On December 15, 2009 Central Bank directors in Chile, Latin America’s seventh largest economy, voted to keep its benchmark interest rate frozen at a record low of 0.5%, as the country battles its worst bout of inflation since 1934.
The decision to maintain interest rates at historic lows is one part of the Chilean government’s larger program of stimulus measures that should help Chile, a country long regarded as Latin America’s best managed economy, to recover from the 2009 crisis by early 2010.
During the 2009 crisis as during previous downturns in recent decades, Chile’s government is acting to stimulate business activity and increase economic output. According to Marpin Binghim, an economist and independent management consultant who specializes in Latin America, “Chile is the most outstanding country in Latin America in terms of macro-economic policy management in the last twenty years.” Binghim explained that “even though there is a global crisis, Chile has been able to tap into its rainy-day fund and smooth output, avoiding a major downturn.”
Like many other countries in the region, Chile is a major natural resource exporter, and is vulnerable to sudden swings in world trade and commodity markets. According to data from the World Bank, in Latin America natural resources account for about half of all export receipts. In Chile, copper alone accounts for 40% of all exports.
However, as is not the case in other resource exporters in the region, Chile’s history of responsible economic policy making, has left it well situated to implement a range of economic stimulus measures. Thomas Trebat, the Executive Director of the Institute of Latin American Studies at Columbia University in New York, explained in a recent interview that because of prudent policies in the past, in 2009 “Chile has been able to implement effective fiscal and monetary stimulus programs” to help counter the effects that the world-wide financial crisis have had on Chile’s economy.
According to data from the Inter-American Development Bank, in 2006, at the height of a boom in commodity prices, when other governments in the region splurged windfall profits from oil and mineral exports, Chilean policy-makers, even though they were criticized for doing so at the time, resisted pressure to increase government spending. Contacted recently by telephone, Luis Oganes, Head of Latin America Research at J.P. Morgan in New York, explained that “Chile still has a poverty rate of 20 percent” and during the recent boom, felt “a lot of pressure to increase spending, but the government was very responsible and did not give into this pressure.”
Using accounting methods that subtract cyclical revenues earned from unusually high export earnings, Chile’s government ran a structural surplus of 1% in 2006, compared to a structural deficit of worth almost one fifth of GDP in Venezuela and a 4% deficit for Latin America as a whole during the same year.
Chile’s frugality during the boom years has appeared to pay off. Cameron Brandt, Senior Global Markets Analyst at EPFR Global, a Cambridge Massachusetts based consultancy, explained that “because of its stockpiled copper reserves, now Chile’s government can spend a lot of money on its stimulus package, without having to worry about when the bill will come due.”
Data from Chile’s Central Bank show that despite the fact that the country’s economy contracted by 2% in the forth quarter of 2008, in 2009 Chile has been well equipped to take immediate measures to counteract the effects of the downturn. According to data from the World Bank, in 2009 Chile has been able to implement a stimulus package worth 2.4% of GDP.
Such measures are important, and are part of the reason why Chile’s year on year growth is expected to fall by only 1.5% in 2009, compared to a 3.2% drop for Latin America as a whole. Contacted this week, Martin Schwerdtfeger, a Senior Economist who covers Chile for IHS Global Insight, a leading economic research firm, explained that although Chle did feel the effects of the effects of the global financial crisis in 2009 as foreign direct investment (FDI) fell by 7.4%, a US$800 million drop, during the first three quarters of the year, “the country’s total fiscal stimulus package amounts to roughly US$7.8 billion, ten times the magnitude of the drop in FDI.”
Chile’s low interest rates and continued government spending measures are expected to boost business activity, bring down the unemployment rate and help the country’s economy recover during 2010. Luis Oganes, the Latin American research director at J.P. Morgan said that unlike Mexico, which sends 80% of its exports to the United States, or Brazil, which is a relatively closed economy, Chile is an open economy that exports goods to a diverse range of markets in Latin America, North America, Europe, and Asia. According to Oganes, “Chile is bound to display particular dynamism in 2010” as growth picks up around the globe. According to Martin Schwerdtfeger, the Senior Economist at Global Insight, Chile will resume growth and report a 4.5% increase in economic output in 2010.
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