Bad Mood

CHILE - Report 22 Oct 2014 by Igal Magendzo, Robert Funk and Alberto Etchegaray

Executive Summary

Most analysts expect the third quarter to be the bottom of the cycle, and the economy to start slowly recovering by year-end. But pessimism is everywhere. The Monthly Index of Business Confidence (IMCE) is at a historical minimum. Consumers do not seem to be very optimistic, either. It is implausible to attribute so much pessimism to fundamentals only. The government´s reform agenda and the political environment it has engendered have certainly affected the mood of business people.

Both the Central Bank and the government injected their dose of adrenaline into the economy. The government proposes to increase spending by an unusually high figure of 9.8% in real terms. According to the proposed budget, public investment will grow a record 27.5%.

In its most recent monetary policy meeting (October 17), the Central Bank board decided to cut the monetary policy rate by 25bps, from 3.25% to 3%. The communiqué makes it clear that the Board has now entered a “wait-and-see” mode.

September inflation was surprisingly high, even without taking into account the effects of volatile foods. In the 12 months to September 2014 the CPI accumulated a variation of 4.9% and is likely to rise slightly above 5% in the coming months, but not much higher.

The investigation into tax evasion on the part of executives of the investment company Penta has turned into a generalized questioning of how politics in Chile is funded. This may be the trigger to force the political system to reform the way parties, candidates and election campaigns are funded. Penta provides yet another example of companies’ finding that what may have been common practice is no longer acceptable.
Public outrage at these situations has undoubtedly bolstered President Michelle Bachelet’s confidence in pursuing a reform agenda aimed at tightening regulation on the private sector.At the same time, the government is increasingly facing – as we argued above – the impact of this hastily designed reform program on confidence and economic activity. Acrimonious congressional debates and a slowing economy are having an effect on public perceptions.

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