Talking growth with Chile's Finance Minister Felipe Larraín
June 7, 2018 |
As Chile feels the effects of its first downgrade since the 1990s, Finance Minister Felipe Larraín lays out the plan to improve the country’s credit rating.
In its first months in office, Chile’s new government is making a big push to put the country on a new fiscal path.
The administration of President Sebastián Piñera announced plans in May to cut nearly $5 billion from the budget over the next four years to rein in Chile’s fiscal deficit. The cuts followed plans to trim $500 million by cutting back on state expenses like travel and other administrative costs.
Long one of Latin America’s more stable economies, Chile is trying to emerge from several years of anemic growth, when investments stagnated and the price of copper, the country’s main export, dropped sharply.
Piñera has promised to unlock an investment logjam and revitalize Chile’s economy. Finance Minister Felipe Larraín sat down with LatinFinance to discuss the new administration’s economic vision, the country’s debt strategy and the road ahead for one of South America’s wealthiest countries.
LatinFinance: Are you still projecting 3.5% growth for this year?
Felipe Larraín: Yes, in the vicinity of 3.5%. This is what we said right after the second round vote in December. It's not the March or April forecast, but this is what we have been saying for five to six months. We believe the Chilean economy can grow 3.5% with the appropriate management by restoring confidence, reducing uncertainty and, of course, with a slightly more favorable external environment.
Three-and-a-half percent is not assured. It is not something that is just a walk in the park. We have to work for it. But the economy is starting to pick up.
LF: What will be the keys to stoking growth?
FL: In order to see growth increase, we have to address five issues. First, we have to regain confidence. We are coming from a four-year period of 1.7% growth. Chile was growing but at half the rate of the global economy. Now, we're picking up.
We also need to eliminate uncertainty. We know that the people who are trying to do their work, or trying to invest, or trying to accomplish business goals and new projects, they have market uncertainty. There is also uncertainty in the management of the state. That's what we have to reduce. And we have already reduced it significantly.
The third part is better management of the state. So, it's uncertainty then the better management of the state. The fourth part is to have better economic and social legislation. And the fifth area is institutions. We’re talking about fiscal institutions, like agroeconomic ones, which are important for growth. I think it’s the combination of all of those factors that will help us get to our goal of growing 3.5% to 4% over the course of the administration.
LF: The fiscal deficit is challenge right now. You have announced some austerity measures, but are more needed? Have you set any short-term fiscal deficit targets?
FL: Our current deficit is 2.8%, and we have said that we will set a path to eliminate the structural deficit in six to eight years. You can say, well, 2.8% is not a huge number. But the accumulation of these deficits is the reason why our public debt doubled. At the end of 2017, it was about 24% of GDP. That is relatively low internationally, but we are concerned that it went from 12% of GDP to 24% of GDP, which was about US$ 35 billion in four years. We cannot continue at this pace.
How are we going to reduce it? Well, first is the austerity package, but that's a signal. We are working on a bigger austerity package. We will be helped if we stoke growth. According to our calculations, about one percentage point of additional growth in one year equals $600 million in additional revenue. The additional growth, with copper prices hopefully staying where they are, and controlled spending will have an important effect in reducing current deficits. One of the objectives of this government is to retake the notch we lost in our credit rating.
LF: Do you have a timeline for recovering Chile’s credit rating?
FL: Three to four years. It’s not realistic to think that we’re gonna do it in one year. It's a long-term process, and we have already had this austerity package which will save $500 million dollars over four years. It is not a small amount, but it's not a huge amount. It's an important signal, and we're going to make it clear that things have changed. We can have a more efficient, more austere management of the state.
LF: What is going to be the key determining factor?
FL: We’re paying the consequences of a combination of factors: an economy that slowed — 1.6%, 1.7% growth is barely growing more than the population of Chile. That combined with a huge increase in spending, particularly during the first two years of the previous administration, along with lower copper prices. We now have better copper prices and we’re going to have a more moderate expansion of government spending.
LF: President Piñera has talked about cutting taxes. It's clearly a priority for him. As you look at the fiscal deficit, can you cut taxes and reduce the deficit simultaneously?
FL: Growth will help reduce the deficit. And in terms of the tax law, we never said we plan to just lower taxes. We will lower some taxes and increase others. We can say technically it's a fiscally neutral tax law. So, yes, part of the problem that we have right now is that we had a terrible tax reform, which damaged our tax system and increased complexities and not just about rates. We are working not just on rates. We're working on a significant simplification of the system.
LF: You’ve talked about austerity measures. What does that mean for your debt strategy?
FL: We have already issued $2 billion, and we have set a target to issue $7 billion during the rest of the year. Those $7 billion will be issued locally. That way we don’t have to bring in dollars and sell the dollars and then depress the exchange rate. We’re concerned about having a competitive exchange rate. So for this year, our issuing strategy is set. We’re going to judge how the markets are, what the situation is, but for this year we have nothing on the agenda in other currencies.
LF: What is the biggest difference in terms of fiscal or economic policy between the current administration and the previous administration?
FL: We believe in the effects of high growth and inclusive growth. An ambitious social agenda cannot be implemented in an almost stagnant economy. We want to implement a virtuous combination of policies of high growth and high revenues. What we saw over the last four years is that job creation fell to half. [In] rough numbers, during the first government [of] President Piñera, we created 1 million jobs. During the previous administration, job creation went to about half a million. But a lot of those jobs where self-employment, street vendors, people without a contract, informal jobs. We want to create better jobs. LF