Chile’s economy is growing below potential. During the last couple of years, it has only grown around 2%, compared to an average more than 5% per year over the past 30 years. It’s not a disaster but it’s lower than what we’re used to. The economy is going through a transition. The significant decline in the price of copper has impacted trade, so the economy is moving away from the mining sector and focusing on other sectors, mostly other exports and services.
We’re helping this transition with an accommodative monetary policy. We’ve kept interest rates down during the period of low growth and allowed the currency to depreciate. In our view, the currency needed to be devalued, but it has come at a cost. We see higher inflation in the short term as transitory but we’re a bit concerned with the second-round effects. That’s why we tightened monetary policy in the latter part of last year and we expect the policy to remain accommodating in the next couple of years.
Diversification is a challenge for the Chilean economy and most economies in Latin America. Resources need to move away from commodities and go to different parts of the economy. We’ve seen some movement in agro-industry and the services sector but we have to admit that the process has been slower than we expected. It’s not an easy process, but we expect it to mature over time.
The negative growth in the mining sector has impacted the whole country’s economy. The pipeline of projects was quite large but it has been scaled back. Just to give you some numbers, mining investment was 3% of GDP in early the 2000s, before the commodities supercycle. It rose above 8% of GDP in 2012 but now it’s back to 6%. It’s still big but it’s going down.We don’t actively promote certain sectors but we have a sound macroeconomic policy framework in place. For example, we expect that allowing the exchange rate to depreciate will provide a price signal to other export sectors. We are a market-oriented economy, so we expect these macro signals will help move resources to the leading sectors of the future.
We expect mining investments to keep falling. It will have an impact this year but then it will level off. Chile is a major copper producer and it has huge reserves, but we don’t expect the price to rebound in the foreseeable future. Commodities are cyclical, so we may see some rebounds. But we’re not relying on it. We see the slowdown as more permanent.
From a fiscal point of view, we have lower economic growth and lower commodity prices, which have led to a deficit. But we’ve compensated that with the money we saved during the commodities supercycle. But we still need to grow other sectors of the economy.
We are fully funded. We have a net debt of zero. The terms and conditions that Chile gets in the global capital markets are quite favorable. The fiscal situation is solid, so we have no need to tap the capital markets. The local debt market is quite deep. Local pension funds are eager to pick up local bonds. Local rates are also by far the lowest in Latin America. The 10-year domestic nominal rate is now 4.4%, by far the lowest in the region. Not many emerging market countries in the world have this deep a local market where you can borrow over such long-dated maturities without many problems. LF
Rodrigo Vergara is the governor of the Central Bank of Chile. This is an edited transcript of his interview with Aaron Weinman.