Chile

www.gemines.cl

At the lowest in the first quarter

The effects of Escondida's extensive strike on economic activity were clearly highlighted
in March, following the effects already produced in February. Mining GDP declined
22.7% from March last year, while total GDP grew 0.2%, as the rest of the economy
expanded 2.2%. With these results, the economic activity of the first quarter would have
grown 0.2% in twelve months, and would have contracted in the same magnitude with
respect to the previous quarter seasonally adjusted. In view of this, it is safe to say that
the activity figures for the coming months will surely be better than those just
described, but this does not imply that they will be good, and are likely to be below 2%
in the next two quarters. On the one hand, the general weakness of the economy makes
it difficult to think of major improvements in sectors other than mining, while this sector
will continue to be affected, in part because Escondida's return to normal production is
not immediate, and partly because it is not expected That copper production will
increase this year, so it would not make a contribution to growth.
The slowdown in the last part of last year, combined with three years of very low
growth, the deterioration in expectations and the growing weakness in the labor market
prevent us from being very optimistic about the economic dynamism in the rest of the
year. To this, the uncertainty of a very different electoral process is added to the
previous ones. In particular, in the labor market, unemployment continued to increase
in the first quarter, reaching 6.6% in March, 3 tenths more than in the same month of
2016. Although employment growth accelerated to 1.4% In twelve months, it is
estimated that this is transitory but, above all, it worries the destruction of salaried jobs
for the fourth consecutive month and for the seventh time in the last eight months,
something unprecedented in the recent economic history of the country. These jobs are
being replaced by other independent (self-employed), which in many cases correspond
to street vendors. Wages, for their part, show a low real growth in twelve months,
which has fluctuated between 1% and 2%, but partly because of the abrupt reduction of
inflation in the middle of last year, but the nominal variation of wages, 4.3% in twelve
months to March, is the lowest since the beginning of 2011, when the country was
coming out of deflation post financial crisis.
In summary, economic activity probably grew at its lowest rate during the current cycle
in the first quarter of the year, but the acceleration that should occur in the coming
quarters will be weak, which will prevent 2017 growth from being above the 1.6%
registered last year. Depending on the results of the November elections (and certainly
December, when the presidential runoff is to be held), prospects are clearly more
favorable, but in the most recent projections, around 2.5%, it is implied that it will be
Sebastian Piera, the leader of Chile Vamos, the opposition coalition to the current
government, the winner of the year-end race.
In the political sphere, the greatest novelty, after the withdrawal of the candidacy of
former President Ricardo Lagos, was the decision of the Christian Democrats to follow
their own path, not attend the primaries of the New Majority and arrive with their

LAECO - Alianza Latino Americana de Consultoras Econmicas 8

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candidate, Carolina Goic, until November. This is a risky decision since it is probable that
the New Majority, consequently, carries two parliamentary lists to the election and not
one as it was styled. There is also the risk that Goic, if one believes the most recent
polls, could be in fourth place, behind Alejandro Guillier, the candidate of the ruling
Nueva Mayora and of Beatriz Sanchez, the probable candidate of the Frente Amplio,
from the extreme left. However, in our opinion, this scenario should change as the
campaign progresses and the possibility of Carolina Goic passing to the second round
should not be ruled out. In any case, everything seems to indicate, so far, that former
President Sebastin Piera would be returning to the Moneda from March next year (it
is assumed that he will win the Chile Vamos primary against Senator Manuel Jose
Ossandon and deputy Felipe Kast), but with a Congress in which, surely, it will have
minority and where it will have an extreme left strengthened, today with only two
deputies, but probably with 5 to 10 after the election of November.
The Christian Democrats' decision to break the government coalition seems to us to be a
risky but logical decision in the face of a conglomerate that has clearly run to the left,
blurring the centrist profile of this party, which has experienced a steady loss of votes,
both to the right and to the left. It will be seen if this decision to fight for the political
center with parties more oriented to the right has been the correct one or not. In
particular, it will be interesting to see if the political center still congregates the majority
or not of the country or if, on the contrary, there has been a movement towards the left
and a greater polarization. The magnitude of the abstention, very significant in the last
elections, will also be an interesting phenomenon to be analysed.

Main projections for 2017 2018

Chile 2015 2016 2017 2018
GDP growth (%) 2.3 1.6 1.6 2.4
Private consumption (%) 1.9 2.4 2.1 2.4
Investments (%) -1.5 -0.8 0.2 2.3
Unemployment Rate (%) 5.8 6.5 6.8 6.5
CPI Inflation (%) 4.4 2.7 2.9 3.2
Monetary Policy Rate - MPR (%) 3.50 3.50 2.50 3.25
Exchange Rate CL$/US$ (end of period) 704 667 675 685
Current Account (% GDP) -2.0 -1.4 -1.8 -2.3
Central Government Balance (% GDP) -2.2 -2.8 -3.0 -2.7

