Copper Windfall Safe With Us, Chile's New Finance Minister Says

  • Eyzaguirre pledges to retain fiscal discipline as copper soars
  • Finance minister sees growth a little over 3 percent next year

Chile’s government won’t spend the windfall from soaring copper prices in the budget to be announced this month, said new Finance Minister Nicolas Eyzaguirre as he pledged to stick to the country’s strict fiscal rules.

Even with copper at a three-year high and money pouring back into the coffers, the government will keep tight control over spending, narrowing the fiscal deficit, Eyzaguirre said after one week in the job.

Nicolas Eyzaguirre

Photographer: Alejandro Olivares/Bloomberg

“It has to be an austere budget,” the minister said. “Being more fiscally conservative in an election year isn’t going to be easy, but that is why we are here.”

Anyone expecting a change in policy from the government following the resignation of the entire economic team and the appointment of Eyzaguirre last week can forget it. The new finance minister says you couldn’t find two people with more similar economic views than him and his predecessor and good friend, Rodrigo Valdes. Central to those views is the importance of fiscal discipline.

Chile’s credibility “is one of the most important assets we have,” Eyzaguirre said in an interview in his office in Santiago. Higher spending could push up borrowing costs and “it’s better not to tempt the devil.”

Copper, which accounts for about half of Chilean exports, rose as high as $3.18 per pound this week, up 44 percent in the past year. Every one cent increase in the average copper price for the year represents $50 million extra revenue for the government.

Fiscal Rule

Chile’s fiscal rule, introduced by Eyzaguirre when he was previously finance minister from 2000 to 2006, states the government should balance its books, excluding any windfall revenue from the copper cycle and above trend growth.

The government has failed to meet that target in all but one year since 2009, but now aims to narrow the shortfall by a quarter point of gross domestic product each year from about 1.7 percent in 2017. The overall deficit has been widening for five years.

The failure to meet the fiscal target and mounting debt led Fitch Ratings and S&P Global Ratings to downgrade Chile in the past two months. Fitch cut Chile to ’A’, the same level as Ireland and Japan.

The continued emphasis on fiscal prudence is bad news for state employees who are currently negotiating next year’s pay increase.

“There is very little slack for the public sector talks,” Eyzaguirre said. “Their expectations for real salary increases will have to be very moderate.”

Good Start

Eyzaguirre’s term in office has come at an auspicious moment for the Chilean economy. After the most sustained period of weak growth since the early 1980s, exports are now rebounding on higher copper prices and consumer demand is picking up.

Industrial output rose 3.3 percent in July from the year earlier, compared with the 0.3 percent forecast by economists and the fastest pace in two-and-a-half years. The Imacec index, a proxy for GDP growth, gained 2.8 percent over the same period.

After months of declines, analyst estimates for economic growth, at least for next year, are beginning to rise.

All the more reason to maintain a tight rein on fiscal spending, according to Eyzaguirre.

“The economy is starting to rebound,” the minister said. “We can’t expand the deficit now, it would be completely incomprehensible for those who lend us money.”

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