Chile's Larraín says tighter fiscal policies are a priority

Chile's Larraín says tighter fiscal policies are a priority

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In 2012, Chile achieved a remarkable feat for a Latin American sovereign issuer. It sold $1.5 billion in dollar-denominated bonds, locking in what at the time was the lowest borrowing costs ever for a Latin American country. Chile Finance Minister Felipe Larraín remembers the bond sale. It occurred during his first stint as the steward of the region’s most stable economy. He took the reins again in 2018 when Sebastian Piñera returned to Chile’s presidency.

During Piñera’s first time in office, he oversaw economic growth that averaged 5.3% a year from 2010 to 2014, helped by high commodity prices for Chile’s main export, copper, and a massive rebuilding effort after a devastating earthquake hit just before he took office.

But under Piñera’s successor, former President Michelle Bachelet, economic growth slowed from 2014 to 2017 to an average annual rate of 1.7% as copper prices slumped. As a result, the Piñera government has embarked on a reform agenda to help reduce the deficit and control the growth of public debt.

Larraín says Chile’s outlook is further complicated by global factors. At the top of his list of concerns, Larraín says, are the brewing US-China trade war, rate increases by the US Federal Reserve and growing budget deficits in the US. The troubling outlook points to higher borrowing costs and the need for countries in the region to clamp down on fiscal policy. “You have pressure on the short-term of interest rates on one side of the spectrum and potential pressure on the long side,” he says.

This calls for a conservative approach, according to Larraín. “These are times to be very prudent on your fiscal policy — markets are watching,” he says. “The value of having solid fiscal accounts has gone up. For those countries with high levels of debt, there will be challenges.”

Since returning to office, Larraín has focused on reducing Chile’s fiscal deficit, which stood at 2.8% of GDP in 2018. The government has implemented austerity measures and moved to tame Chile’s debt load, now around 25% of GDP, up from 13% in 2009. The belttightening measures include cutting $4.4 billion in spending by the end of 2022. “The thinking of our government is there is a virtuous cycle between fiscal consolidation and growth,” Larraín says.

To help stimulate economic growth, Larraín says Chile is also looking to foster deeper trade ties with other members of the Pacific Alliance trade bloc, Mexico, Colombia and Peru. Ultimately, Chile’s austerity drive will help in its approach to the capital markets, he says. Chile’s last dollar bond sale was in January 2018. The country since then has largely relied on issuances in the local market.

“We are lucky to have deep local financial markets,” says Larraín, who’s confident about the future. “With falling deficits, we will reduce our need for financing,” he says. “We will still need to go to the markets, but we’ll be able to go in a better position of strength, particularly in these challenging times.”