R O D R I G O VA L D É S P U L I D O MINISTER OF FINANCE OF CHILE Chilean Economy: Sailing in a Volatile World London, September 7th 2015 University College of London MINISTRY OF FINANCE. GOVERNMENT OF CHILE Outline 1. Overview 1. Macroeconomic Framework 2. Chilean Economic Adjustment 3. Challenges MINISTERIO DE HACIENDA . GOBIERNO DE CHILE 1. Overview MINISTRY OF FINANCE. GOVERNMENT OF CHILE CHILE AT A GLANCE Total surface area1 (sq. km) Population (million people) 1990 2014 756,626 13.2 17.8 GDP (US$ billion) GDP per capita PPP (US$) GDP Growth GDP Growth forecast 2015 32.6 5,847 3.4% - 258.2 22,971 1.9% 2.5% Poverty (% of population) Gini coefficiente 38.6 0.56 14.4 (1) 0.49 (1) (1) Data for 2013. Source: Central Bank, IMF, National Statistic Office and Ministry of Social Development. MINISTERIO DE HACIENDA . GOBIERNO DE CHILE Chile is a small and …. 2015 GDP (US$ PPP) Source: Worldmapper. MINISTERIO DE HACIENDA . GOBIERNO DE CHILE …. open economy (Export+Import)/GDP=55% Most Favored Nation Tariff, (%) Chile Chile, effective tariff 0 Source: UNCTAD 10 20 30 40 MINISTERIO DE HACIENDA . GOBIERNO DE CHILE Highly dependent on natural resources, and…. Exports, 2013 (composition, %) Source: Atlas of Economic Complexity, Harvard. MINISTERIO DE HACIENDA . GOBIERNO DE CHILE …vulnerable to external shocks GDP Growth and External Conditions (1) (annual % variation, % PIB) 20% GDP growth External Conditions Index, detrended 15% 10% 5% 0% -5% -10% -15% 1980 1984 1988 1992 1996 2000 2004 2008 2012 (1) External condition index measures the effects of term of trade and capital inflow shocks on the GDP. Source: Central Bank ,IMF and Ministry of Finance. MINISTERIO DE HACIENDA . GOBIERNO DE CHILE Even though, Chile has managed to “converge” in the last years GDP per capita PPP, 1990 dollars (developed countries = 100) 120% 120% 100% 100% 80% 80% 60% 60% 40% 40% 20% 20% % ARG CHI BRA KOR 0% 0% 1950-59 1960-69 1970-79 1980-89 1990-99 2000-09 2010-14 Source: IMF and Madison. MINISTERIO DE HACIENDA . GOBIERNO DE CHILE 2. Macroeconomic Framework MINISTERIO DE HACIENDA . GOBIERNO DE CHILE Credible Central Bank Inflation (% y-o-y variation) 30 30 25 25 20 20 Inflation target 15 10 15 Headline inflation Inflation expectations 10 5 5 0 0 -5 -5 1991 1994 1997 2000 2003 2006 2009 2012 2015 Source: Central Bank. MINISTERIO DE HACIENDA . GOBIERNO DE CHILE Responsible Fiscal Policy Fiscal Balance (% GDP) 20 10 8 Assets and Debt of Central Government, (% GDP) Nominal Structural Sovereign Funds 18 Central Government Gross Debt 16 6 14 4 12 2 10 0 8 -2 6 4 -4 2 -6 2000 2002 2004 2006 2008 2010 2012 2014 Source: Ministry of Finance 0 2000 2002 2004 2006 2008 2010 2012 2014 MINISTERIO DE HACIENDA . GOBIERNO DE CHILE 3. Chilean Economic Adjustment MINISTERIO DE HACIENDA . GOBIERNO DE CHILE Copper price “super cycle” is ending Real Copper price (cUS$ per pound, 2014 ) 700 600 500 400 300 200 100 0 1870 1890 1910 1930 Source: Catholic University of Chile, Central Bank and LME. 1950 1970 1990 2010 MINISTERIO DE HACIENDA . GOBIERNO DE CHILE Resources have to be reallocated! MINISTERIO DE HACIENDA . GOBIERNO DE CHILE Salter-Swan Model Chile 2003-2004: internal and external balance Non tradables CNT0=YNT0 P=C CTnc0= YTnc0 Tradables non copper MINISTERIO DE HACIENDA . GOBIERNO DE CHILE Salter-Swan Model Chile 2004-2008, copper boom Non tradables CNT1 YNT0 YTnc0 CTnc1 Tradables non copper MINISTERIO DE HACIENDA . GOBIERNO DE CHILE Salter-Swan Model Chile 2004-2008, copper boom Non tradables Tradables non copper MINISTERIO DE HACIENDA . GOBIERNO DE CHILE Salter-Swan Model Chile 2004-2008, copper boom Non tradables CNT2=YNT2 YTnc2 CTnc2 Tradables non copper MINISTERIO DE HACIENDA . GOBIERNO DE CHILE Salter-Swan Model Chile 2013-2015, negative term of trade shock Non tradables YNT3 CNT3 YTnc3= CTnc3 Tradables non copper MINISTERIO DE HACIENDA . GOBIERNO DE CHILE Salter-Swan Model Chile 2013-2015, negative term of trade shock Non tradables Tradables non copper MINISTERIO DE HACIENDA . GOBIERNO DE CHILE Salter-Swan Model Chile: medium term Non tradables CNT0=YNT0 P=C CTnc0= YTnc0 Tradables non copper MINISTERIO DE HACIENDA . GOBIERNO DE CHILE Fiscal Balance and Current Account Fiscal Balance and Copper Price(*) (% GDP, US$ per pound) Current Account and Copper Price (*) (% GDP, US$ per pound) 6 5 8 5 6 4 4 2 3 0 4 4 2 3 0 2 2 -2 -2 1 -4 -6 0 1 -4 -6 2003 2005 2007 2009 2011 2013 2015(p) Current account Real copper price (right scale) (*) Nominal copper price deflacted by the industrial PPI of US (2014=100). (f) forecast Source: Central Bank of Chile and Budget Office of Chile 0 2003 2005 2007 2009 2011 2013 2015(p) Fiscal Balance Real copper price (right scale) 23 MINISTERIO DE HACIENDA . GOBIERNO DE CHILE Tradable sector shrank over the years Tradable sector participation in total GDP (percentage) 2003 2014 24.8% 33.8% 66.2% 75.2% Tradable Non Tradable Tradables: Agriculture, Fishery, Mining and Manufactures; Non Tradables: Utilities, Services and Public Administration Source: Central Bank of Chile. MINISTERIO DE HACIENDA . GOBIERNO DE CHILE 4. Challenges MINISTERIO DE HACIENDA . GOBIERNO DE CHILE Economic policies has to ease the reallocation Flexible exchange rate Credible and monetary policy Gradual adjustment of fiscal accounts MINISTERIO DE HACIENDA . GOBIERNO DE CHILE Economic policies has to ease the reallocation Support resources mobility Support private confidence R O D R I G O VA L D É S P U L I D O MINISTER OF FINANCE OF CHILE Thanks London, September 7th 2015 University College of London