Chile’s government expects economic recovery this year, with growth reaching potential by 2018, deputy finance minister Alejandro Micco told Emerging Markets on Friday.
The economy grew just 1.9% last year, its worst performance since the global financial crisis in 2009. It expanded at an annual rate of 2.7% in January, according to the central bank. The government expects the economy will grow by 3% and surpass 4.5% within the next three years.
“We have been seeing some new buds in the economy,” Micco said. He said stronger growth was the result of the reforms implemented last year, a devaluation of the peso, and expansionary monetary and fiscal policies.
There will be an increase in fiscal spending this year by 9.8% and an increase in 27% in public investment. “These factors have combined to give us a certain level of recuperation that make us optimistic,” he said.
The optimism is shared by rating agencies and investment banks. “Chile can take care of itself, following its traditional rules. It is still on a very responsible path. Growth is lower, simply because copper prices are lower,” said Joydeep Mukherji, managing director at Standard and Poor’s.
Mario Castro, a strategist at Nomura Holdings, said he expected growth to accelerate this year. “We have been saying for several months that we expect a recovery to 3.2% this year given the fiscal impulse and more exports. The latest data is showing that we are on target and the market is now moving toward our number,” he said.
Cutting energy costs
The focus for medium and long term growth is on improving the country’s energy sector, ramping up innovation and education, and focusing on non-copper exports.
Chile has one of the highest electricity costs in the region and there had been concerns that the already high cost of energy, $110MW/h, would reach $150MW/h. That fear has dissipated with the strategy of diversifying the energy matrix to bring on line renewable plants, particularly solar plants in the northern desert where demand is high from mining and supply low. The government is working to integrate its southern and northern electricity grids.
Education reform is aimed at increasing quality at all levels. Mukherji said this set Chile apart. “The government passed tax reform to finance its education reform. Unlike other countries, it raised the money before deciding to spend it,” he said.
The government is working on reforms to put services on an equal footing as goods to make sure that taxes are not exported. Micco said there were successful experiences with software development and financial services, among others. “Services represent a new seed of exports that we need to cultivate,” he said. “We need to take advantage of our accumulated know-how.”
The big question hanging over the economy is copper, which accounts for roughly 60% of the country’s exports and a large chunk of government revenues. Chile enjoyed a bonanza from high copper prices, but now expects them to settle around $3/pound. Castro said copper prices would stabilise.