What to expect when you are expecting
Felipe Larraín is the future (and past) finance minister. During his previous term, asset-liability management was driven more by political — and to some extent populist — considerations than by economic rationale. Hopefully Larraín will not do the same thing he did at the beginning of the decade. He should work to contain the increase in gross debt, which is already close to 25% of GDP. The new Minister of the Economy will be Jose Ramon Valente. He is definitely an ultra-liberal “Chicago boy”. How committed will he be to consumer protection, anti-trust and rigorous regulation of natural monopolies? It remains to be seen.
As we write this report, the Board of the Central Bank has only four members instead of five. It is unclear when the new board member will be chosen, and most likely we will have to wait until March. In this circumstance, in case of a tie the President of the Board has the right to settle the issue. Both short-term interest rate swaps and the latest survey of financial analysts show that the market is assigning about a 20% probability that the Monetary Policy Rate (TPM) will decline from the current 2.5% to 2.0% in three months. This is probably due to the recent appreciation of the peso and the ultra-dovish attitude of Board Member García.
In November, the Monthly Index of Economic Activity (IMACEC) surprised analysts on the upside. What stood out was the record-high 0.9% monthly variation of the IMACEC ex-mining. Nevertheless, this may have reflected an anticipation of Christmas sales from December. Manufacturing production also came in well above expectations. This might be good news not only from the point of view of production, but also for the prospects for investment. In 2017, trade balance behavior matched that of the economic cycle; after falling for five consecutive years, in 2017 the value of exports increased 12.7%. In any case, in 2017 the value of imports still stood below the 2013-2014 levels.
The year ended with inflation of 2.3%, inside the 2%-4% Central Bank target range. This is the smallest year-end 12-month variation in the last five years, while that of the underlying measures was marginally below it. In the case of the latter, their 12-month variation remained relatively stable during the second half of the year.
A new publicly-owned company has been created under the name “Infrastructure Fund”. Its purpose is to boost infrastructure investment in Chile through the provision of financial instruments and guarantees, aiming to financially balance projects that are socially but not necessarily financially profitable. Is this good policy?
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