Bloomberg News

Vial Says World Crisis Trumps Chile Overheating as Threat

November 07, 2012

The threat of a global collapse remains the greatest risk to Chile’s economy, preventing tighter monetary policy even after Europe’s debt crisis had a smaller impact on the Andean nation than anticipated, policy maker Joaquin Vial said.

Domestic growth has beaten expectations as a mining boom in the northern desert helps prop up consumer spending, Vial said in an interview in his office in Santiago today. Credit growth isn’t high enough to indicate that domestic demand is excessive, he added.

“If you want to weigh the dangers of overheating in the local economy and the threat of a strong shock in external demand and consumer confidence coming from abroad, the two are quite balanced,” Vial said. “But if pressed to say where the biggest threats come from, there are more threats abroad than at home.”

Chile’s central bank has kept its key interest rate unchanged at 5 percent since January, when it surprised economists by cutting borrowing costs by a quarter-point. Analysts surveyed on Oct. 9 by the bank expected policy makers to keep rates on hold for 17 months, and then raise rates.

Economic growth in the world’s top copper miner exceeded analyst forecasts in six of the first nine months of 2012, with gross domestic product expanding about 5.4 percent from last year. Analysts surveyed by Bloomberg forecast Chile will grow 5 percent this year, surpassing the region’s biggest economies Brazil and Mexico.

Domestic Strength

Retail sales leaped 8.4 percent in the first nine month of 2012 while bank credit expanded 12 percent in September from last year, according to government data. Unemployment fell to 6.5 percent in the three months through September from 7.4 percent in the same period of 2011.

“We probably have a problem that internal demand is growing stronger than we had anticipated,” Vial said. “Consumption, investment, credit and employment are growing at high rates, as well as salaries, which have moderated a little bit in recent months. Clearly it’s all a little bit higher than what would be considered the optimal trajectory.”

While domestic growth hasn’t put pressure on inflation rates, it has fed a current account deficit that poses potential risks to the Chilean economy if, for example, copper prices fall below $3 a pound, he said. The metal, which accounts for more than half of Chile’s exports, settled at $3.4415 a pound today on the Comex in New York.

Vulnerabilities

Vial’s comments come a day after central bank President Rodrigo Vergara said current rates of internal demand growth create vulnerabilities in an economy where the current account deficit is expanding. While Vergara called on authorities to contain spending, Finance Minister Felipe Larrain at the same forum said investment rather than spending is largely to blame.

Chile’s current account deficit will expand to 3.2 percent of GDP this year from 1.3 percent in 2011 as imports climb 4 percent, according to central bank forecasts published in September. The trade surplus will shrink to $4.2 billion from $10.8 billion over the same period, it said.

Vial, who was appointed by President Sebastian Pinera and approved by the Senate in January this year, is the newest member of the central bank board. He previously was chief economist for South America at Banco Bilbao Vizcaya Argentaria SA.

Vial has a PhD in economics from the University of Pennsylvania and was budget director in the government of President Eduardo Frei Ruiz-Tagle from 1997 to 2000. He was later chairman of BBVA’s Chilean pension fund AFP Provida SA, where he oversaw more than $40 billion in assets.

To contact the reporter on this story: Randall Woods in Santiago at rwoods13@bloomberg.net.

To contact the editor responsible for this story: Joshua Goodman at jgoodman19@bloomberg.net.


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