ECONOMY NATIONAL

Is Chile entering a recession in 2023?

Despite Chile’s impressive recovery from the Covid-19 pandemic and response, economists forecast a recession for 2023. The Central Bank of Chile reported that the country’s gross domestic product only grew 5.4 percent and that strategic measures need to be taken. The bank and the International Monetary Fund are working to strengthen the country’s resilience.

After the Central Bank of Chile (BCCh) reported that the country’s gross domestic product grew 5.4 percent in the second quarter of 2022, a figure below market expectations, economic analysts assume the Andean country will enter a recession in 2023.

“The worst is yet to come,” warned International Monetary Fund (IMF) Director of Research Pierre-Olivier Gourinchas, speaking generally about next year’s prospects for the global economy, amid the recessive breezes buffeting most countries.

According to the IMF’s concluding statement for 2022, Chile is among these countries. Chile’s GDP growth is projected to turn negative at 1.3 percent in 2023 before returning to an estimated rate of 2.5 percent over the medium term. Still, it is likely that Chile will have the worst performance in Latin America, according to the IMF: a contraction of 1 percent next year.

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Taming inflation

Chile was one of the first countries in Latin America to raise interest rates to control the inflation rate. While high rates hold a grip on inflation, they drag down economic growth, discouraging access to credit. According to the BCCh, the country currently has the third highest interest rate (11.25 percent) after Argentina and Brazil.

Chile’s growth momentum is currently favorable, as service sectors and employment are returning to pre-pandemic levels, but financing is becoming scarcer and costlier as major central banks raise interest rates to tame inflation. 

In light of the adverse predictions, the BCCh has announced that it will tighten monetary policy to tame inflation and that it will remain vigilant.

Internal and external pressures and responses

Inflation is only the tip of the iceberg. Uncertainty about the future of the country’s constitution also influences economic growth. Benjamin Gedan, Associate Director of the Latin American Program at Washington, D.C.-based think tank Wilson Center, asserts, “With this rejection, the resolution of a constitutional change remains pending, an aspiration of those who led the social outbreak of 2019. The lack of clarity about what will happen with the constitutional process and the tax reform does little to illuminate the political and economic direction that may result from those outcomes.” 

Gedan also called attention to the global scenario and how it affects Chile’s performance. For example, as Chile’s main trading partner, China, is experiencing a sharp slowdown in economic growth, its thirst for raw materials diminishes. That, added to similar slowdowns in the United States and the rest of the world, is a strong blow to an open economy like Chile’s.

Also, unlike other oil-producing and gas-exporting countries that have benefited from the escalation in the price of crude oil, Chile has only been on the receiving end of these price-hikes – and this as the value of its primary export, copper, has been fluctuating.

Alongside BCCh’s quick response in raising the benchmark interest rate to 11.25 percent, the IMF approved a two-year Flexible Credit Line (FCL). The arrangement, which is slated to make available about US$18 billion, is meant to augment precautionary buffers and provide substantial insurance against adverse scenarios. Chile qualifies for the FCL because it respects the program’s requirement of having a low public debt ratio and ample liquidity buffers such as international reserves, foreign exchange liquidity lines, and assets in the sovereign wealth funds.

 

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