Chile - Economic Briefing December  2001

Outlook Subdued Despite Copper Price Recovery (continued)

Fiscal balances remain under control

In the third quarter, fiscal accounts remained almost balanced, registering a deficit of 11 billion Pesos (US$ 16 million or 0.1% of GDP).  Income increased 14.2% in nominal terms owing to increased copper revenues and a higher tax take.  The strong increase, however, is mainly due to a subdued comparison base in the same quarter last year.  At the same time, expenditures increased at a far lesser 6.3% pace. 

Owing to the positive third quarter performance, the budget reached a 0.5% of GDP surplus in the first nine months of the year.  However, since the government foresees substantial disbursements for public investment projects in the fourth quarter, the annual fiscal deficit target of 0.5% of GDP has been maintained.  Consensus Forecast participants expect even a slightly higher deficit in 2001.  For 2002, panellists see the government fulfilling its pledge to lower the fiscal deficit.

Current account balance deteriorates but improvement in capital account covers the gap

The current account balance registered a deficit of US$ 612 million in the third quarter, which was much higher than the second quarter deficit of US$ 118 million and also above the deficit for the same quarter last year.  The deterioration in the current account balance is entirely due to a change in the trade balance, which reverted from a US$ 631 million surplus in the second quarter to a US$ 120 million deficit as exports contracted at a faster clip (-11.3% year-on-year) than imports (-6.5% yoy) while as prices for Chilean exports dropped a staggering 16.2% year-on-year driven by weaker copper and cellulose prices.  The moving annual current account deficit now stands at US$ 1.1 billion and is seen deteriorating further to US$ 1.5 billion towards the end of the year.  In 2002, panellists expect only a marginal improvement in the current account deficit. 

The surplus in the capital account balance (US$ 608 million) fell just a notch short of covering the current account gap but improved markedly from a US$ 377 million deficit in the second quarter.  The improvement can be attributed to a sharp increase in portfolio investments and other short- and long-term capital movements, since net direct investment flows deteriorated amidst higher Chilean investments abroad. 

Consumer prices unchanged in November – annual inflation continues dropping

In November, consumer prices were unchanged, which lowered the annual inflation rate from 3.4% in October to 3.1%.  The decline in fuel prices provided for the stability in consumer prices.  As a result, the core inflation index, which excludes fuels, increased albeit at a still moderate 0.15%.  Annual core inflation dropped 0.1 percentage points to 3.7%.  Subdued domestic demand should assist the Central Bank in keeping inflation in check in the coming year. 

Note:  The above text is an abridged version of the LatinFocus Consensus Forecast briefing on Chile.  For more details please click here.

For five-year forecasts, please click here.