Recurring Shocks
Jul 18, 2006
Serhan Cevik (from Dubai)
The ‘latest’ tension is another twist in the endless cycle of shocks in the Middle East. Since we published the first report on Israel almost a decade ago, the geopolitical theme has hardly changed, and not for the good anyway. Every now and then we have enjoyed a brief moment of excitement about a glimpse of hope for the end of the violence or the small possibility of political openings and institutional progress in the region. But sometimes, just as the state of affairs is about to get benign, a ‘shock’ has forced us to believe that violence is an endless cycle in this part of the world. And this is exactly what has happened in recent days, as the eruption of hostilities on two fronts — Gaza and Lebanon — has reminded all of us that cycles are not just about economics but also symbolize recurring geopolitical shocks in the Middle East. After the kidnapping of an Israeli soldier by Palestinian militants that turned the Gaza Strip into a war zone, Hezbollah, a fundamentalist political party with an armed militia in Lebanon, has committed, according to the Israeli government, an “act of war” by killing three and kidnapping two Israeli soldiers in northern Israel. All of a sudden, the fragile relations have moved to the brink of a regional conflict. But why, and, more importantly, is a conventional war between Israel and its Arab neighbours really probable?
The regionalisation of hostilities is not very likely, in our view. Market participants are speculating on the worst-case scenario — an extensive military campaign bringing Israel and Syria and Iran face to face. However, before attaching any probability to such a risk, we need to look beyond today’s headlines and into the pages of history. Since 1948 and even before then, Israel and its Arab neighbours have waged numerous conventional wars and acts of terror, bringing nothing but disappointment and misery. Lebanon presents one of the best examples of how even just a sense of peace and stability can lead to economic prosperity. After Israel’s withdrawal from southern Lebanon in 2000, the country, despite all its shortcomings, enjoyed an unusual period of growth and financial strengthening. Unfortunately, the war in Iraq and Israel’s failure to find a sustainable solution to the Palestinian conflict have fuelled popular resentment and, in particular, encouraged fundamentalist groupings to call for jihadi aggression against Israel. Nevertheless, even the most marginal groups in the region are well aware of Israel’s overwhelming military superiority and economic stamina to sustain simultaneous military campaigns. This is why we think what is happening today is another twist in a chronic problem in the Middle East’s fragile political landscape, and is unlikely to regionalise the conflict. Hezbollah’s strike against Israel reflects domestic and regional power struggles. The assassination of Rafik Hariri, a former Lebanese prime minister, triggered the so-called Cedar Revolution — a protest movement against the militia politics and Syria’s presence — in Lebanon. Even though the country’s fragmented political structure has not allowed the government to disarm radical militias and take control of southern Lebanon from Hezbollah’s military wing, Syria’s sudden departure was still enough to alter the balance of power. With the benefits of economic growth, the mainstream majority has come to oppose the traditional rhetoric coming from Syria and Iran — two players with their own strategic and ideological agendas. This is why we think that Hezbollah’s strike against Israeli interests reflects internal as well as regional power struggles. However, despite apparent attempts to widen hostilities into a region-wide conflagration, the great majority of Arab countries stand against ‘irresponsible adventurism’ that puts the entire Middle East at risk. In our view, this is yet another important reason why the regionalisation of the conflict remains unlikely. Economic implications of the conflict depend on how long it lasts and how bad it gets. Israel’s financial markets have naturally come under pressure and will continue facing a period of heightened uncertainty. Economic consequences of the conflict, however, depend on how long it lasts and how bad it gets. For the time being, the Israeli economy remains on a strong footing and enjoys robust growth. Of course, the escalation of hostilities may lead to a slowdown in economic activity through a reduction in tourist arrivals, a withdrawal of foreign portfolio investments, and a drop in domestic demand. That said, comparisons with the 2001 recession are unfounded, at least at this stage, in our view. Although the outbreak of the Intifada contributed to economic troubles, the bursting of the global technology bubble had a far more significant effect on Israel’s technology-intensive economy. Today, the global economy continues to grow at a vigorous pace, generating strong demand for Israel’s high-tech goods and services. But the outlook is becoming less exuberant, especially with the emergence of geopolitical threats. This is why Israel’s military might alone cannot bring peace and keep economic expansion on track. In our view, until one of the most important root causes of all these hostilities ─ the Palestinian crisis ─ is resolved, Israel will not be able to achieve its true economic potential.
