framework to attain greater equity, inclu- sion, and environmental sustainability CHILE Key conditions and while preserving a sound macroeconomic environment, securing fiscal responsibili- challenges ty, property rights, and an open trade regime will be critical. Reducing uncertain- Table 1 2021 A new government is taking office in ty during the process will be important to Population, million 19.2 March 2022 and will face a challenging create the conditions for renewed private GDP, current US$ billion 305.5 macroeconomic backdrop, with growth sector dynamism. GDP per capita, current US$ 15903.1 decelerating significantly and high infla- In the longer term, Chile needs to tackle a 0.7 International poverty rate ($1.9) tion. The 2022 budget has set a sharp fiscal long-standing barriers to productivity a 1.4 consolidation path, removing Covid-relat- growth such as: regulatory hurdles, low Lower middle-income poverty rate ($3.2) a 4.4 ed cash transfers that helped cushion competition in some sectors, innovation, Upper middle-income poverty rate ($5.5) Gini index a 44.9 household income losses. In the absence of education quality, and female labor force School enrollment, primary (% gross) b 102.4 emergency cash transfers, poverty (US$5.5 participation. b 80.2 a day) would have increased to 6.2 percent Life expectancy at birth, years instead of 4.4 percent in 2020. The mitiga- Total GHG Emissions (mtCO2e) 47.6 tion effects are estimated to have been even Source: WDI, Macro Poverty Outlook, and official data. a/ Most recent value (2020), 2011 PPPs. more substantial in 2021, with the rollout Recent developments b/ Most recent WDI value (2019). of the IFE universal, Chile’s most extensive and generous cash transfer, received by 85 Fueled by a strong fiscal response, Chile’s percent of the population. GDP grew at 11.7 percent in 2021, one of Three pension fund withdrawals worth the fastest recoveries worldwide. Econom- 16 percent of GDP provided liquidity ic activity far exceeded pre-pandemic lev- Growth will decelerate sharply in 2022 during 2021 but depressed capital mar- els. All sectors surpassed February 2020 on a reversal of fiscal stimulus and politi- kets and will impact future pensions. levels by the end of 2021, with the strong cal uncertainty. High inflation is expect- Tightening public spending to stabilize rebound in services behind more than half ed to trigger additional monetary tighten- debt and inflation and facilitating access of economic growth in the second part of to economic opportunities for the poor 2021. Growth was driven by consumption, ing. Temporary gains in poverty reduc- and vulnerable will be key to a sustain- amid pension fund withdrawals and direct tion from increased transfers will fade as able and even recovery. fiscal support worth 9 percent of GDP. One emergency measures are removed. Chile’s In the medium term, Chile needs to ad- of the fastest vaccination rates globally also medium-term prospects will depend on its dress social demands raised during the contributed to the fast normalization of capacity to deliver a new constitution 2019 protests. Tax and pension reforms economic activity. will need to be discussed in a new Con- However, job market recovery has been that supports greater equity, inclusion, gress without a clear majority. The ongo- slower than expected, with only 60 per- and environmental sustainability while ing constitutional process is an opportu- cent of the jobs lost in 2020 regained preserving sound macroeconomic man- nity to reach a new social consensus that in 2021 and many previously active agement and unlocking productivity. meets the population’s expectations, but women (most of them low-skilled) still this also involves risks. Creating a legal out of the workforce. FIGURE 1 Chile / Exchange rate and copper prices FIGURE 2 Chile / Actual and projected poverty rates and real GDP per capita CLP, US$ US$ per pound Poverty rate (%) Real GDP per capita (millions constant LCU) 900 1 25 10 850 1.5 9 800 20 8 2 750 7 700 2.5 15 6 650 3 5 600 10 4 3.5 3 550 4 5 2 500 4.5 1 450 0 0 400 5 2006 2008 2010 2012 2014 2016 2018 2020 2022 2024 2006M01 2009M01 2012M01 2015M01 2018M01 2021M01 International poverty rate Lower middle-income pov. rate Exchange rate Copper price (rhs, inverse scale) Upper middle-income pov. rate Real GDP pc Source: Central Bank of Chile. Source: World Bank based on CASEN data for 2006-2020. Notes: see Table 2. MPO 1 Apr 22 Inflation accelerated to 7.8 percent y/y in have temporarily lowered poverty (US$5.5 Fiscal spending is expected to decline in February, driven by strong demand pres- a day) to less than 1.0 percent. Further, 2022 as Covid-related transfers are re- sures, commodity price increases, supply the Gini coefficient is estimated to have moved, leading to a reduction in the disruptions, and the peso depreciation. dropped