Chile – Facing two shocks

Political tensions seem to have accelerated in some LatAm countries, such as in Brazil and Mexico This comes after unrest reached a boiling point in Chile in 2019 (strong enough to flatten GDP growth to 1%, much lower than 5% expectation prior to protests). The response of Chilean authorities was twofold: increase social spending and begin re-writing the constitution. Accompanied by a referendum, the process was set to begin in April. But in Q1 2020, after covid-19 hit, authorities were pushed to implement unprecedented fiscal and monetary expansion programs, and to postpone the referendum until October. Effectively, Chile is now facing two shocks. How will Chile emerge from the dual-crisis? Because Chile is a small very-open economy, the country’s economic fate will heavily depend on global factors. But, fiscal and monetary actions will allow for a strong rebound in Chile in 2021. Chile is uniquely positioned, among EM countries, to deploy fiscal resources without affecting underlying fundamentals because of its stock of savings and low debt to GDP. It also has demonstrated credibility in possibly limiting future fiscal spending. Public opinion suggests that the new constitution will move from the right, to the center, while maintaining traditional pillars of unfettered markets, strong private property rights, central bank independence, responsible fiscal policy, and protections for domestic and foreign investors. This note is organized as follows: 1) first, we make the case that Chile is a very open economy, and therefore, its outlook depends on what happens in the global macro picture. We provide Natixis’ view on China, the US and Europe. 2) Secondly, we review the domestic shock due to Covid-19 and the measures taken by authorities thus far. 3) Thirdly, we review with the status of the referendum, and 4) Natixis’ outlook on GDP growth, inflation, monetary policy and the USDCLP.