Copper Slump Pressuring Chile to ‘Shift Gears’, Valdes Says

  • Government may struggle to meet pledges on higher education
  • Companies in position to pick up investment and drive growth

Chile’s government is finding it increasingly hard to meet its spending pledges as a slump in copper, its principal export, challenges the Latin American country’s tradition of fiscal prudence, Finance Minister Rodrigo Valdes said.

“If the price of copper doesn’t recover, we have to face up to a different reality,” Valdes said in an interview in Lima following a meeting of the International Monetary Fund. “The worst thing we can do is something populist and promise things we can’t deliver.”

President Michelle Bachelet surged to power last year on a wave of student protests in favor of free education in the biggest demonstrations the country has seen since the end of August Pinochet’s dictatorship in 1990. The former political prisoner’s promises to ensure free education for all secondary school students are on their way to completion. Pledges to guarantee the same for 70 percent of students in higher education are proving more difficult as the budget deficit widens.

“I can’t guarantee now that we will reach 70 percent because we depend on the resources available,” Valdes said.

Unveiling the details of the 2016 budget last week, Valdes said that the government would be unable to balance the so-called structural, or cyclically-adjusted deficit in 2018 as it had promised. That will now be left to the next government, he said.

The overall budget gap will narrow to 3.2 percent of gross domestic product in 2016 from 3.3 percent this year.

“What worries me is that we have a relatively high deficit and that we have to turn it around,” Valdes said Saturday. “In 2017 and 2018 we are planning to spend more money than we have under the current macro framework.” Given mounting social demands “we have to reflect as a country and shift gears to something more realistic.”

Industry Dependent

Economic growth next year will be “completely dependent” on the private sector, be it consumer spending, exports or corporate investment, Valdes said. The impact of government spending would be “slightly” negative, he said.

The government’s forecast for growth of 2.75 percent in2016 is “very demanding,” with the risks “slightly on the downside.”

“If the global economy grows less, we will grow less and macro policies will have to adapt,” Valdes said.

Still, industry is in a good position to accelerate spending after cutting back on investment in the past two years, he said. There had been no excessive credit boom in Chile and companies are not over-leveraged.

Concern over corporate debt levels in Chile of about 110 percent of GDP were misplaced, Valdes said. Chile is more financially developed than its peers, enabling higher debt levels without threatening stability. Moreover, corporate profitability was higher than in many of its peers, debt as a percentage of equity was not excessive and the weight of debt payments was coming down.

“Chile is not a country that has particularly high debt,” Valdes said. “Balance sheets remain relatively healthy."

Peso Slump

Chile’s economy is beginning to adapt to the 13 percent slump in the peso against the dollar over the past year as companies alter their investment plans to reflect the new reality, Valdes said.

“I would love industry to adapt investment more quickly, but there are no short-cuts,” he said. Changing investment areas depends on financing, skills and even the migration of workers within the country. “That takes time.”

What is certain is that the days of high copper prices ensuring a fiscal surplus, a strong peso and robust growth are over.

“We are going to have a very different exchange rate in the next three years to the one we have seen in the past 10 years,” Valdes said. “The commodity boom is something of the past.”

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