Chile: IMF Staff Concluding Statement of the 2023 Article IV Mission
IMF News, November 21, 2023
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- Published: November 21, 2023
Macroeconomic outlook and transition to trend growth
- Chile’s macroeconomic imbalances built during the pandemic have been largely resolved.
- Staff projects quarterly growth to return to its potential pace in 2024, yielding about 1.5–2 percent real GDP growth next year and 2–2.5 percent over the medium term.
- Inflation is expected to decelerate to 4–4.5 percent by end-2023 and converge to the 3 percent target in the second half of 2024.
- The current account deficit is projected to narrow to 3¼ percent of GDP in 2023 and to around 3 percent of GDP in the medium term.
Risks
- External risks:
- Uncertainties around potentially higher-for-longer interest rates.
- Commodity price volatility due to the slowdown in China.
- Intensification of regional conflicts.
- Potential consequences: abrupt changes in global financial conditions, higher long-term borrowing costs, reduced capital inflows, lower commodity exports, higher oil prices.
- Domestic risks:
- Political polarization and fragmentation that could lead to reform gridlock.
- Social discontent over inequality and the security situation.
- Uncertainty related to the solvency of private health insurance companies.
- Upside opportunity:
- Increased global demand for copper, lithium, and renewable energy as the world transitions to greener technologies.
Monetary policy
- The pace of further monetary easing should continue to be data-dependent.
- Real rates will likely need to remain above their neutral levels for the near future, given still high core and food inflation and pass-through from higher oil prices and exchange rate depreciation since July.
- The pace of policy easing could be faster if disinflation accelerates due to factors such as further labor market slack, persistently lower oil prices, or strong exchange rate appreciation.
External buffers and reserves
- Rebuilding foreign reserve buffers is important to enhance resilience.
- Recommendation to resume the Central Bank of Chile’s suspended reserve accumulation program when market conditions are conducive.
- Over the medium term, consider adjustments to the BCCh’s foreign reserve strategy to address new risks from rising external exposures and ensure long-term adequacy of reserve buffers.
Fiscal policy and sustainability
- Chile has some fiscal space to support reactivation and social needs, but frontloading deficit reduction would facilitate meeting the government’s medium-term fiscal target.
- The proposed 2024 budget is a welcome step toward lowering the deficit but implies significant spending restraint in outer years absent political support for new tax measures.
- Permanent spending measures should be conditioned on structural revenue performance.
- The proposed fiscal pact links tax reforms with higher social and security spending, aims to modernize the state, increase spending efficiency, and create incentives for growth and investment.
- Caution against overreliance on expected yields from measures against tax evasion until strong evidence of realization exists.
- Further revenue-raising options suggested include adjustments to corrective taxes and addressing Chile’s low personal income tax collection.
- Climate policy:
- A gradual increase of the carbon price would contribute to achieving Nationally Defined Contribution (NDC) and net-zero climate goals.
- Proceeds from carbon pricing can be recycled for targeted transfers and public investment to offset impacts on vulnerable households and boost potential growth.
- Fiscal framework refinements:
- Adoption of a prudent debt ceiling in 2022, introduction of annual fiscal targets along the medium-term path starting in 2024, and the proposed escape clause under consideration in Congress have strengthened the fiscal framework.
- The new simplified formula for determining structural lithium revenue is a welcome upgrade that could be refined over time.
- Link fiscal decentralization with initiatives to strengthen regional public investment management capacity, enforce governance controls, enhance regional fiscal transparency and accountability, and broaden the role of the Autonomous Fiscal Council (CFA) to evaluate sub-national fiscal rules.
Financial sector resilience
- Overall resilience:
- Banks’ capital adequacy and liquidity ratios stand comfortably above regulatory requirements.
- Profitability is around pre-pandemic levels.
- Corporate and household financial situations remain overall robust.
- Pockets of vulnerability:
- Construction and real estate sectors.
- Smaller firms with government-guaranteed loans.
- Low-income indebted households.
- Non-performing loan ratios have increased but remain around their pre-pandemic level, with recent signs of stabilization.
- Policy recommendations:
- Implementation of the activated countercyclical capital buffer (CCyB) to strengthen resilience.
- Swift calibration of the CCyB neutral level to provide banks planning certainty; BCCh announced review of the CCyB framework in 2024.
- Continue monitoring banks’ implementation of Basel III capital and liquidity requirements and preparations for unwinding extraordinary pandemic liquidity measures (FCIC) supported by the BCCh’s “Liquidity Deposits” program.
- Planned introduction of an industry-funded deposit insurance and bank resolution framework, and implementation of the Financial Market Resilience Law would further improve resilience.
- Financial regulation and supervision should keep pace with digitalization; the new Fintech Law aims to promote innovation and financial inclusion.
- Authorities should actively assess and mitigate cyberattack risks, strengthening capabilities and preparedness.
Inclusion, pensions, and structural transformation
- Inclusion and inequality:
- Poverty fell significantly following higher household subsidies and the new minimum guaranteed pension (PGU), but income inequality remains high.
- Gender gaps narrowed in some dimensions (higher female employment rates, greater female representation in parliament) though a gender pay gap persists.
- Policy priorities: raise female labor force participation (ensuring sufficient childcare and flexible work arrangements) and lift labor productivity by expanding access to high-quality education and workforce training that keeps pace with digital requirements.
- Caution against excessive reliance on increases in real minimum wages beyond current plans due to potential adverse effects on formal employment.
- Pension system:
- Chile’s full-capitalization pension system delivers low replacement rates due to low contribution density and rates, rising life expectancy, and declining returns; situation aggravated by pension withdrawals over 2020–21.
- The proposed hike in the contribution rate by 6 percentage points would significantly lift replacement rates while ensuring adequate financing of the system.
- The PGU has addressed old-age poverty and improved replacement rates but comes at a significant fiscal cost likely to increase given Chile’s demographic dynamics.
Natural resource and green transition opportunities
- Lithium and renewable energy:
- Increased global demand for lithium could allow expansion of Chile’s production in the medium to long term, taking into consideration social and environmental objectives.
- Room exists for development of related industries along the value chain in an investment-friendly environment.
- An institutional framework balancing the state’s strategic objectives and private investors’ interests is important to develop the industry.
- Chile’s endowment in solar and wind gives a comparative advantage in renewable energy production.
- Main bottleneck: geographic mismatch between power generation and consumption; continued efforts to improve the transmission network are critical.
- Development of the green hydrogen industry could offer additional growth prospects conditional on technological progress.
Other structural reform priorities
- Accelerating investment is a priority; ongoing efforts to tackle long permitting processes are critical to make regulatory procedures more efficient.
- Addressing labor market informality would benefit inclusive growth and revenue mobilization.
IMF Staff Concluding Statement of the 2023 Article IV Mission (November 21, 2023).