Source: Gemines

LAECO - Alianza Latino Americana de Consultoras Econmicas 9

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www.ecolatina.com
Colombia

www.econometria.com

Colombias Country Risk: Improving after the Oil Crisis

Country risk is one of the indicators that mostly affect a countrys economy. If a
credit rating agency assigns a country a speculative or highly speculative rating, the
interest rates of government bonds may increase and, as a consequence, the
countrys public debt would be more expensive. Additionally, the potential market
for the countrys bonds will decrease because only the less risk averse will remain in
it. Besides, the country risk rating also affects the foreign direct investment (FDI); if a
country becomes more risky, it will receive less FDI. Currently, Colombia has a rating
of BBB negative from Standard and Poors, BBB stable from Fitch (which
increased from negative to stable a few weeks ago) and Baa2 stable (equivalent to
BBB stable) from Moodys. All three ratings reflect a medium lower degree of
investment. For Colombia, it is critical not to lower its risk rating given that the
country wants to obey the fiscal rule set for 2017, where the maximum public
budget balance deficit must be of 3,3% of its GDP and it must gradually reduce until
it reaches 1,6% of its GDP in 2020. Furthermore, it is difficult for the government to
cut public spending because a lot of its resources are assigned to the requirements
derived from the implementation of the peace treaty signed in November of 2016.
With the purpose of complying with the fiscal rule and maintain or even increase-
the risk rating, the government proposed a tax reform, which was approved (with a
few changes) by Congress in December of 2016. The biggest change made by the tax
reform was an increase in the value-added tax from 16% to 19%. The purpose of this
increase was to compensate the decrease of the governments income generated by
the drop in oil prices. The tax reform will also gradually lower taxes to the
companies, which is expected to improve their performance and generate more jobs.
Besides the tax reform, the government has also looked for other solutions to
improve its risk rating. One of these is the attempt to enter the OECD, which had an
important progress at the beginning of May. Colombia was approved by two more
committees set by this organization: Economic and Development review and Public
Governance. According to the government, Colombia is in the final stretch to enter
this organization, which may improve its country risk rating.
The Emerging Markets Bonds Index (EMBI), estimated daily by JP Morgan Chase is a
dynamic indicator of a countrys risk. This indicator shows the difference between a
US government bond and an underdeveloped countrys bond such as Colombia. The
EMBI has a high and negative correlation with oil prices and with FDI. Colombias
main exporting product is oil, therefore, some macroeconomic variables are affected
by what happens in the international market of this commodity. In the case of the
EMBI and the FDI; if the oil prices decrease, the country risk (EMBI) increases and, as
a consequence, the FDI decreases. Figure 1 shows the relationship between the price
of a barrel of Brent crude and the Colombian EMBI index from January of 2014 until
April of 2017. In the time frame, the EMBI reached one of its peaks while the crude

LAECO - Alianza Latino Americana de Consultoras Econmicas 10

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price was at its minimum. Afterwards, given the gradual increase of Brent crude, the
EMBI has shown a negative tendency.

Figure 1: EMBI Vs Brent Crude

Source: Elaborated by Econometra Consultores with information from Fedegn and Bloomberg

The fact that the tendency has remained negative over the last few months is a sign
that the country is capable of absorbing negative shocks which could affect the
country risk rating. For example, the recent corruption scandals such as the bribes
made by Odebrecht, Cartagenas Refinery (Reficar) and the presidential elections
campaigns, which have surrounded the political sphere in the last few months, have
not driven away investors and the country risk has maintained a negative tendency.
According to analysts interviewed by the journal La Repblica, Colombia has
improved its reliability in the financial markets because of the increase in oil prices
and the higher incomes derived by the tax reform.
Nonetheless, the country is still vulnerable to factors different to oil prices. Even
though inflation has decreased over the last 9 months, the figure in April of 2017 was
of 4,66% (12 months), which is above the Central Banks inflation goal. Furthermore,
in the course of 2017, the economy has grown at a very slow pace, mostly explained
by the decrease in consumption, reflected in the consumer trust index which has
been in negative figures since January of 2016.
In conclusion, even though Colombia has improved its country risk in the last few
months, risk ratings are still subject to exogenous factors. As an attempt to revert
this situation, the government promoted a tax reform to increase its income.
However, the reform was not structural enough and, as a consequence, it is likely
that another one is needed in the near future. Additionally, the economy is still
vulnerable despite the attempts to turn the country less dependent to international
oil prices, hence, it is difficult to predict if the country risk will maintain its negative
tendency.

LAECO - Alianza Latino Americana de Consultoras Econmicas 11

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Main projections for 2016, 2017 and 2018
Colombia 2015 2016f 2017f 2018f
1
GDP growth (%) 3.1 2.0 2.1 1.3
1
Consumption (%) 3.6 2.0 3.2 4.5
1
Investment (%) 1.2 -4.52 -3.4 6.3
Unemployment rate (%, average) 1 8.9 9.2 9.1 8.8
Inflation - CPI (%, average) 1 5.0 7.5 4.7 5.0
2
Exchange rate ($/US$, average) 2742 3055 2897 2870
Current account (% GDP) 2 -6.4 -5,3 -3,2 -3,2
2
Fiscal balance (% GDP) -3.0 -3,8 -3,1 -3,1
Sources of historical data:
(1) Departamento Administrativo Nacional de Estadstica DANE.
(2) Banco de la Repblica.

LAECO - Alianza Latino Americana de Consultoras Econmicas 12

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