Chile Seen Leaving Disneyland by Former Central Bank Chief

Chile’s economy will grow less than the central bank and government forecast next year as it emerges from the “Disneyland” of high copper prices and low global borrowing costs, said a former head of the central bank.

Gross domestic product in the world’s largest copper producer will expand 3.5 percent to 4 percent, compared with the 4.9 percent forecast by the government, said Vittorio Corbo, senior investigator at Santiago-based think-tank Centro de Estudios Publicos. The central bank is estimating growth of 4 percent to 5 percent next year.

“We’ve had three very good years,” said Corbo, who was president of the central bank between 2003 and 2007, in an interview in Santiago yesterday. “They were chasing Chilean companies to lend them money. We were in Disneyland, but from here on conditions won’t be the same.”

Surging investment in the mining industry that has enabled economic growth to average 5.8 percent in the past three years is set to weaken as rising costs and falling prices crimp profit margins, said Corbo, who is a director of Banco Santander SA. A three-year boom in consumer spending will also peter out soon, paving the way for an interest rate cut before the end of the year, he said.

“In the next few years, Chile will have to work hard in order to grow and even to maintain an expansion of 4.5 percent,” he said. “Everything points to one or two rate cuts in the next six to 12 months.”

Falling From the Sky

President Sebastian Pinera told Charlie Rose in an interview aired on PBS and Bloomberg Television that Chile can maintain growth of 6 percent as long as it doesn’t rest on its past achievements.

“You have to be taking measures all the time to innovate, to improve, to modernize the whole system,” Pinera said. “So the worst danger is when you think that growth happens by chance, or falls from the sky.”

The four pillars of growth will be education, innovation, science and poverty reduction, Pinera said, comments that echoed Corbo’s list of areas the government needs to concentrate on.

The principal risk for Chile’s economy next year remains a sudden slowdown in China and subsequent slump in copper prices, Corbo said. The end of quantitative easing in the U.S. could also push up global borrowing costs, draining funds from emerging markets.

Interest Rates

Chile’s central bank has kept its benchmark interest rate at 5 percent for the past 20 months as a forecast slowdown in consumer spending failed to materialize.

Retail sales leaped 12 percent in August from the year earlier, bringing growth in the year to date to 10.2 percent, the National Institute of Statistics said Sept. 30. Manufacturing production stagnated over the same period, creating a “dichotomy” for policy makers, the central bank said in the minute of its September rate meeting.

“With the figures from this week the central bank has additional arguments to wait some more, but it isn’t going to wait long,” Corbo said. “The bank will continue to be prudent and from here to the end of the year it is possible we will have the first rate cut.”

One-year swaps were unchanged at 4.67 percent today, as traders priced in a rate cut as soon as Oct. 17. Once reduced, rates won’t be coming back up again soon, Corbo said.

Slowing Down

With real wage growth slowing and consumer sentiment weakening, policy makers may cut rates even before retail sales start to ease, central bank President Rodrigo Vergara said Oct. 1.

“If we have evidence of a relatively strong slowdown in coming months, we could take monetary policy decisions even if the current information isn’t showing the symptoms,” Vergara said. The debate on consumer demand shouldn’t dominate rate decisions, he said.

Corbo echoed Vergara’s confidence that the retail sales boom will end soon.

“The labor market is going to be less dynamic,” he said. “It is strange that consumption hasn’t slowed as we expected, but it should start to do it soon.”

Chile may not be as vulnerable as policy makers had thought to a withdrawal of foreign funds as the current account stabilizes at about 4 percent of GDP, Corbo said.

Weaker internal demand, led by a slowdown in investment in the mining industry, may provide a “positive surprise” for the current account deficit, which is currently forecast to end the year at about 4 percent of GDP, Vergara said this week.

Corbo put a number on the changed outlook for the broadest measure of trade in goods and services.

“The 4.8 percent current account deficit the central bank is forecasting for 2014 is very unlikely,” Corbo said “It will be close to 4 percent.”

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