The Finance Minister, Alberto Arenas, released the 2014 Annual Review of the Finance Ministry’s performance, in conjunction with Subsecretary Alejandro Micco. He explained that since this administration took office on 11 March, it has pursued an active fiscal policy to address the economic downturn by stimulating private investment through the expansion of public investment.
“The bottom line in 2014 is that the economy has grown. It has grown slowly, but it has grown. Over the course of the year, the economy has undergone a sound, orderly adjustment, without generating any significant imbalances. When I say there are no imbalances, that includes at least five areas: unemployment is exceptionally low: inflation is under control: long-term interest rates are at historically low levels: the current account deficit has shrunk: and sovereign spreads are low and stable. All of these trends point to the strength of our economy,” he stated.
The Minister went on to add that the economic slowdown facing the Chilean economy can largely be explained by the end of the commodity super-cycle and the beginning of the normalization of monetary policy in the United States. “The Finance Ministry’s priority in 2014 was to tackle the downturn with an active fiscal policy,” he said.
In his presentation, he discussed the economic situation of the region, indicating that external conditions had affected the growth of Latin American countries. Despite the economic slowdown, unemployment remains low in Chile and has even fallen according to the latest data, and while inflation has increased in recent months, “there is a consensus that it is transitory.”
“The economic forecasts for 2014 have been revised downward in the world, in the region and also in Chile,” he indicated.
He emphasized the need to keep expectations in line: ”This is not the time to get caught up in an acrimonious debate, to get distracted by personal insults. It’s a time to work harder, more efficiently.”
He suggested that the sharp drop in oil prices since mid-year will contribute to stimulating growth: “Oil prices have been falling steadily—around 40%—which has brought down international gasoline prices. In the last eight weeks, gas prices have declined by Ch$141. This change in the price level is one of the factors contributing to the sound adjustment of the Chilean economy, with no imbalances.”
The Minister said that there is room for long-term interest rates to stay low for some time.
He also indicated that the Central Bank, the OECD, the IMF and other international organizations all expect Chile to record a higher a growth rate in 2015 than in 2014.
Among the year’s highlights, the Tax Reform Bill was sent to the National Congress within the first 20 days of the administration, with the goal of increasing revenues by around US$ 8.3 billion, equivalent to 3 points of GDP. The legislative process and approval took just five months. As Minister Arenas described, “The new revenues will finance the new fixed costs committed under President Bachelet’s government program; increase tax fairness in order to improve the distribution of income; introduce new incentives for investment and saving; and reduce tax evasion and avoidance.”
He emphasized that the reform was forged with “a broad political consensus, understanding from a wide range of sectors and the determination to achieve the objectives of the reform.” He explained that the implementation is backed by technical studies and consulting from international organizations such as the IDB and the World Bank. Seven directives and three resolutions have been issued since September, out of a total of eleven and eight, respectively, which will be issued before 31 December 2014.
Another highlight was the “the complex and successful issue of sovereign bonds for US$ 2.058 billion, including EU$ 800 million, US$ 506 million and US$ 552 million in bond buybacks (2020 and 2021).” The rate on the euro issue was 1.745%, with a spread of 75 basis points over the risk-free rate (mid-swap), and the demand was 3.75 times the supply. Minister Arenas said that “the coupon rate is 1.625%, the lowest in history for a Chilean sovereign bond and the lowest paid by an emerging economy. The rate on the dollar issue was 3.185%, with a spread of 90 basis points over the risk-free rate (ten-year U.S. Treasury bonds), while the demand was 3.5 times the supply. In addition, local debt issues, in pesos and UFs, are equivalent to a total of US$ 5.3 billion.”
He added that “if anything should be highlighted from an international perspective, it is the placement of sovereign bonds—not for technical issues of rates, amounts, currencies and buybacks, but for how Chile is perceived at the international level. There is confidence and credibility in the future of the Chilean economy, and that is good news in the 2014 annual review.”
He described the government’s lines of action to stimulate growth, such as the plan to reinforce public investment, with an increase of US$ 500 million; the plan to facilitate private investment in 2014, with the creation of the Pro-Investment Committee and the Committee of Economic Ministers; the strengthening of the Infrastructure Concession Plan; the investment plan for public transportation infrastructure; the Innovation and Productivity Agenda; and the plan to promote SME exports.
“Private investment is a key driver of growth in Chile, representing 85% of total investment. The Pro-Investment Committee will monitor progress on 27 measures announced by the President and ensure that they meet the established deadlines, in order to facilitate private investment projects in the public sector, in compliance with all applicable regulations. This is a clear signal that the government’s priority in 2015 is to contribute to laying the foundation for the country’s long-term growth, and that is because investment stimulates the economy,” Minister Arenas commented.
The Minister noted that the budget execution in 2014 was 87.1% as of 30 November. The 2015 Budget is “clearly aimed at recovery, with a growth in spending of 9.8%. The biggest expense is mainly public investment, which will increase at a historic rate of 27.5%.”
He also discussed the capitalization of BancoEstado through the passing of a law to provide the state-owned bank with US$ 450 million, of which US$ 250 million was paid-in this year. “The capitalization of BancoEstado has helped maintain the flow of credit to small businesses and stimulate the growth of key segments, such as mortgage loans. As of November, small business loans have increased US$ 439 million, and new home loans totaled US$ 1.3 billion.”
With regard to the capitalization of Codelco for up to US$ 4.0 billion, which conforms with the investment plan and will finance the company’s 2014–2014 Business and Development Plan, Minister Arenas asserted that “this investment plan aims to maintain and increase production and improve the company’s earnings, in a financially sustainable manner. On 27 June 2014, US$200 million was paid in as part of the capitalization program.”
On MEPCO, the vehicle fuel price stabilization mechanism, he pointed out that international oil prices began to fall in June, triggering a drop in domestic fuel prices. As of mid-October, the local price of 93 octane gasoline had fallen by nearly $135 per liter and 97 octane gasoline by $147 per liter.
The Finance Minister emphasized that as of the first half of December 2014, ten draft bills under the Ministry’s responsibility had been passed by Congress and signed into law, as well as three draft bills from the previous administration.
Currently, the draft bill on the partial reintegration of the specific tax on cargo transport and the tax benefit for Easter Island is in the second legislative phase, submitted on 16 December. In addition, the following initiatives will be submitted over the coming days: the Draft Bill on Municipal Casinos; the Reinforcement of the Tax and Customs Courts; and the Labor Reform.
In 2014, the Finance Ministry’s international agenda included the organization of Chile Day in London, with the broad participation of both Chilean and foreign businesses; the High-Level Conference organized by the IMF, which included the attendance of President Michelle Bachelet and Christine Lagarde, the Managing Director of the IMF; and the signing of an agreement with the World Bank to establish a Global Economic Development Indicator Center in Chile.
Minister Arenas also reported on the IDB Program for the Modernization of the State, for US$96 million. This program is a joint effort by the Chilean government and the Inter-American Development Bank to improve the quality of public administration and citizen services.
He concluded the annual review with the Finance Ministry’s Gender Agenda. A Gender Committee was created for the Ministry and its twelve departments, with the goal of increasing women’s participation in the management of public companies: “The share of women increased from 2% to 27% in 2014, which is a huge step toward meeting the government’s target of 40% women.”