Chile’s Entire Economic Team Resigns in Government Crisis

  • Finance Minister Valdes, Economy Minister Cespedes resign
  • Departures come just three months before presidential election

Chile, Latin America’s wealthiest and most stable nation, saw the resignation of the government’s entire economic team Thursday as policy disputes boiled over following almost four years of sluggish growth. Markets shrugged off the crisis.

Finance Minister Rodrigo Valdes, his deputy Alejandro Micco and Economy Minister Luis Felipe Cespedes all resigned after the cabinet split over a decision to block a $2.5 billion iron-ore project in northern Chile for environmental reasons. All three complained about the haste with which the decision was taken, while President Michelle Bachelet backed the process. Valdes will be replaced by Nicolas Eyzaguirre, a former finance minister.

“A sustained advance to faster levels of growth requires discipline and conviction in the government and the opening of new spaces where the private sector can use its initiative with clear and stable rules,” Valdes told reporters. “But I didn’t manage to get everyone to share that conviction.”

The dispute over the Dominga iron-ore project has laid bare the deep divisions within Bachelet’s administration. Whereas Bachelet has focused on social justice and redistributing wealth, Valdes had stressed the need to revive investment amid the slowest four years of growth since the early 1980s. His departure will make a victory for the ruling coalition’s candidate in November’s election all the less likely, paving the way for opposition leader and billionaire Sebastian Pinera.

“It is a political problem that shows the cracks in the center-left are bigger than we thought,” said Kenneth Bunker, a professor at the Universidad Central. “The ruling coalition is going to the polls divided, while the right is unified.”

Worst Moment

The resignations couldn’t come at a worse moment for the government as it races to push through pension reform and changes to the securities and banking regulator before its term ends in March. Valdes and Micco were also negotiating next year’s budget and pay increases for public sector workers.

“It’s the government’s biggest own goal,” said Sebastian Ide, head trader at Banco de Chile. “To score a big own goal in the last minutes of a match you’re already losing is tough.”

Still, the peso held onto its gains following the announcement, rising 0.5 percent to 626.90 to the dollar. The currency has been the best performer in emerging markets in the last week after the Russian ruble, with a 1.9 percent gain. The benchmark IPSA stock index was little changed at 5,153.15

“The resignation of minister Valdes reaffirms doubts about governability in the closing stages of this government and strengthens the candidacy of Pinera as a pro-growth president,” Ide said.

Economic Rebound

Ironically, disputes over economic policy have boiled over just as evidence mounts that the economy is finally picking up after growth all but stalled in the first quarter. Industrial production rose at the fastest pace in more than two years in July amid a rebound in the mining industry, while unemployment unexpectedly fell.

Moreover, the rebound is set to accelerate after the price of copper, which accounts for about half of Chilean exports, reached a three-year high this month. As the price gained, BHP Billiton Ltd. gave the go-ahead for the $2.46 billion expansion of its Spence mine in northern Chile this month.

Valdes had become finance minister in May 2015, replacing Alberto Arenas after the latter pushed through the biggest tax increases in 30 years. Valdes then modified those changes after industry complained they were unworkable, while maintaining a tight rein on government finances as a slump in the copper price pushed up the fiscal deficit.

“For us, Valdes was a fairly good finance minister,” said Adam Collins, Latin American economist at Capital Economics. “Admittedly, he has overseen a widening of the budget deficit and the rise in public debt that led to S&P downgrading Chile’s sovereign rating recently but this has more to do with the slowdown in the economy (triggered by lower copper prices) than with his policies.”

Growth, Growth, Growth

President Bachelet thanked both ministers for their hard work today, but didn’t back down in the debate over growth.

“I can’t conceive of development” that doesn’t benefit the people, “where the only thing that matters is the numbers and not what is happening to families,” Bachelet said.

Cespedes will be replaced by Jorge Rodriguez, who served as mining and economy minister during the 2000 to 2006 government of President Ricardo Lagos. The new finance minister, Eyzaguirre, was also a minister for Lagos before moving on to the International Monetary Fund. He was the minister in charge of government relations with congress until today.

Asked what his priorities would be, Eyzaguirre replied simply “growth, growth, growth.”

— With assistance by Sebastian Boyd, Laura Millan Lombrana, and Eduardo Thomson

(Corrects second name of economy minister.)
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