Itaú BBA - Resetting expectations

Scenario Review - Chile

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Resetting expectations

Dezembro 12, 2019

Increased uncertainty hurt asset prices and expectations, leading to a large fiscal response and a robust FX intervention package.

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• Besides embarking on an ambitious social reform agenda, politicians have agreed to re-write the Chilean constitution as a response to social unrest. 

• Following sharp exchange rate depreciation, an FX intervention program valued at half of the central bank’s reserves was announced. Meanwhile, a 2% of GDP fiscal stimulus package for next year means real expenditures are set to grow at a near double-digit pace in 2020 (compared with the 3% initially proposed in September), with part of the financing coming from the use of just under 1/3 of the country’s USD 25 billion fiscal savings. The expected rise of debt metrics increases the risk of a rating downgrade in the medium term, despite broadly positive responses from rating agencies to date.

• The effect from protest action on current activity and confidence has led us to significantly reduce our growth forecasts (from 2.0% to 1% this year and from 2.4% to 1.2% for 2020), despite the more expansionary fiscal policy.  

• Amid heightened uncertainty, we now see the exchange rate at CLP 780 per USD by the end of 2020 (715 previously), which led us to increase our inflation forecast. In this environment, the central bank indicated rate cuts are unlikely in the upcoming months and suggested rate hikes are possible should pressures on the CLP reemerge. While we still expect rate cuts in 2020, we do not see the central bank moving while intervening aggressively on the currency, meaning additional easing is unlikely before the end of 2Q20.    


João Pedro Bumachar
Vittorio Peretti
Miguel Ricaurte

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