Chile - Economic Briefing December 2002

Global Concerns Continue to Weigh on Outlook  (continued)

Consumer prices drop in November, as lower fuel prices contain spikes in fresh fruits and vegetables
In November, consumer prices dropped by 0.09%; the annual headline inflation rate remained unchanged form October at 3.0%. The November price decline ends a string of considerable upward price movements observed in the past four months and came as a surprise -- the market had expected a price increase of 0.2%. The price drop was mainly due to lower transport prices, which dropped amid lower fuel prices. A strong surge in prices for fresh fruits and vegetables partially offset the downside effect of lower fuel prices. In November, prices for fresh fruits and vegetables rose by 3.2% over the previous month and thus continued the upward pressure on prices in this category. On an annual basis, prices fresh fruit and vegetable prices have increased by a staggering 21.3%, exerting considerable pressure on the overall price level. Consequently, the core inflation rate, which excludes volatile items such as fuels and fresh fruits and vegetables, is 1.2 percentage points below the headline rate at 1.8%. Despite the upcoming holiday spending season, the Consensus sees inflationary pressures contained in the final month of the year and annual headline inflation at 3.0%. In the coming year, panellists see inflation virtually unchanged, ending the year at 2.9%.

Capital account continues deteriorating trend as investment inflows dwindle
In the third quarter, the current account deficit reached US$ 860 million. The deficit was slightly larger than the US$ 791 million expected by the Consensus and exceeded both the deficit registered in the same quarter last year (US$ 780 million) and in the second quarter (US$ 28 million). The increase of the current account deficit compared to the third quarter last year is mainly due to a higher deficit in the investment income balance, since trade flows remained virtually unchanged. The largest shift in the balance of payments occurred in the financial account balance (excl. reserves), which reverted from a US$ 1,324 million surplus to a US$ 181 million deficit. The deterioration can be explained by a strong decline in investment flows to Chile. Portfolio investment reverted from a US$ 717 million surplus in the third quarter last year to a US$ 914 million deficit in Q3 2002. Direct investment flows also dropped albeit less dramatically (Q3 2001: +754 million; Q3 2002: +221 million). The annual financial account surplus has now shrivelled to a mere US$ 102 million, the lowest level in more than a decade. The current level confirms concerns that the times of healthy foreign investment flows, which had entered the country in the 1990s and boosted the average annual growth to above 7%, appear to have drawn to an end. So far, the receding capital inflows have not yet raised concerns about the sustainability of the current account deficit, which at an annualised US$ 912 million (1.4% of GDP) remains far from levels that could raise doubts among investors. The Consensus Forecast expects the annual current account deficit to drop to US$ 584 million in 2002, following seasonal patterns observed in the past. In 2003, the deficit should remain constrained at US$ 709 million, as a moderate pickup in global demand should enhance export volumes and commodity prices.
 

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.