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The following OECD assessment and recommendations summarise chapter 1 of the Economic Survey of Chile published on 27 January 2010.
Chile is now emerging from the economic crisis
Chile was hit hard by the collapse in world trade and commodity prices, notably the decline in copper prices by more than half. Domestic demand was also severely affected by the worsening environment, with both gross capital formation and consumption falling sharply. GDP growth was negative during four consecutive quarters between mid-2008 and mid-2009 and unemployment increased rapidly during the same period. However, a good part of the drop in the terms of trade, especially copper prices, was reversed by mid-2009 and world trade started to grow again, helping activity to bottom out in the second half of the year. With support from a substantial macroeconomic stimulus, growth is set to increase in 2010 and gather further pace in 2011.
Macroeconomic policy should remain supportive in the near term, but assuming that the economy regains traction as projected, the stimulus should then be withdrawn gradually
Faced with rapidly deteriorating activity and declining inflation, Banco Central de Chile reacted vigorously in the first half of 2009 by reducing the monetary policy interest rate from 8.25% to 0.5% and finally taking non conventional measures, such as reducing short term debt issuance and establishing a term liquidity facility. While the economic environment improved in the second half of 2009, activity nonetheless remained below potential, the unemployment rate stayed close to 9% and consumer prices declined mildly. This is why the central bank decided to hold the policy interest rate close to its minimum level for a prolonged time period and to use its policies with flexibility so that projected annual inflation stands at 3% over the policy horizon. Assuming the economy regains strength in 2010-11, as projected, and that prices stop falling thanks to the supportive monetary policies, the stimulus should be withdrawn in time to keep inflation expectations well anchored. Unless inflationary pressures build up appreciably faster than expected, interest rates should remain low well into 2010 and then be raised gradually.
The government was also quick to enact a well-targeted fiscal stimulus in 2009. The package comprised temporary measures in favour of public investment, a cash allowance for low income households, tax reductions and a temporary increase in subsidies for training programmes. In addition, some permanent measures were introduced, including an extension of unemployment benefits to workers with fixed-term contracts and a wage subsidy for young, low-wage workers. The slump in activity and copper prices, along with the fiscal measures, could see the 2008 fiscal surplus of more than 5% of GDP move to a deficit of around 3½ per cent of GDP in 2009. Notwithstanding the recent deterioration of the budget balance, Chile continues to enjoy the benefits of low debt and positive net financial assets. It can thus afford to keep some of the fiscal stimulus measures in place in 2010 to provide further support to domestic demand. Assuming the recovery gains pace as projected, fiscal stimulus could be further withdrawn in 2011.
The financial system has held up well in the crisis, but in some areas regulation needs to be strengthened
Thanks to prudent financial supervision and careful regulation, Chile’s financial system seems comparatively sound with little or no exposure to currency mismatches or to the toxic assets that brought down OECD financial markets. To keep credit flowing during the crisis the government extended credit guarantees by state agencies, recapitalised state owned BancoEstado and allowed insurance companies and other non-bank financial institutions to provide credit. It increased the ceiling for debt financing of subsidised housing, while lowering the capital requirement for bank credit with guarantees from government funds. While it is important to facilitate access to credit in the current environment, some of these measures imply laxer prudential standards and should therefore be subject to close monitoring. They should be reassessed once the recovery is well entrenched. Despite a dominance of financial groups and conglomerates operating in several segments of financial markets, coordination between the separate supervisors for banking, for insurance and securities and for pensions remains limited. Since it is difficult for separate supervisors to detect intra group risks of financial contagion, there is a need for close cooperation. Recently introduced information-sharing between regulators in committees is welcome, but should be formalised and deepened, and consolidated information for financial conglomerates should be collected. In the longer term, the government should take action to establish group-wide financial supervision. One option would be to designate a “lead supervisor” based on the group’s main activity.
Department stores’ issuance of credit cards, mainly targeted at lower-income households with higher credit risk, now accounts for more than 80% of cards in circulation though a minor share of total credit. Credit rating agencies have downgraded several of the department stores because of mounting losses this year. Banks and department stores do not share full information on credit histories, weakening their ability to evaluate their clients’ credit risk. The recent draft bill to create a consolidated credit register is welcome. The authorities need to carefully monitor non-bank credit issuers to detect potential threats to systemic stability. The Superintendency of Banks should supervise all credit card issuers.
How to obtain this publication
The complete edition of the Economic Survey of Chile is available from:
The Policy Brief (pdf format) can be downloaded in English. It contains the OECD assessment and recommendations.
For further information please contact the Chile Desk at the OECD Economics Department at email@example.com.
The OECD Secretariat's report was prepared by Nicola Brandt, Cyrille Schwellnus and Rodrigo Paillacar under the supervision of Patrick Lenain. Research assistance was provided by Roselyne Jamin, Jehan Sauvage and Valéry Dugain.