from 0.45 in 2020 to 0.39 in 2021. government`s deficit to 3.8 percent of Persistent high inflation is risking second- GDP. Interest payments will increase round effects and has become a paramount amid higher debt stock and rates. In the concern, leading the Central Bank to in- medium term, the fiscal deficit should crease the monetary policy rate by 5 per- Outlook gradually converge towards the structur- centage points between July 2021 and Jan- al deficit target if increased social spend- uary 2022. Real GDP growth is expected to decel- ing is accompanied by increases in rev- Despite recovering revenues, the fiscal erate to 1.9 percent in 2022 due to the enue mobilization. deficit closed at around 7.7 percent of GDP reversal of policy stimulus, while tighter The current account deficit is projected to in 2021 due to high public spending. financial conditions and persistent politi- narrow to around 3 percent of GDP, as im- Notwithstanding the heavy use of public cal uncertainty will weigh on investment. ports normalize. savings funds, public debt reached 37 per- Still-high liquidity in households and the Amid the ceasing of emergency transfers cent of GDP, the highest in three decades. enhanced Guaranteed Universal Pension and challenging macroeconomic condi- Despite the record surge in copper prices, is expected to provide some cushion to tions, poverty (US$5.5 a day) is projected the current account deficit reached 6.6 per- the slowdown in consumption. Exports to increase to 4.7 percent and the Gini coef- cent of GDP in 2021 after a sharp increase will contribute positively to GDP growth ficient to 0.46 in 2022, and they are not ex- in imports fueled by the consumption-led amid a projected increase in copper out- pected to return to the pre-pandemic level recovery. Net FDI flows turned negative in put after supply disruptions in 2021. Fur- in the medium term. the third quarter amidst policy uncertainty ther ahead, the removal of direct social Risks to the outlook are mostly on the around the ongoing constitutional process transfers, tighter financial conditions, a downside and include new Covid variants, and election outcomes. The local currency deteriorated capital market and persistent climatic events, and deterioration in exter- depreciated by 16 percent in 2021 in a devi- uncertainty would lead to weak growth nal financial conditions as central banks ation from its historically close alignment through 2024. increase policy rates. The Russia-Ukraine to the copper price. Inflation is projected to remain above 7 conflict poses an upward risk to inflation The sharp rise in the non-labor incomes of percent for most of 2022 and begin to drop given the increase in commodity prices, to- the poor and vulnerable due to the mas- gradually towards 3 percent within the gether with a downward risk to growth sive cash transfers implemented in 2021, forecast horizon, provided fiscal and mon- due to the impact on export demand, mainly the IFE universal, is estimated to etary imbalances are addressed. terms of trade and financial uncertainty. TABLE 2 Chile / Macro poverty outlook indicators (annual percent change unless indicated otherwise) 2019 2020 2021e 2022f 2023f 2024f Real GDP growth, at constant market prices 0.8 -6.0 11.7 1.9 1.5 2.0 Private Consumption 0.7 -8.0 20.3 1.2 0.7 1.8 Government Consumption 0.5 -4.0 10.3 -3.7 0.8 1.7 Gross Fixed Capital Investment 4.7 -9.3 17.6 1.0 1.1 2.1 Exports, Goods and Services -2.5 -1.1 -1.5 5.6 3.7 2.9 Imports, Goods and Services -1.7 -12.7 31.3 0.2 1.0 2.4 Real GDP growth, at constant factor prices 0.9 -5.9 11.7 1.9 1.5 2.0 Agriculture -0.7 -1.6 2.4 2.2 1.5 1.5 Industry -0.5 -3.5 5.8 1.7 1.5 1.5 Services 1.7 -7.3 15.2 2.0 1.5 2.2 Inflation (Consumer Price Index) 2.3 3.0 4.5 7.7 4.5 3.0 Current Account Balance (% of GDP) -5.2 -1.7 -6.6 -3.1 -2.5 -2.1 Net Foreign Direct Investment (% of GDP) 1.2 1.0 0.3 1.1 1.0 1.1 Fiscal Balance (% of GDP) -2.7 -7.1 -7.7 -3.8 -3.3 -2.7 Debt (% of GDP) 28.3 34.1 37.1 40.5 43.3 41.1 Primary Balance (% of GDP) -1.8 -6.2 -6.4 -0.5 -0.1 0.0 a,b International poverty rate ($1.9 in 2011 PPP) 0.7 0.0 0.9 0.9 0.9 a,b Lower middle-income poverty rate ($3.2 in 2011 PPP) 1.4 0.1 1.6 1.6 1.5 a,b Upper middle-income poverty rate ($5.5 in 2011 PPP) 4.4 0.8 4.7 4.5 4.3 GHG emissions growth (mtCO2e) 3.6 -15.8 5.5 -2.8 -2.1 -1.0 Energy related GHG emissions (% of total) 168.6 182.0 179.2 182.1 184.8 186.6 Source: World Bank, Poverty & Equity and Macroeconomics, Trade & Investment Global Practices. Emissions data sourced from CAIT and OECD. a/ Calculations based on SEDLAC harmonization, using 2020-CASEN.Actual data: 2020. Nowcast: 2021. Forecasts are from 2022 to 2024. b/ Projection using microsimulation model for 2021 and neutral distribution with pass-through = 1 based on GDP per capita in constant LCU for 2022-2024. MPO 2 Apr 22