI (end of period): 3.5 (2023), 3.0 (2024)
- Change of CPI (period average): 7.6 (2023), 3.1 (2024)
- Central government revenue (percent of GDP): 22.9 (2023), 22.3 (2024), 23.2 (2025), 24.0 (2026), 24.1 (2027)
- Central government expenditure (percent of GDP): 25.3 (2023), 24.8 (2024), 24.7 (2025), 24.3 (2026)
- Central government fiscal balance (percent of GDP): -2.4 (2023), -2.5 (2024), -1.6 (2025), -0.6 (2026), -0.2 (2027)
- Central government structural fiscal balance: -3.4 (2023), -2.9 (2024), -2.0 (2025)
- Central government gross debt (percent of GDP): 39.4 (2023), 42.1 (2024), 43.2 (2025), 43.4 (2026), 42.7 (2027)
- Public sector gross debt (percent of GDP): 70.2 (2023), 73.0 (2024), 73.9 (2025), 74.2 (2026), 73.5 (2027)
- Current account balance (share of US$ GDP): -3.5 (2023), -2.1 (2024), -2.6 (2025)
- Foreign direct investment net flows (share of US$ GDP): -4.6 (2023), -2.2 (2024), -2.3 (2025)
- Gross external debt (share of US$ GDP): 71.1 (2023), 77.2 (2024), 76.5 (2025), 75.6 (2026)
IMF mission team concluding statement, November 26, 2024.