Alphacast Highlight - The Chilean Roallercoaster
Despite the historical strong fundamentals, the combined effect of COVID, the Russia-Ukrainian War, and a visible shift in economic policy has cornered the Chilean economy into an atypical, unstable trend.
Chile was strongly hit by the COVID lockdown in 2020. The economy saw a contraction of 15% at the peak of the crisis. The contraction was mild compared with its regional peers, and recovery was strong: current activity levels are about 8% above pre-COVID. However, most of this happened in 2021. For more than half a year now the economy looks stagnant.
A surprising jobless recovery, like in many other countries around the globe. Unemployment levels are back on pre-COVID levels but with activity levels almost 3% below. After COVID about 5% of the people simply left the labor market.
Chilean inflation has risen in line with increasing global energy and food prices, but Chile is ranking among the worst performers in the region (excluding of course Argentina).
This has happened even though Chilean Central Bank turned hawkish and raised policy rates 7 times to 8,25%. Not enough, however, to stop real rates from turning negative to decades-low levels.
External shocks explain most of the inflation acceleration but the pervasive weakness of the Peso has undermined the strength of monetary policy transmission channels. The CLP/USP fell from around 700 in May 2021 to a peak of 1040 in June and the multilateral exchange rate is the highest in three decades.
This has happened even with Terms of Trade at record highs and booming exports. Political uncertainty has increased Chilean risk premiums and capital flows have moved accordingly
After COVID, the main economic challenge, looking forward will be whether the historically tight fiscal discipline can be regained and sustained.