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Avoiding a New Cold War
Jul 18, 2006
Robert Alan Feldman (Tokyo)
What’s new: China voted against a new cold war The UN Security Council action on North Korea demonstrated that China takes its role as a stakeholder in the world geopolitical order seriously. That said, the Chinese action came only after a strong joint stance by the US and Japan. Conclusion: One vote is just one vote China’s vote against North Korea was a vote against a new cold war. However, many more tests lie ahead. The North Korea issue is not solved. An active Chinese role in global issues, such as the Middle East, will be needed. Protectionism could worsen if China fails to side with her export customers on geopolitical issues. Market implication: Risk premium down slightly The UN action on North Korea could shave risk premiums in financial markets. Further reduction of geopolitical risk will depend on how united the UN can be on the Middle East, and on who China sides with. Risks: Will China stay the geopolitical course? There is no guarantee that China will move fast enough or strongly enough to diffuse concerns about its geopolitical role. China is desperate for energy, and may ally with potential energy suppliers (e.g., Russia and Iran), on the hope that its customers (the US, Europe and Japan) have no viable alternatives to Chinese export supply. Nervous optimism My colleague Steve Roach shares my tentative optimism (See Global Fault Lines, Global Economic Forum, July 17, 2006). However, Steve quite correctly puts two conditions on optimism, “if sanity prevails”, and “if a full-blown geopolitical crisis is averted”. These conditions show why markets will remain nervous, in my view.
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A Stormy Summer Ahead
Jul 18, 2006
Andy Xie (Hong Kong)
*Risk of recession is increasing with softening global demand and rising oil prices. Global macro developments are unfolding in the least favorable direction for export-oriented Asia. A property downturn and rising oil prices are slowing retail sales in the US (the most important export market for Asia), while surging oil prices are ratcheting up production costs. *Excess liquidity congregates in oil. Oil prices have decoupled from demand as: (1) global real interest rates are still too low; and (2) the major oil producers are national governments that have enjoyed inflated profits from three years of elevated prices and are not motivated to raise production despite high and rising prices. Excess liquidity flows into markets where supplies are not price-elastic, and oil is just such a market at present. *Data-dependent central banks are encouraging oil speculation. Major central banks remain slow to raise interest rates, because the main downside of low rates is commodity speculation, which affects Asia more than their own economies. The major central banks are behind the curve, which is hidden partly by the stress building up in Asia. *Asia needs to raise interest rates aggressively. I believe that Asia must raise interest rates aggressively and stop subsidizing exports, as this encourages major central banks to raise interest rates only gradually, squeezing Asia. However, growth-obsessed Asian governments appear to lack the resolve to prevent the developed economies using Asia as a sinkhole for macro pressure. *The summer may be stormy. Rising oil prices have a greater effect on Asia than many may realize. The effect of rising oil prices on the region appears mild so far, but this is due largely to strong exports offsetting high oil prices. If global demand turns soft and the Fed turns hawkish again, the coming months could prove painful. Summary and conclusions Softening global demand and rising oil prices are squeezing export-dependent Asia. If current high oil prices persist until the year-end, the region could suffer income loss of 1.2% of GDP. Moreover, if US imports from the region stop growing in 2H06, I estimate that the region could see its GDP growth rate cut by a further 1.2 percentage points directly. As domestic demand in the region is still not strong, a potential reduction of GDP growth by 2.3 percentage points due to the external environment could have a substantial multiplier effect. Some economies in the region could slide into recession in the next six quarters, I believe. The region’s governments still want to keep interest rates low to help growth. The net effect of this is an ‘inflation tax’ on the region’s consumers to subsidize consumers in developed economies. This encourages the major central banks to take a gradualist approach to raising interest rates, which in turn encourages oil speculation and puts more pressure on Asia. Capital inflow has alleviated the squeeze so far, as it keeps the region’s currencies strong despite very low real interest rates. However, as the global environment becomes less and less attractive for risk taking, Asian currencies could weaken considerably in coming weeks, which would exacerbate inflationary pressure and increase the ‘inflation tax’ on the region’s consumers. Asian financial markets look to be entering their most difficult period for five years. I believe that a considerable shake-out is likely over the summer. In particular, as investors are still long Asia on a bullish outlook for the global economy, which is likely to be wrong, in my view, the unwinding could be quite painful for Asian assets. Indeed, if the Fed flip-flops again and turns hawkish on inflation, we could see a capitulation sell-off in the summer. The big squeeze The global