Economy and Trade
After the fall of the Marxist government of Salvador Allende in 1973, through a military coup led by Augusto Pinochet, Chile endured 17 years of dictatorship before a freely elected president replaced Pinochet in 1990. Under Pinochet’s regime in the 1980s, the country implemented sound economic policies, which have continued to the present, contributing to steady growth, and more than halving the level of poverty in the country. One of the positive steps taken by the regime was to privatize many state-owned companies, and successive democratic governments since the 1990s have continued the privatization process. Chile’s commitment to a democratic and representative government, along with its growing economic strength, has made it a leader in the area. Chile has a market-oriented economy characterized by a high level of foreign trade, and a reputation for strong financial institutions and sound policy. As a result, it enjoys the strongest sovereign bond rating in South America. Exports account for 40% of GDP, with commodities making up some three-quarters of total exports. Copper alone provides one-third of government revenue.
Economic Policy over 12 Months
A sound economic policy framework has enabled Chile to weather the global financial crisis better than many other economies, according to the International Monetary Fund (IMF). The organization adds that this framework has been underpinned by an inflation target regime, a structural budget rule, and a flexible exchange rate, allowing the economy to enter the crisis with a fundamentally robust position. The IMF argues that large fiscal savings accumulated in past years have been critical to preserve stability and cover financing needs, while the imbalances in the financial and corporate sectors witnessed elsewhere have been absent in Chile.
The IMF also praised Chile’s policy response, which it said had been sizeable, well balanced, and coordinated. The government has sought to stimulate the economy through fiscal policy, announcing in 2009 a stimulus package equal to 2.9% of GDP comprising higher public investment, transitory tax reductions, and direct transfers and subsidies to low income households.
The government also adopted additional measures to foster employment and credit, and promote competition in the financial system. The fiscal measures were financed through the issuance of new government debt and with resources from the Economic and Social Stabilization Fund. The central bank adjusted its debt management program for 2009 to offset any impact of the government’s additional financing needs. The government also continued with structural reforms in the financial sector and domestic capital markets to strengthen the supervisory framework, as well as to bring forward the implementation of the reform of the pension system.
Meanwhile, the central bank has slashed interest rates and sought to support lending. From early 2009 onwards, the Central Bank of Chile cut the policy rate by 775 basis points to a historic low of 0.5%. It remained at this low by April 2010. Interest rates have been kept at very low levels in 2010 to help the country weather the ravages of a massive earthquake in February, which killed around 500 people.
In July 2009, the Central Bank of Chile also unveiled measures to better align market rates with the policy rate, including the establishment of a liquidity facility at the monetary policy rate with tenures of up to six months; adjustments to the issuance of short-term central bank notes to ensure consistency with the new liquidity facility; and the suspension for the remainder of 2009 of the previously planned issuances of one-year notes and two-year nominal bonds.
Economic Performance over 12 Months
The Chilean economy proved resilient in the face of the global financial crisis, according to an IMF report published in September 2009, despite its close integration with the global economy. However, the global crisis affected Chile quickly through trade and financial linkages. Real GDP slowed markedly in the fourth quarter of 2008 and contracted in the first quarter of 2009. The economy expanded by 2.1% in the fourth quarter of 2009 from the same period a year earlier, the first year-on-year quarterly growth since the end of 2008. In January 2010, the economy expanded at the fastest pace in 16 months, boosted by growth in retailing, automobile sales, and the electricity, water, and gas industries.
However, the massive earthquake that struck the country in February 2010 will have an impact on economic growth, according to the country’s manufacturers’ association. It said that the 8.8-magnitude earthquake hit Chile’s central-southern Bio Bio and Maule regions, an area that accounts for 25% of industrial GDP. Oil refining, which makes up 11.6% of industrial production’s aggregate value, for example, was cut in half as state-run oil company Empresa Nacional del Petroleo’s Bio Bio refinery was knocked offline. It won’t restart production until June 2010. Prior to the earthquake, industrial production had been recovering strongly and was expected to expand by 5.5% in 2010, but the manufacturers’ association now says that growth of between 1.5% and 2% is more likely.
The central bank has also reduced its growth forecast for 2010 and raised its inflation outlook following the earthquake. Thus in April 2010, the organization said that the economy would grow by between 4.25% and 5.25% in 2010, while consumer prices would rise by 3.7%. In its December report, the bank had forecast that the economy would expand by between 4.5% and 5.5% with annual inflation of 2.5%.
Chile has struggled to reduce the high unemployment rates of the last 15 to 18 years (unemployment, which averaged 5% to 6% in the 1990s, rose to around 10% in 1999). At the end of 2007, unemployment had been reduced to 7.1%, but it started to climb again in 2008, and rose further in 2009. However, the unemployment rate fell to 8.5% in the three months through to February 2010, the lowest in a year, and down from 8.7% in the three months through to January. Most international observers place some of the blame for Chile’s consistently high unemployment rate on complicated and restrictive labor laws.
Support for Inward Investment and Imports
CORFO, the Chilean Economic Development Agency, was founded in 1939 to encourage economic growth in Chile by promoting investment, innovation, and business cluster development. The InvestChile program was created by CORFO in 2000 specifically to encourage foreign investment, with a specific focus on technological companies, and companies looking to relocate to Chile. There are incentives and services available for investors. Contact CORFO and InvestChile for information.
There is a range of incentives available; further information is available from InvestChile.
GDP growth: −1.7% (2009 est.)
GDP per capita: US$14,700 (2009 est.)
CPI: 1.7% (2009 est.)
Key interest rate: 0.5% (central bank)
Exchange rate versus US dollar: CH$569.37 (2009)*
Unemployment: 10% (2009 est.)
FDI: US$115 billion (December 31, 2009 est.)
Current account deficit: −US$50 million (2009 est.)
Population: 16,746,491 (July 2010 est.)
* Chilean peso
Source: CIA World Factbook except where stated