Alphacast Highlight - Chile December 2022 Macro Brief
Chile was among the fast-growing economies before it was hit by political turmoil in 2019. Ten years' growth is 2.1%. That said, it grew fast after the pandemic and nowadays it is 9% above that level. Stronger consumption was financed by three partial withdrawals of pension savings. Not only is it the single economy in the region that is contracting in 2022 but it is expected to contract in 2023 as well. Regarding inflation, they showed the worst performer of the year. The rejection of the constitutional amendment may lead to a more market-friendly path ahead. Nonetheless, social unrest, volatile copper prices, and the government’s weak parliamentary position imply a highly uncertain scenario.
In 2023 GDP is expected to fall 1.5%. In October, Chile's Monthly GDP Estimate grew for the third time in the year, by 0.55% MoM, while in annual terms it fell -1.3%. This growth was pushed by the mining sector (+6.4% MoM) and wholesale and retail trade (+0.4% MoM), offsetting the fall of the tertiary sector (-0.6% MoM) and of the industrial sector (-1.5% MoM). The slowdown of activity in 2022 can be explained by the cease in the Covid-19 transfers and the lack of impulse that the withdrawals of pension savings gave to the economy the previous year.
Headline inflation rose in November (13.3% YoY vs. 12.8% YoY in October), following the core inflation's behavior which rose 9.5% YoY (vs. 9.3% YoY in October) and more volatile prices such as food that also went up, rising to +23.9% YoY (vs. 22% YoY in October), highly permeable to the global acceleration of food prices. Meanwhile energy prices maintained its annual variation at +21.4% YoY. In addition, inflation expectations remained way above the 3% target: 2022 12.6% YoY, and for 2023 they moderated and fell to 5% YoY.
The Chilean central bank's hikes have been particularly aggressive, raising the policy rate from 0.5% in October 2021 to 11.25% in December 2022. This rapid rise could be explained by both the nation's extraordinarily high inflation rates, as well as its complex political context, with a major rethinking of the country's economic institutions underway. Even though nominal interest rates are significantly higher, they are still below the inflation rate, as seen in negative real rates over the past month.
FX & Markets
The Chilean Peso had a bad performance in 2022, but towards the end of October there has been an improvement, falling 5% since the beginning of the year, standing at 889.6 on December 21st. The CLP increasing risk premium has somehow dwindled after the referendum, following a downward path since then, and even though there was certain stress in the FX market towards the end of September due to the culmination of the FX intervention program by the Chilean Central Bank, the improvement of economic expectations in Chile had a positive impact on the Chilean Peso.
On the other hand, the most outstanding feature of the Chilean capital market is the smoothness of its risk premium compared to the rest of Latin America, which closed in November at 157bps (-276bps vs Latam), 5 bps below its historical average. The stability of its risk perception has been positively incorporated into its bond yields. More sensitive to changes in its central bank's monetary policy cycles than to political issues, the EMBI Chile JPM Total Return Index maintained an uptrend from Sep-13 to Dec-21. Fully in line with global and regional bond markets, Chilean fixed income trades -16.8% YTD, impacted by the aggressive tightening of its MP rate.
Chile’s equity ETF, on the other hand, accumulated positive performance as of late December (ECH, +14.2% YTD). Although it is usually traded with a high correlation to Latam (ILF, -1.3% YTD), the Chilean ETF is 24% exposed to Sociedad Química y Minera de Chile (SQM, +58.9% YTD), the world's largest lithium producer. Because of the lithium bull run, ECH’s returns are influenced by the company's outstanding performance. As of December 21st, the ECH was trading at USD 26.5 (+54.7% from the Mar-20 low), while in the last 18 months the index has traded sideways in the USD 22-29 range.
Chile shows an outstanding fiscal consolidation in 2022, from a primary deficit of 6.8% of GDP and a fiscal result of -7.7% of GDP in 2021, it already accumulates a primary and fiscal surplus at October 2022. The 2023 budget estimates a fiscal surplus of around 1.6% of GDP for 2022, a great improvement from the deficit of -7.7% in 2021. This can be explained by a sharp decrease in expenditures due to the fall in Covid-19 transfers from 2021, while income has been boosted by extraordinary payments received from lithium production contracts and higher-than-expected tax revenues. However, due to the forecast of a fall in activity for 2023 and hence the prospects of higher expenditures and lower tax revenue, the fiscal result is expected to be in deficit again next year.
Trade & Current Account
Since the beginning of the pandemic, Chile’s terms of trade rose, reaching a peak on June 2021, and then started following a descending path, mainly due to its close link to copper prices which have been falling lately. Also, the multilateral real exchange rate appreciated from early 2020 until April 2020 and started depreciating. The combination of both, descending terms of trade and appreciation of the multilateral exchange rate led to a deterioration in the trade balance, with imports growing faster and above exports.
As the current account is closely related to the trade balance, there is a notable deterioration of this indicator, at 9.9% of GDP in 3Q-22. The strengthening of the USD, the weakening of its main trade partners, and local uncertainty are key to understanding the decline of the current account balance. Also, the record high current account deficit is a weak spot of a country positively exposed to oil prices (aka, the war) and negatively exposed to metals/copper prices (aka, China deceleration).