Chile - Economic Briefing October 2002

Global Concerns, Brazilian Spill-over and Oil Price Weigh on Outlook  (continued)

Exchange rate drops to historic lows - Central Bank may intervene in forex markets
Increased uncertainty over the outcome of presidential elections in Brazil has spilled over to Chile and prompted further currency softening. In September, the peso spiked from 715 pesos to the US$ at the end of August to 747 by the end of the September, loosing 4.7% of its value in nominal terms against the US$. While monetary authorities usually refrain from interventions in the foreign exchange markets, the Central Bank statutes grant the right to buy or sell currencies. Recently, Central Bank president Carlos Massad indicated that the Central Bank may make use of its right to intervene in the foreign exchange market. The last time, the Central Bank intervened in the currency market to prop up the currency was in the second half of 2001, when the peso was affected by spill-over effects from Argentina's financial crisis. Massad indicated that the Bank would only intervene if the peso starts to fall independently of regional contagion. As a result of recent developments, panellists have substantially hiked their year-end exchange rate forecast. However, the Chilean currency is seen to remain virtually unchanged next year.

Interest rate hike unlikely
Central Bank officials also indicate that monetary authorities may turn to hiking interest rates if the currency slide continues. However, such a move would prove highly unpopular given the current economic deceleration that the country is experiencing. Moreover, it would reverse a string of interest rate cuts, with the latest downward adjustment as recent as 8 August. Consensus Forecast panellists have not raised their year-end interest rate forecasts. In fact, the Consensus dropped 0.3 percentage points since last month.

First trade balance deficit in a year as exports tank and imports spike
In August, the trade balance registered a deficit of US$ 226 million. This was the first monthly deficit since September last year. The sudden shift in the trade balance – in the past eight months the monthly trade surplus hovered between US$ 151 million and US$ 462 million – was prompted by a sharp reversal in both export and import trends. Exports contracted 13.3% over August 2001, far exceeding the trend of moderately declining exports observed in the past months. The sudden drop was driven by a 27.0% decline of copper exports, amid lower shipments of Chile’s main commodity, which more than offset higher copper prices. The monthly average copper price in August was up 3.7% over August 2001. Imports, on the other hand, increased a staggering 21.0% over the same month last year, the highest growth rate in more than two years. According to the Central Bank, the increase was driven by capital goods (+38.6% year-on-year), intermediate goods (+19.9% yoy) and consumer goods (+14.3% yoy). As a result of the August trade deficit, the annual trade surplus narrowed from US$ 2.7 billion in July to US$ 2.2 billion in August, which is slightly above the trade surplus expected by panellists for this 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.