Chile forecast to see strongest investment growth among Pacific Alliance nations

Of the Pacific Alliance nations, Chile could see the largest increase in gross fixed capital formation this year, a conference heard.

The consensus forecast – using September figures – is that investment in Chile will rise 4.1%, outpacing fellow bloc members Colombia and Peru. Mexico, meanwhile, is expected to see investment dip.

The September estimate is around one percentage point lower than a previous forecast, the government’s budget director, Rodrigo Cerda, said during the conference, hosted in capital Santiago by industry federation Sofofa. 

The downward trend was seen in all bloc members as well as in Brazil and Argentina. 

Last month a central bank official said, globally, trade tensions were weakening investor appetite. 

The central bank expects gross fixed capital formation to register 4.0% growth this year, down from 4.7% in 2018.

The 4.1% consensus forecast, meanwhile, does not take into account the potential positive impact of the government’s tax reform bill – which remains in congress – Cerda (pictured) said.

He told the conference: “Overall, this is a bill that should provide an important boost to private investment.”

The bill faces strong opposition from quarters of the left, who argue it favors the wealthy and would actually lead to a reduction in revenue. 

Central government investment is due to rise 6.8% in 2020 from 1.2% this year.

GDP OUTLOOK

The finance ministry expects the economy to expand 2.4-2.9% this year while the central bank forecasts growth to fall within the 2.25-2.75% range. For 2020, the central bank expects growth between 2.75% and 3.75%.

Both the finance ministry and the central bank expect the economy will gather pace this half, following a challenging H1 impacted by, among other factors, a strike at the Chuquicamata copper mine and flooding, which reduced output. Economic activity increased at a faster-than-expected pace in August, thanks largely to the mining sector. 

Confidence levels, which have been falling, are also expected to increase.

Under a plan to help spur flagging economic growth against a backdrop of unfavorable external conditions and weakened consumer confidence, the government is speeding up the execution this year and next of US$3bn in planned investment, the bulk geared to housing, and urban and public works projects.

The central bank has also cut its benchmark rate by 100 basis points this year to help spur the economy.

“The changes in monetary policy are, effectively, in a way, creating space for the reactivation of the private sector,” Cerda said.

Central bank chief Mario Marcel told the conference that, like in the area of investment, Chile was performing relatively well in terms of economic growth.

Marcel said in a presentation: “Despite the worsening of the external environment, the economy is positioned to grow at rates above the average of previous years and resume growth above 3% in the coming years.

“This is due to various factors. First, because the global economy is expected to experience an important slowdown, but not enter recession. Second, because investment keeps growing despite increased uncertainty. Third, because in recent years the vulnerability of the economy to forex fluctuations has decreased.” 

An easing in trade tensions between the US and China would help support prices of copper, Chile’s main export, providing additional headwinds for the economy. The price of the commodity began falling around mid-2018 and has failed to bounce back.

Fitch Solutions Macro Research, a unit of the Fitch group, recently revised down its copper price forecast for 2019 to US$5,900/t from US$6,300/t, citing “poor investor sentiment and Chinese consumption turning out lower than we previously expected, on the back of escalating trade tensions with the US and an already slowing economy.”

Fitch Solutions Macro Research forecasts prices to start rebounding in 2022.

But not all market observers share the same view. Citing copper’s fundamentals, some expect prices will strengthen over the coming quarters, partly on account of a global supply shortage.

Chile, the world's largest producer, last year shipped around half of its copper to China, which has been hurt by the trade war.

Some analysts expect US President Donald Trump will take a conciliatory approach to China ahead of next year’s elections to secure a trade deal and avoid harming the US economy in the run-up to polling day. Others forecast he will keep piling the pressure on Beijing to maintain the support of his voter base.