Hit by a sharp decline in the price of copper, Chile is putting the brakes on public spending with a 2016 budget that aims at keeping costs under control.

Author: Tiziana Barghini
Rodrigo Valdés’s Chile reflects new econonomic realities.

This new fiscal discipline, imposed by Finance minister Rodrigo Valdés, arrives a bit late for the only country in Latin America with a net saving position: The government has abandoned its target of reaching a balanced structural budget by 2018 and says it expects Chile to become a net debtor in two years.

“I think we need to plan ahead, as if a significant recovery in the price of commodities is unlikely,” Valdés said in October after meeting Wall Street investors in New York City. “We need to adjust to new conditions, because the period of high commodity prices seems to be over.”

Chile, the globe’s largest copper producer, used to get about 20% of state revenues from government-owned National Copper Corporation of Chile (Codelco), the world’s largest copper firm. But copper prices have declined more than 17% so far this year, and public revenues have fallen at the same time that costs have been climbing. As the government attempts to get a handle on outlays, public spending is expected to rise by less than 5% in 2016, versus a 9.8% increase this year. Balancing the cyclically adjusted deficit in 2018 will be left to the next government.

Chile is a net creditor, meaning that the value of state-owned assets is larger than its debt, but this can’t last long, given the current trends. Although there are various ways to compute the nation’s net saving position, it is clear that the gap between assets and liabilities is shrinking. 

“Chile is still a net creditor, but we will stop being one, under my preferred definition, in a couple of years,” said Valdes. “This is one of the reasons why fiscal policy needs to enter into a period of consolidation.”

“We have some time,” he said. “Having some net debt for a while is not a major issue, but we need to work in a way that Chile does not build a debt problem.”


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