Chile Country Risk Report Q4 2018
Real GDP growth in Chile will continue to gain steam in the quarters ahead, on rising copper output, increased business confidence and strong private consump-tion. The non-copper sectors of the economy will likely become increasingly important drivers of growth in the years ahead.
Chile's current account deficit will narrow in 2018 as the goods trade surplus widens. In the years ahead, a diversifying export base and strong copper production will support narrowing deficits, while capital inflows stabilise Chile's balance of payments position.
The Chilean peso will gradually depreciate over the next two years, due to relatively low real interest rates compared to Chile's emerging market peers and limited upside for copper prices. Over the next decade, a diversifying export base will help reduce the unit's close association with copper prices.
The Banco Central de Chile will enact one rate hike in 2018, increasing the benchmark policy rate by 25 basis points to 2.75% as inflation and economic activity pick up.
Chile's fiscal deficit will narrow in 2018 as an uptick in activity supports revenues, while a commitment to fiscal prudence limits spending growth. In the years thereafter, social demands on government spending will see the deficit gradually widen.
Should the Chinese economy deteriorate more significantly than currently anticipated in the coming quarters, copper prices could continue falling, leading to weaker-than-expected export performance, slower growth and depreciation of the CLP.
Similarly, the escalation of trade tensions between the US and China would likely reduce the price of copper, which is widely seen as an indicator of global trade, weighing on Chile's economy.
Relatively weak inflation could slow the pace of rate hikes in 2018, or potentially open the door to an additional cut if price growth does not pick up.
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