The macroeconomic challenges facing Chile’s next government

The prospect of stronger global demand for exports such as copper and lithium bodes well for the economy of major producer Chile, but a confluence of domestic factors is whipping up local headwinds.

Uncertainty surrounding future policy – stemming from November’s presidential elections, the constitutional rewrite process and populism in congress – is expected to impact investment.

Tighter monetary policy, introduced to help tame inflation fueled by early pension fund withdrawals, as well as a winding down of fiscal stimulus, is also expected to weigh on prospects.

ALSO READ: Former finmin: 'I believe difficult years are coming for Chile'

GDP growth is forecast to decelerate rapidly next year after bouncing back strongly in 2021, on the back of a rapid vaccination program, while fiscal support and the pension withdrawals have helped support consumption. Local bank Bci says the country could slip into recession in 2H22 and growth could be 0% in 2023 and just 0.5% in 2024.

The bank forecasts fixed capital formation, a key long-term growth driver for Chile’s economy, will contract 2.0% next year and 0.1% in 2023. Energy, mining and public works are expected to demonstrate resilience, with other sectors offsetting this.  

Rodrigo Montero, economist and dean of the business faculty of Universidad Autónoma de Chile, told BNamericas that raising the country’s growth potential was the central challenge of the next administration.  

As things stand, the long-term growth potential of Chile is around 2.5%, below past levels. Getting the country’s economy firing on all cylinders again is vital in a context of stronger demand for state spending, Montero said.

“Stronger growth is the only way that will permit having the necessary resources to meet the growing social demands that have been incorporating into our society,” Montero said. “Therefore, it is urgent to place at the center of debate the question of what we need to do to recover past growth rates, those that made us the standout student in the region.”

Chile's next president is due to take office in March 2022. A leftist, Gabriel Boric, leads the polls.

Montero also underscored the importance of inclusive growth and referred to the likely role this factor played in the 2019 protests. 

“Growing for the sake of achieving growth is insufficient," he said. "The objective is growing to achieve greater development which translates into the greater wellbeing of people.”

Associated challenges for Chile include improving deteriorated debt metrics and rebuilding capacity to withstand economic shocks, which has weakened following the pandemic and the social crisis of 2019.

The full interview with Montero will be published next week.