MercoPress. South Atlantic News Agency

IMF anticipates slower growth for Chile’s export dependent economy

Prices for copper, used in the power and construction industries, have fallen about 15% so far this year

Growth in Chile's export-dependent economy will slow to 4.6% this year due to softer copper prices, investment and domestic demand, the IMF said in a report posted on the central bank's website earlier this week. In April, the IMF projected the economy of the world's leading copper producer would expand by 4.9% in 2013.

“The key near-term challenge is to support a soft landing in the economy in the context of a widening current account deficit, swelling capital inflows, and an uncertain outlook for copper” the IMF said in the report.

The economy grew 5.6% last year, but growth eased in the first quarter of 2013 to 4.1%, compared with a year earlier, its slowest pace of expansion since late 2011.

Chile's central bank anticipates the economy will expand between 4% and 5% this year, a half percentage point below its prior projection, according to the bank's quarterly Monetary Policy Report released last week.

Prices for copper, a metal used in the power and construction industries, have fallen about 15% so far this year.

The IMF warned that a steep and lasting price decline would have a major impact on Chile's current account and foreign direct investment and public finances as well as medium-term growth prospects. About 14% of government revenue came straight from copper sales in 2012.

Analysts have long warned that commodities-dependent Latin American countries should diversify their economies. Copper accounts for roughly 60% of Chile's export revenue.

In the medium to long term, the country's biggest challenge “is to foster sustained growth without the boost from rising copper prices and against the headwind of a stagnating working-age population,” the report added.

“Monetary policy considerations are finely balanced” in Chile, where rates have been on hold at 5% since a surprise cut in January 2012, the IMF added in its report.

“Staff and the central bank agreed that a broadly neutral stance is appropriate and that this might call for a rate cut if inflation and inflation expectations remain low, domestic demand weakens faster than expected, or the external outlook deteriorates,” the IMF said.

The bank's latest traders’ poll, released on June 26, showed the median forecast was for the rate to remain at 5% in July and be cut to 4.75% in three months.

“At the same time, staff noted that if domestic demand does not cool as envisaged, a policy rate increase might be needed, despite the likely effect on peso appreciation,” the IMF added.

While a faster-than-expected slowdown in Chile has prompted market bets on a looming interest rate cut, domestic consumption has remained strong.