Chile Forecasts Second-Biggest Fiscal Gap in a Quarter Century

  • Forecast for GDP growth lowered to 1.75% from 2% in March
  • Government looking at funding debt with sovereign wealth fund

Chile’s government cut its forecast for growth this year and predicted the second-largest fiscal deficit in the 25 years after the unemployment rate jumped to a five-year high and mining revenue slumped.

Gross domestic product will expand 1.75 percent, compared with the 2 percent forecast in March, Finance Minister Rodrigo Valdes told the Senate Monday. The fiscal deficit will widen to 3.2 percent of GDP from 2.2 percent in 2015 and from the 2.9 percent estimated for this year in February.

Unemployment has started to rise in Chile as the economy endures its third year of sluggish growth, threatening to undermine consumer spending and deepen the slowdown. As the economy continues to weaken following a slump in copper prices, the government cut spending plans earlier this year and is now considering tapping one of its sovereign wealth funds to cover part of its expenditure in 2017.

"There hasn’t been a clear economic recovery," Valdes told congressmen. "It is important to act in a timely fashion. We need to have the possibility of acting responsibly and flexibly to face events."

Chile’s sovereign wealth funds hold $27.6 billion after the government put money aside during the decade-long commodity boom. That boom is now over, with revenue from the state-owned copper company Codelco and the private copper industry slumping this year.

While revenue weakened, fiscal spending rose 6 percent in the 12 months through May, compared with the 4.2 percent budgeted for this year, prompting Valdes to reiterate his commitment to narrowing the fiscal deficit. The government has pledged to cut the shortfall in the so-called structural deficit by a quarter-point of GDP each year from 1.4 percent in 2016.

"We are on a path of coherent spending," Valdes said. "We will need to be careful with the implementation" of budget plans.

The government lowered the short term copper price forecast to $2.15 per pound, from $2.5 per pound.

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