Publish in Perspectives - Wednesday, April 29, 2020
Chile’s government and central bank (photo) have acted forcefully in the face of the coronavirus pandemic, experts say. (Photo: Chile Central Bank)
Will Piñera’s plan help Chile face the Covid recession?
BY LATIN AMERICA ADVISOR
Chilean President Sebastián Piñera on April 8 announced a second phase to his emergency measures, designed to soften the economic fallout of the coronavirus pandemic, including a $2 billion fund to benefit informal workers. The previously announced stimulus package of almost $12 billion, or 5 percent of GDP, aims to save jobs and protect small businesses. Finance Minister Ignacio Briones said the new measures could bring Chile’s fiscal deficit to 8 percent of GDP. Will Piñera’s economic package effectively help Chileans weather the recession, and should the government be doing more in terms of economic relief? Are these the right moves, or could the growing deficit backfire significantly in the longer term? Will the stimulus be enough to temper social discontent among Chileans?
Carolina Goic Boroevic, Chilean senator for Magallanes and the Chilean Antarctic: For now, the Chilean government’s economic measures are going in the right direction. Politically, the proposals have had the support of the opposition, consistent with the objective of facing the pandemic as a countrywide challenge. However, it is evident that we still need a larger fiscal effort in order to help those who work in the informal sector and live day by day, those who cannot comply with the quarantines and stay at home without a guaranteed minimum income to sustain their families. Likewise, instruments targeted at the middle class, made up of professionals who work on a fee basis, whose incomes have dropped dramatically and who are not among the most vulnerable, are still pending. The support package, which Congress recently approved, will be put to the test in its implementation. The speed with which it is implemented, the elimination of unnecessary bureaucracy and the flexibility in requirements for access to funds will be key to its success, especially in the case of the many, many entrepreneurs whose sales had already been hurt as a consequence of the protests that began last October. Chile has been orderly in its finances since the restoration of democracy, which today allows it to borrow and make a greater fiscal effort to face the impacts of the pandemic.
Kathleen C. Barclay, former president of the American Chamber of Commerce in Chile: Chile has quickly and decisively reacted to the challenges that the pandemic has presented. The government imposed focused lockdowns to control the spread of Covid-19, complemented by $1.66 billion in funding to strengthen the health system, in order to minimize the loss of life and control the economic costs of the pandemic. Both are relevant to managing the social issues at the heart of recent social unrest. On the economic side, Chile has implemented strong fiscal and monetary responses to the health crisis. The $17.1 billion (6.9 percent of GNP) committed under phases one and two of the Economic Emergency Plan have focused on strengthening the health system, protecting jobs, providing minimum incomes for the most vulnerable and ensuring liquidity for the productive sector (including through deferred taxes and government-guaranteed loans for small and medium-sized companies). This will help facilitate businesses’ recovery when circumstances permit. There will certainly be strain on the fiscal sector. However, the country’s strong institutions (including an independent central bank), a solid financial sector and a long history of disciplined fiscal management, have so far enabled these significant steps. The existence of Chile’s sovereign wealth fund and savings through its unemployment insurance system have also contributed. A strategy to support large companies is still pending. Chile’s programs are designed to face a three-month challenge. The speed of recovery will depend on global cooperation and the health crisis not turning into a global financial crisis. If all goes well, Chile will be able to address its pending social issues with a new set of priorities, one of the most important of which is addressing the high level of informality in the work force.
Mark Manger, associate professor of political economy at the Munk School of Global Affairs & Public Policy at the University of Toronto: Compared to its neighbors, Chile has the advantage of a still generous cushion in the Economic and Social Stabilization Fund. It also has sufficient credibility and a good standing in financial markets that allow it to pursue policies that would be impossible for poorer emerging markets, such as using the banking system to guarantee credit lines to the private sector. Overall, the government’s economic response has been exemplary, especially compared to its relative dithering over public health measures in the beginning, and it compares favorably with far wealthier countries. A case in point is that even as the most advanced Latin American economy, Chile faced a similar challenge as its neighbors: how to provide support to the estimated 30 percent of workers in the informal sector. The $2 billion package will provide significant relief here. Still, debt will jump from 25 percent to 40 percent of GDP at a time when governments around the world are going all out to borrow, which will inevitably increase Chile’s funding costs. Resource prices are falling rapidly and will put pressure on export earnings. But once the pandemic is overcome, the government will face renewed demands for more redistribution and an expansion of the social safety net. This will conflict with the imperative to rein in spending again, and it bodes ill for the second half of Piñera’s term.
Alex Schober, senior analyst for the Southern Cone at DuckerFrontier: Chile’s government and central bank have acted forcefully in the face of the coronavirus pandemic. The government has already approved two separate fiscal stimulus packages that total nearly $17 billion (6.7 percent of GDP), which dwarf the economic response to the 2008-2009 global financial crisis. Only Peru and Brazil have announced larger fiscal stimulus packages in the region so far. Chile’s central bank has slashed interest rates by 125 basis points over the last month and a half to 0.5 percent, the lowest this rate can reach per the entity’s guidelines. However, both the Piñera government and the central bank should do more. My firm anticipates a real GDP contraction of 4.8 percent in 2020. It will take at least two years to fully recover. That said, Chile is blessed with the fiscal profile and the savings to ramp up spending this year and next year without raising concern about a sovereign debt crisis. In our view, the government should do more now to put money in peoples’ pockets. One plausible suggestion would be to issue universal basic income checks to all Chileans, not just to those in the informal sector, such as what happened in the United States. It should also carry out a moratorium on housing payments. Regarding monetary policy, Chile’s central bank can lower its benchmark policy rate even more. It also can consider lowering its reserve requirement ratios both in local currency and foreign currency terms for commercial banks. Finally, the government will need to shift focus back to social issues once the pandemic has passed. This will require more fiscal concessions and deft policymaking. Hopefully, the government’s experience managing this crisis will allow it to engage with protesters in a more meaningful way than it did last year.