Arenas Signals Wider-Than-Forecast Chile Deficit on Slowdown

Chile probably will post a wider fiscal deficit than budgeted for this year as an economic slowdown damps revenue, Finance Minister Alberto Arenas said in an interview yesterday.

“It’s very likely that the macro-economic conditions are very different to those on which the budget was based,” Arenas said. “The most likely outcome is that we’ll have a deficit that is bigger that what we would have had.”

The budget, which forecast a shortfall equivalent to 0.9 percent of gross domestic product, was based on growth of 4.9 percent, a target the economy is unlikely to reach, said Arenas, 48, without giving his own forecast. Deputy Finance Minister Alejandro Micco told Bloomberg last month that growth was more likely to be about 3.5 percent.

Drawn up by the previous administration of President Sebastian Pinera, the growth forecast was excessive, meaning fiscal revenue may miss the target, said Arenas, who assumed his post along with the new government in March.

The so-called structural deficit, which takes into account cyclical swings in copper prices, may also be wider than the 1 percent of GDP forecast in the budget, he said. In 2013, the budget deficit was 0.6 percent of GDP and the structural shortfall was 0.7 percent.

Increased Borrowing

“We expect the effective deficit to be around 1.9 percent of GDP,” Jorge Selaive, chief economist at Banco Bilbao Vizcaya Argentaria SA in Santiago, said by phone. The wider shortfall may push the government to request another $1 billion in borrowing in addition to the $6 billion of local-market debt already authorized by Congress, he said. The budget also allows for $300 million of foreign bond sales.

The government will give new forecasts for economic growth and the structural deficit at a meeting with a congressional committee on May 12, Arenas said.

The economy grew about 2.4 percent in the first quarter, down from 4.1 percent in all of last year and 5.4 percent in 2012 as an investment boom in the mining industry wanes.

The widening deficit won’t weaken the government’s commitment to finance the state-owned copper company Codelco, Arenas said.

“There is a commitment to capitalize Codelco,” he said. “That is not in doubt.”

Expansion Plans

Codelco’s investment program requires more than $20 billion to increase output by about 10 percent this decade, ensuring Codelco’s title as the world’s biggest copper miner. Without the investments, output would fall by more than half, Chief Executive Officer Thomas Keller said in an April 7 interview.

Arenas declined to say how the government would finance Codelco, saying that President Michelle Bachelet will announce the funding plans “in due course.” The government has until June 30 to announce how much money it will give the company this year.

Codelco’s profit slid to $3.89 billion in 2013 from $4.01 billion the year before on waning copper prices. Pinera’s government allowed Codelco to retain $2 billion of its profit as Keller oversaw a record $4.2 billion in investment needed to revamp the company’s aging mines.

Arenas dismissed allegations by the previous administration, including his predecessor Felipe Larrain, that tax changes under debate in Congress threaten to damp investment.

Tax Proposals

The tax proposals include an increase in the corporate tax rate to 25 percent from 20 percent over four years and the elimination of an incentive to reinvest profits. The government plans to raise an extra 3 percentage points of GDP, or $8.2 billion, to finance expenditure on education and health, as well as eliminate the structural deficit within four years.

Studies have showed that the increase in corporate taxes won’t affect investment, Arenas said. “Good investment projects will find financing sources.”

The gradual implementation of the changes, Chile’s economic progress over the last few decades and measures to boost investment and savings meant the tax proposals could be implemented without damping economic growth, he said.

The government plans to announce measures in the next two weeks to boost investment in the energy industry and improve productivity and growth. The measures would include steps to improve access to credit for small and median-sized companies, especially from the state-owned Banco Estado, Arenas said.

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