macro environment looks to be evolving in the least favorable direction for Asia. US retail sales are surprising on the downside, and oil prices are surprising on the upside. The US is the biggest market for export-oriented Asia, and oil prices are the biggest input for the manufacturing-heavy region. If the current trend continues for another six months, I think it could push several economies in the region into recession. Rising tension in the Middle East has become an additional catalyst for oil price appreciation. The price of Brent crude has been 31% higher on average so far in 2006 compared with 2005. If the current price level persists, the average price for the remainder of 2006 would be one-third higher than last year. The ten economies in Asia under our coverage consumed 16.7 mn bbl/d and produced 6.7 mn bbl/d in 2005, according to BP Energy. At the current rate, the oil price could average US$16 more per barrel in 2006 than in 2005, implying an income loss of US$58.4 billion, or 1.2% of the region’s GDP. US retail sales for June 2006 surprised on the downside. US imports from Asia totaled US$440 billion last year (8.8% of the region’s GDP) and grew by 14.6% in 2005 and the first five months of 2006. Should the growth slow to zero in the second half of 2006, I estimate that the region’s GDP growth rate could be 1.2 percentage points lower than otherwise. High oil prices could cut further into US retail sales, adding to pressure from a softening housing market. The consensus still expects 3% US GDP growth in 2H06, but recent developments dampen the outlook considerably. Hence, I believe that the risk to consensus expectations for Asian exports in 2H06 is skewed to the downside. I estimate that the squeeze from rising oil prices and decelerating US demand could cut Asian GDP growth by more than 2% in 2H06. This would be the biggest shock to the region since the financial crisis of 1998. Oil price rises against demand trend Commodities are rising rapidly despite slowing global demand due to low real interest rates. Although the rate hikes by the major central banks have curbed rising liquidity levels, the levels are still high, and so there remains room for speculation. Speculation works in markets where supplies are not price-sensitive. Oil exporters are national governments who do not necessarily look to maximize profits. They have already earned more than enough money from high oil prices to look after their social and economic needs, and have limited motivation to increase production. The oil market is a natural place for speculative money, and geopolitical tensions are further fuelling this behavior. Central banks are still data-dependent, and are therefore maintaining a gradualist approach to raising interest rates. Since inflation is also picking up, however, real interest rates have not increased much. I believe the bottom line is that the major central banks are not recognizing that the current stock of money is too high to allow price stability. Commodity speculation is just one manifestation of excess money turning into inflation. This will likely cause inflation and interest rates to peak at higher levels than the market expects now, in my view. Of course, oil prices will also peak at higher levels than would otherwise be the case, which is the biggest negative for Asia. Asialacks an effective policy response Asian governments tend to resort to energy subsidies and low real interest rates to cope with the squeeze highlighted above. This type of policy response tends to warehouse some of the global inflationary pressure in Asia, supporting the major central banks’ gradualist approach to increasing interest rates. Asian export prices are rising this year. This implies that Asian exporters are finally passing on their higher costs. However, export prices are still rising much more slowly than import prices — i.e., the terms of trade for the region are still deteriorating and Asian countries are still subsidizing consumers in developed economies. I believe that the right response for Asia is to increase interest rates quickly and remove oil subsidies, which would allow Asia to pass inflation on to the developed economies more quickly via faster export price increases. I believe it is the region’s obsession with growth that is causing Asian governments to adopt such a soft approach to tightening. This makes it easier for the major central banks to normalize their monetary conditions at a slow pace. As oil, inflation and interest rates peak at higher levels in such an environment, Asia pays dearly for it over time. A stormy summer ahead Financial markets are sailing into a summer storm, I believe. Rising oil prices and slowing demand are a bad combination for corporate earnings. Should the Fed flip-flop on inflation and turn hawkish again, it could deliver the coup de grace for the considerable optimism on growth and corporate earnings that remains in the market. Asia is right in the eye of the coming storm. As noted, I estimate that the squeeze between the current high oil prices and slowing US retail sales could exceed 2% of the region’s GDP. As domestic demand in the region is still weak, the multiplier effect from the external shock could be quite large. I believe several economies could slide into recession in the next six quarters if the global environment does not improve. If the Middle East conflict escalates and oil prices reach US$100/bbl, I would expect most economies in the region to slide into recession. The capitulation sell-off in the current bear market could pan out over the summer, in my view.
