OECD Economic Outlook, Volume 2020 Issue 1

Chile

After the social protests of late 2019, the COVID‑19 outbreak and the drop in commodity prices will push the economy into its deepest recession since 1982. If a second outbreak occurs later in the year, GDP will decrease by 7% and will start rebounding only in 2021. Should the current pandemic subside, a recovery led by consumption will start in the third quarter of 2020, even though GDP will still fall by 5.6% in 2020. Trade will remain depressed by a sluggish global recovery.

The authorities have introduced swift and unprecedented fiscal and monetary stimulus packages to mitigate the impact of COVID‑19 by ensuring resources for the health sector, supporting household incomes and preserving jobs and working capital, especially for SMEs. Monetary measures should be stepped up if necessary to provide liquidity to uphold domestic demand and business activities. Existing fiscal space could be used for further support to SMEs and additional targeted transfers to the most vulnerable families to spur an inclusive recovery and avoid long‑lasting adverse effects on jobs, poverty and inequality.

Chile reacted early to contain the spread of COVID-19

The COVID‑19 pandemic reached Chile in March 2020. The spread of the virus has been uneven across the country, with the Metropolitan Region of Santiago accounting for more than 50% of total infections. Chile is continuously increasing its capacity for special care units with respiratory support and is able to perform more than 15 thousand tests per day.

Chile: Two scenarios of real GDP and exchange rate

Source: OECD Economic Outlook 107 database; Central Bank of Chile; and Refinitiv.

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Chile: Demand, output and prices (double-hit scenario)

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On 18 March, Chile entered a 90‑day state of emergency, the second time in the past five months, the first having occurred following the social protests of October 2019. All schools and universities have been closed since 16 March and winter holidays were brought forward. All borders are closed and entry by air is restricted to returning nationals and residents. A national curfew is in force until further notice, while lockdown measures and the closure of non‑essential businesses are affecting all districts of the Gran Santiago area as of 15 May, and other particularly impacted areas.

The economy is visibly hit

Containment measures affect around one‑fifth of the economy. Hotels and restaurants, which represent 2.3% of GDP, have shut down. Transportation, representing 5% of GDP, and retail sales are operating at 50‑60% of their capacities, threatening employment in these sectors. Export shipments have collapsed, in particular of fruits, vegetables, salmon and forest products. However, the mining sector has been resilient, reporting delays and logistical issues but no interruption in orders; mining output in volume terms increased by 0.8% year‑on‑year in March. Recent movements in domestic financial markets broadly reflect the volatility in international financial markets. The Chilean peso depreciated sharply by 10 points at the start of the crisis, but has subsequently been one of the emerging‑market currencies that has most appreciated relative to the US dollar. Additionally, metal prices have collapsed, especially for copper, despite some recovery in prices more recently. The impact of lower copper prices is partly mitigated by the steeper fall in oil prices, given that the country is a net oil importer.

Chile: Demand, output and prices (single-hit scenario)

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The policy response has been large and timely

Given ample fiscal space, a large temporary fiscal package was passed in March (4.7% of GDP) and another one in April (2% of GDP) to support affected workers and provide liquidity and working capital to companies, particularly SMEs. A mechanism to protect labour income was introduced, allowing for the temporary suspension of the contractual relationship when teleworking is not possible. Moreover, at the end of March, the central bank cut its interest rate to 0.5%, extended its peso and USD liquidity programme through repo operations and swaps, and announced a new conditional financing facility in which banks have access up to a total of USD 4.8bn in 4‑year loans at the policy rate (0.5%), with an additional USD 19.2bn as a function of additional credit to more stressed segments. The window for dollar sales that was opened in November 2019 after the social events was also extended. These unprecedented measures should mitigate the destruction of jobs and capital during a time when a large part of the economy has come to a halt.

The hit to growth will be strong and long‑lasting

Following the crisis triggered by the major social protests at the end of 2019, the fight against the COVID‑19 outbreak will push the economy into recession in 2020. Should there be a resurgence in infections towards the end of 2020, output is expected to drop by 7% in 2020. The sharp contraction will be driven by a slowdown in exports, as copper prices drop and global and regional value chains are disrupted, the negative impact of containment measures on consumption and jobs, and the uncertainty surrounding households’ income. The effects of the pandemic in the United States and China will significantly affect Chile since these two economies account for almost a half of total exports and foreign investment. The labour market should however be quite resilient – as was the case during the social unrest – with some moderate increase in unemployment and informal employment. The economy is expected to rebound in 2021, but in the event of a second outbreak, the level of output at the end of 2021 will be 6% lower than before the social events of end‑2019.

Policies priorities to support the recovery

COVID‑19 infections may strike again, either directly or indirectly through the effect on other economies, so the authorities must stand ready to react, if needed. Until an effective treatment or a vaccine are available, the immediate priorities should be to increase capacity for extensive testing, tracking and tracing, and the provision of health care treatment for all patients, regardless of whether they are insured or not. Providing support to healthcare workers and enhancing the provision of medical and protective equipment for all the population are also important to cushion the shock of a second outbreak and save human lives. Credible institutions and sustainable fiscal policy have put the economy in a favourable position before entering the social crisis and the virus outbreak, which leaves room for further fiscal and monetary policies to support the economy, if needed. Fiscal measures to help firms and in particular SMEs are warranted, such as the further deferral or cancellation of corporate and VAT tax payments and the increase of the conditional financial facility and liquidity credit line, and transfers to the most vulnerable families ‑ including non‑conditional cash transfers, tax deferrals and reductions, food baskets or suspension of payments of basic utilities.