Weaker Fiscal Position Likely To Prompt Bond Issuances
BMI View: We forecast that Chile's nominal budget surplus will narrow in the coming years amidst weaker revenue inflows as economic growth cools, and an uptick in counter-cyclical spending by the centre-left Chilean government. Moreover, in order to help fund its policy agenda, we expect the incoming government to increase its debt issuances, abetted by a new law aimed at encouraging foreign participation in the country's bond markets.
We forecast that Chile's gross nominal budget surplus will shrink to 1.8% and 1.6% of GDP in 2014 and 2015 respectively, from our estimate of 2.9% of GDP in 2013, based on our view that revenue inflows will remain relatively weak as the economy cools, while spending will tick up as the government seeks to stimulate growth, as well as fund education reform. Moreover, we believe that Chile's net fiscal balance, which includes transactions of non-financial assets, flipped into deficit in 2013 for the first time in three years, and we expect it will remain in the red through 2015. Indeed, we forecast net budget deficits of 1.1% and 1.2% of GDP in 2014 and 2015, respectively, compared to our estimate of 0.6% of GDP in 2013. Supporting our view that Chile's net and gross fiscal balances have passed their peak, recently released data from the central bank indicate that total revenue inflows fell by 2.2% in 2013, the first time that government inflows have contracted since 2009. This was primarily due to a 28.1% drop in gross copper revenues, and only modest gains in tax collections. At the same time, expenditures rose by 5.0% last year, although we estimate that expenditures as a percentage of GDP remained relatively constant at 17.5%, only a slight uptick from 17.4% in 2012.
Looking forward, we believe that the incoming, centre-left administration of President-elect Michelle Bachelet will pursue a counter-cyclical increase in outlays in order to stimulate real GDP growth, which we forecast will moderate to 3.7% in 2014, from our estimate of 4.3% in 2013, amidst weakening mining sector investment and a slowdown in household consumption in H114 ( see 'High Frequency Data Point To Slowdown In 2014', February 7). In addition, Bachelet's proposal to expand public education is likely to cost between 1.5-2.5% of GDP, requiring an uptick in spending. As such, we forecast that government expenditure will rise by 12.0% annually in the next two years, outpacing growth in revenues of 5.0% and 10.0%, which will be capped by a continued drop in industrial metals prices as demand from China wanes. Our Commodities team forecasts average LME copper prices of US$6,800/tonne in 2014, down from US$7,350/tonne in 2013.
|Nominal Surplus To Continue Narrowing|
|Chile - Central Government Revenue And Expenditure, % chg y-o-y 12ma And Budget Balance, CLPmn 12-Month Rolling|