Chile - Economic Briefing December 2003

  Robust Growth Ahead Amid Global Rebound (continued)

Government incurs deficit in third quarter
In the third quarter, the central government incurred a deficit of 277 billion pesos (US$ 410 million), equivalent to 0.56% of annual GDP. Central government revenues dropped 7.3% over the same period last year. In part, the decline is due to a higher copper price which impeded the government from withdrawing funds from the Copper Stabilization Fund. In addition, the collection of the value added tax (VAT) suffered from lower domestic demand growth during the third quarter. Finally, revenues dropped in the wake of lower tariff collection due to the free trade agreement (FTA) with the European Union. Central government expenditures, in contrast, increased 5.1% over the third quarter of 2002. Expenditures rose as a result of higher interest payments and wages in the public sector, amid the “New Deal” Law for public employees, which provided retroactive benefits.

Budget law for 2004 approved by Congress
On 14 November, Congress approved the 2004 budget law. According to the budget, fiscal revenues will reach approximately US$ 18.2 billion and expenditures will amount to US$ 18.9 billion. The budget assumes GDP growth above 4.0% and a copper price of 83 cents per pound. The copper price projection seems very conservative given the average price of 93.2 cents per pound in November and good prospects for increased copper demand in the wake of accelerating global economic growth. The planned central government deficit is equivalent to 0.6% of GDP, which is in line with the 1% structural surplus rule that commits the government to incur a surplus equivalent of 1.0% of GDP when Chile is growing at full potential (details see September 2003 edition of the LatinFocus Consensus Forecast). The Consensus is slightly more optimistic about next year’s fiscal deficit, projecting a deficit of 0.3% of GDP.

Current account balance improves over last year
In the third quarter, the current account balance incurred a deficit of US$ 391 million, exceeding market expectations of a US$ 313 million gap. The deficit was also above the US$ 132 million registered in the second quarter but was less than half the US$ 852 million shortfall observed in the third quarter last year. The improvement over last year’s deficit was mainly attributable to shifts in the trade balance, which incurred a US$ 64 million deficit in the third quarter last year reverting to a US$ 510 million surplus this year. The trade balance profited from a strong increase in exports (+22.9% yoy), whereas imports added only 8.8% over the same period. Exports benefited from higher demand for Chilean manufactures – industrial exports increased 16.1% over the same period last year – and higher copper prices and volumes, which lifted exports of Chile’s most important commodity by 35.1% in the third quarter. The capital and financial account balance incurred a surplus in the third quarter. However, the US$ 23 million surplus was insufficient to cover the current account gap. In the third quarter last year, the capital account surplus had amounted to US$ 552 million. The principal cause for the lower surplus this year, were higher portfolio investment outflows, which reached US$ 1.5 billion, more than double the US$ 709 million figure observed in the third quarter last year. Consensus Forecast panellists expect the current account deficit to be just a notch ahead of last year’s US$ 18 million shortfall. As a result, the full year deficit will rise only slightly from the current US$ 272 shortfall to US$ 335 million.