Chile: 2014 Article IV Consultation - Staff Report; Press Release; and Statement by the Executive Director for Chile

<p>KEY ISSUES<br>Politics: President Bachelet won the Presidential election on a platform to foster<br>inclusive growth and reduce inequality. Her government took office in March 2014 and is launching <br>an ambitious policy agenda that includes important reforms in several areas, including taxation, <br>education, productivity, and energy.<br>Outlook and risks: Chile's global environment is shifting, with a dimmer outlook for its main <br>export, copper, and normalization of global monetary conditions. Growth has slowed markedly, <br>resulting in a modest output gap. The peso has depreciated, feeding into inflation. Staff projects <br>growth to bottom out in 2014 and then gradually recover. Key risks relate to a large and lasting <br>drop in copper prices and global financial volatility.<br>Policy mix: The freely floating peso is working as a shock absorber and will support the economic <br>recovery. The policy mix with broadly neutral fiscal and accommodative monetary policy is <br>appropriate. Room for further monetary easing has narrowed but space remains if domestic demand <br>flounders, so long as inflation expectations remain well anchored. On fiscal, given the strong <br>public finances, automatic stabilizers should be allowed to operate unimpeded and there is space <br>for stimuli in the event of a major downturn. The commitment to close the structural fiscal deficit <br>by 2018 is appropriate and should be phased in a way that avoids undue drag on the recovery. Should <br>risks materialize, the freely floating currency is the first line of defense.<br>Growth and equity reforms: Achieving strong growth while reducing inequality will require <br>structural reforms. The authorities' agenda focuses on the right areas but many details remain work <br>in progress. Clarity on the details, timetables, and prioritization will reduce uncertainty and the <br>risk of delays.<br>Financial stability: Risks to financial stability appear contained, but it will be important to <br>push through with regulatory reforms underway, including initiatives currently in Congress. Further <br>effort will be needed to close regulatory gaps, in particular bank<br>capital requirements, relative to international benchmarks.<br></p>
Publication date: July 2014
ISBN: 9781498380331
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