Chile Is in Recession, But Will Rebound, Says Finance Minister Quiroz

Current Economic Status and Outlook

• Chile experienced technical recessionary conditions with two consecutive quarters of negative growth in Q1 and Q2.
• The contraction is attributed primarily to a supply shock involving a significant decline in copper production, rather than a demand-side failure.
• Non-copper economic activity shows strong growth, with seasonally adjusted figures rising sharply in the most recent month.
• The government projects a GDP growth rate of 3.3% for next year, contingent on the recovery of copper output.
• Long-term economic recovery is anticipated to reach 4% annual growth by 2028.
• Investment growth is projected to increase by 8% next year, driving the aforementioned GDP expansion.

Fiscal Policy and Spending Reductions

• The fiscal deficit has decreased from 2.8% of GDP to 1.8% of GDP, achieving a 1% reduction within the administration's first year.
• The administration aims to reduce the deficit further to 1.5% of GDP, a target that aligns with a primary equilibrium goal.
• Expenditure growth has been slowed to 3% annually against a previous trend of 6%, representing roughly half of the targeted $6 billion reduction.
• The government intends to maintain government debt below 45% of GDP, ensuring a natural decline in the debt-to-GDP ratio as growth accelerates.
• Bond issuance strategies will maintain a ratio of approximately two-thirds in the local market and one-third abroad.
• Efforts are underway to make the Chilean peso convertible, including the expansion of peso-denominated bonds in international markets.

Structural Reforms and Investment Climate

• Corporate tax rates have been reduced from 27% to 23%, marking the first decline in the tax rate in over 30 years of democracy.
• A new tax stability regime guarantees 20-year stability for large investments exceeding $300 million.
• Private investment projects worth nearly $40 billion have received environmental approval in the first seven months of the current administration, a record for the last decade.
• Urban land reform and permit streamlining have spurred a strong recovery in the construction sector.
• Mining output is expected to recover slowly over the next 2–3 years due to recent policy uncertainties, with a target of 5.5 to 6 million tons annually within the next five years.
• Codelco, the state-owned mining company, requires private capital and a focus on core businesses, with immediate plans favoring project-level partnerships.
• Codelco's management is being restructured to improve accountability and returns after investing over $30 billion in the last seven years with negligible returns.
• Private ownership in Codelco is not an immediate plan, though the government remains open to future discussions regarding private capital injection.
• Foreign investment screening is being implemented to verify investor origins and counterpart risk, particularly linked to tax stability contracts.
• The screening process is not targeted specifically at China, which is viewed as a credible trading partner and investor.
• Future restrictions on foreign market share may be considered in strategic sectors like electricity distribution to prevent single-country dominance.
• The government actively seeks U.S. investment in copper cathode production and refining to diversify export clients away from China.

Monetary Policy and Pension Reform

• Inflationary pressures are attributed to rising international fuel prices, which account for 50% of Chile's diesel consumption.
• The government supports the central bank's potential for a stronger stance against inflation, viewing price increases as transitory.
• A new administrative investigation has been launched regarding the AFP pension scandal to assess board diligence and derivative usage.
• Regulatory caps on derivatives and investment durations have been implemented to prevent similar losses caused by interest rate hikes.
• The administration anticipates that new pension rules approved in the previous term, combined with current caps, will prevent future issues.

Political Dynamics and Governance

• Government approval ratings are currently low, yet the economic agenda has faced no legislative obstacles, with major reforms passed in record time.
• The administration distinguishes between strategic objectives (tax reduction, deregulation) and tactical adjustments (transitory fuel price laws, increased public investment).
• Corporate tax reductions on smaller enterprises are being planned, with a potential move to zero tax for lower-income companies.
• The President has provided full support for the economic program, with a dynamic characterized by long-term planning and trust.
• The administration is committed to leaving a legacy of a diversified production matrix, higher youth optimism, and streamlined permitting processes.