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Overheated Growth Persists Amid Ineffective Tightening
Jul 18, 2006
Denise Yam, CFA(Hong Kong) and Andy Xie (Hong Kong)
Growth powers ahead. Economic growth continued to accelerate in China in 2Q06 despite macro tightening measures since April. The economy expanded 11.3% YoY in real terms in 2Q, the strongest since 1Q95, and up from 10.3% in 1Q (+10.9% average for 1H06). Urban fixed investment (+31.3% YoY in 1H06), industrial production (+19.5% in June) and retail sales (+13.9% in June) data generally suggest continued strong growth. More tightening ahead. Efforts to cool the economy through administrative controls on lending and property investment have met with limited success, prompting China to shift towards more market-based fiscal and monetary policies. We reiterate that another interest rate hike is imminent, in our view. We expect a 27bp increase in both deposit and lending rates this quarter, and another 27bp in 4Q06. Growth forecast upgrade, again. We are wary that the government’s control over investment is not as effective as desired, and that excess liquidity in the banking system is not likely to contract soon enough. It appears likely that overheated investment and overall economic growth will continue into 2H06 and possibly even 2007. We are upgrading our real GDP growth forecasts from 9.5% to 10.5% for 2006, and from 7.5% to 8.5% for 2007, primarily on the back of our expectation for persistently strong investment growth. Economic growth continued to accelerate in China in 2Q06, despite macro tightening initiatives introduced after stronger-than-expected 1Q results. The economy expanded 11.3% YoY in real terms in 2Q, the strongest pace since 1Q95, up from 10.3% in 1Q (+10.9% average for 1H06). Nominal GDP reached Rmb9,144.3 billion in 1H06, up 14.3% YoY in both 1Q and 2Q. Adding to trade and monetary data already released last week, China also unveiled the latest data points for fixed investment, industrial production, retail sales and price indices. They generally suggest continued strong growth. Efforts to cool the economy through monetary tightening and administrative controls on lending and property investment have met with limited success. In our view, continued capital inflows and hence the sustained availability of capital at low cost on the back of a currency appreciation expectation remain the key reasons, in our view. Moreover, local governments have assumed a dominant role in fixed investment. Their influence over local banks has undermined directions from the central government to halt lending and investment. We believe that weakening effectiveness of administrative measures in macro management will prompt China to shift towards more market-based standard fiscal and monetary policies. The government has started addressing excess liquidity in the banking system, through issuing bonds and bills. We believe that effective liquidity tightening will require a substantial rise in interest rates, as well as greater currency flexibility ahead. We reiterate that another interest rate hike appears imminent. We expect a 27bp increase in both deposit and lending rates this quarter, and another 27bp in 4Q06. Nevertheless, we are wary that the government’s control over investment is not as effective as we would like, and that excess liquidity in the banking system is not likely to contract soon enough. It appears likely that overheated investment and overall economic growth will continue into 2H06 and possibly even 2007. We are upgrading our real GDP growth forecasts from 9.5% to 10.5% for 2006, and from 7.5% to 8.5% for 2007, primarily on the back of our expectation of persistently strong investment growth. The economy remains HOTFixed investment still extremely strong. The NBS confirmed the 1H06 growth figure for urban fixed asset investment at 31.3% YoY, accelerating further from 30.3% in January-May (+29.6% in Jan-Apr) and totaling Rmb3.64 trillion. Including capex in rural areas, total fixed investment in the economy also gathered pace, up 29.8% YoY in 1H06 to Rmb4.24 trillion. The latest figures confirm our view that even though investment should have come under pressure from overcapacity, declining profits and policy direction, the availability of low-cost capital continued to support capex. Although YoY loan and broad money growth eased somewhat in June, it appears that local projects saw little difficulty in raising funds outside of banks (self-raised funds +37.9% YoY in Jan-May). Real