Economic growth in Chile will stagnate in 2016 as lower average copper prices undermine exports and force a paring back of government spending. Private consumption and investment will pick up, as manufacturing gradually strengthens.
Chile's ongoing external account rebalancing will continue in the coming years, as a weaker average peso bolsters the economic competitiveness of manufactured goods exports, offsetting weakness in mining exports. Moreover, structurally lower oil prices will reduce Chile's import bill, contributing to a widening of the goods trade surplus.
The Chilean peso will remain under broad downside pressure from falling copper prices and a bull run on the US dollar over the coming quarters. However, structurally lower oil prices will bolster the country's terms of trade, helping the unit to stabilise following a significant sell-off.
The Chilean government's expansionary fiscal policies will drive a widening of the nominal budget shortfall in 2016. Beyond 2016, the deficit will begin to gradually narrow as spending policies normalise and an increase in the corporate tax rate bolsters revenues.
Should the Chinese economy deteriorate more significantly than currently anticipated in 2016, copper prices could continue falling, leading to weaker-than-expected export performance, slower growth and a further depreciation of the CLP.
Investigations into official corruption could further undermine President Michelle Bachelet's political support and derail her government's reform agenda.
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