Chile: Outlook Mixed for 2017 - BBH

Research Team at BBH notes that Chile is poised to start the easing cycle this week. Rate cuts along with the rally in copper should help the economy rebound this year. However, Chile is facing some political risks as the November presidential election approaches.

Political Outlook - Key Quotes

"The ruling center-left coalition Nueva Mayoria’s losses in the October municipal elections does not bode well for its prospects in the presidential election this November. President Bachelet’s popularity during her second term has been hurt by several corruption scandals, the weak economy, and a poorly executed structural reform agenda.  

"Former President Sebastian Pinera of the opposition center-right coalition Chile Vamos may be considered the frontrunner for the November 2017 vote. However, polls do not show Pinera to be particularly popular (around 20% support), as he has been dogged by corruption allegations too.  Indeed, voter apathy may be the biggest determinant of this year’s vote. Turnout for last October’s municipal vote was a paltry 35%, the lowest for any election since the return to democracy in 1990."

"Socialist Party leader (and daughter of former President Salvador Allende) Isabel Allende withdrew her candidacy for the presidency back in November. She instead threw her support behind center-left candidate Ricardo Lagos, another former president. The center-right may be considered to be more business-friendly than the center-left. However, the policy differences in practice are quite small."  

Economic Outlook - Key Quotes

"The economy is still sluggish. GDP growth is forecast to accelerate modestly to around 2% in 2017 from 1.7% in 2016. GDP rose 1.6% y/y in both Q2 and Q3. However, monthly data so far show a 0.9% y/y rate for Q4 and so there are downside risks near-term. On the other hand, higher copper prices should help boost growth in 2017."

"Copper prices bottomed last year. In October, Chilean Copper Commission (Cochilco) forecast copper prices averaging $2.20 per pound in 2017 year vs. $2.15 in 2016. We see upside risks, as Trump’s victory along with signs that the mainland Chinese economy stabilized helped boost prices over 25% since the start of November. However, the rally has stalled out in recent weeks."  

"Price pressures are falling, with CPI decelerating to 2.7% y/y in December. This is the lowest rate since November 2013, and has been in the 2-4% target range for five straight months. This supports the case for a 25 bp rate cut when the bank meets Thursday. The central bank last hiked rates 25 bp to 3.5% in December 2015 but has been on hold since."

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