Chile has pledged to reduce its deficits despite unveiling plans to tap sovereign bond markets for as much as $10.5bn next year.
Finance minister Rodrigo Valdés told GlobalMarkets that while Chile’s gross debt was still low, it was time to bring the fiscal deficit in line. “I am worried in the sense that we cannot continue increasing debt at this pace for too long. We cannot have these deficits for too long,” he said.
The fiscal deficit for the A+ ranked economy will likely be 3.2% of GDP this year, an increase from the initial forecast of 2.9%. It was 2.2% last year. The government is forecasting GDP to expand this year by 1.75%, increasing to 2.25% in 2017. Fitch said that Chile’s sluggish 1.9% growth in the 2014-2016 period was the second lowest is its A rated class.
The government has not decided on the breakdown of debt for next year, but the minister said that while there would be some paper placed on the international market it would rely more on local debt because interest rates are low and the country has a deep financial sector.
The government’s approach to the debt is part of a larger effort to continue unwinding the fiscal stimulus in place since the start of the commodity slowdown. The 2017 budget will increase by 2.7%, the slowest increase in 14 years. Valdés said the government has aimed for a neutral fiscal stance this year and that will continue in 2017.
PRIVATE PENSION REFORM
A number of major issues could impact the government’s projections, including the need to conclude salary negotiations with public sector workers and come up with an agreement on its pension system.
Total spending on wages is around 20% of GDP, which makes the negotiations critical to government plans. A point that could work in the government’s favour is a decline in inflation. Annual inflation rate in September was 3.1%, safely within the 2%-4% target. The Central Bank has responded all year to lower inflation by keeping the benchmark interest rate unchanged at 3.5%.
Tougher will be the negotiation on the country’s pension system. Chile’s private pension system, adopted in 1981, has been a model for the region, but it is now widely disparaged by Chileans. President Michelle Bachelet has announced some changes, but the government hopes to come to broad agreement with stakeholders on deep reforms to the system. Chile’s private pension funds have around $160bn of assets under management.
Valdés said Chileans across the board are not satisfied with the system, with the vast majority saying that they are not receiving enough from their pension fund when they retire.
“We hope to come to an agreement to improve the system in the next few months. We are very aware that we need to find ways to make the system more friendly and with greater risk sharing,” he said.