estate development spending picked up further despite targeted administrative controls on the sector; capex grew 24.2% YoY in 1H, accelerating from 21.8% in Jan-May and 21.3% in Jan-Apr. Other industries that continued to see strong gains in capex were coal mining (+45.7% in 1H) and railway transport (+87.6%). Full details and a breakdown of the fixed investment dataset will be released on July 20. Retail sales growth steady, though slightly below expectation. Retail sales growth averaged 13.3% YoY in 1H06, up from 12.9% in 2005, although sales in June alone saw growth slipping to 13.9% from 14.2% in May. Recent hikes in minimum wages in several industrial cities form part of the series of initiatives to lift consumption in China. However, we believe that this process will take time. Even though the latest figures represent encouraging evidence for the growing consumption, we had highlighted earlier that China’s ‘retail sales’ data incorporates a portion of the fixed investment story. Sales of construction and renovation materials (+20.2% YoY in May), electrical appliances (+26.6% in May) and furniture (+40.1% in May) are closely associated with residential investment. Full details of sales of these items in June will be released on July 19. Industrial output growth beat expectations, buoyed by strong investment. The 19.5% YoY gain in value-added industrial output in June (+17.9% in May) beat even the most optimistic forecast on the Street (+19% according to a Bloomberg survey). This is the strongest ever seen in a month unaffected by Lunar New Year distortions, since the data series started in 1995. Total value-added jumped to a record Rmb781.8 billion. Electricity generation saw a noticeable pick-up, up 12% YoY in 1H, against 11.3% in January-May, suggesting that growth in June alone could have accelerated to close to 15%. The breakdown of output by sector in June will be released on July 19. Pick-up in inflation led by raw materials. The pick-up in raw materials prices again added to inflationary pressure, although overall inflation remains mild. The CPI, RPI, PPI, raw materials purchasing price index (RMPPI) and corporate goods price index (CGPI) rose 1.5%, 1.6%, 3.5%, 6.6% and 2.3% YoY, respectively, all showing larger increases than in May despite worsening excess capacity; however, downstream margins appear to be worsening again, as seen in the gap between upstream and downstream price gains. More tightening ahead?It is unambiguous that China’s economy remains overheated, driven primarily by excessive investment and supported by the availability of low-cost capital through excessive bank lending and persistent capital inflow. Tightening initiatives introduced since late April have yet to create any dampening impact on the economy. We believe that more tightening measures are in the pipeline. Administrative measures, which are being proven ineffective in macro management, will likely be replaced by more market-based fiscal and monetary policies. The PBoC has stepped up market operations to drain liquidity from the banking system. Indeed, in addition to the regular bill issues, the PBoC has sold three special 1-year issues totaling Rmb250 billion on May 17, June 14 and July 13. But we believe that effective liquidity tightening will require a substantial rise in interest rates, as well as greater currency flexibility ahead. We reiterate that another interest rate hike appears imminent. We expect a 27bp increase in both deposit and lending rates this quarter, and another 27bp in 4Q06.
Forecasts lifted againReal GDP growth averaged 10.9% YoY in 1H06, far exceeding our 9.5% forecast for the full year. The currency appreciation expectation, which sustains capital inflows, remains the biggest determining factor for monetary conditions. The liquidity injection from capital inflows could more than offset the impact of the rate hikes, sterilization in the interbank market, and increases in reserve requirements. We are wary that the government’s control over investment is not as effective as desired, and that excess liquidity in the banking system is not likely to contract soon enough. It now appears likely that overheated investment and overall economic growth will continue into 2H06 and possibly even 2007. We are upgrading our real GDP growth forecasts from 9.5% to 10.5% for 2006, and from 7.5% to 8.5% for 2007, primarily on the back of persistently strong investment growth. Even with slower growth in 2H06, full-year capex is expected to sustain the pace seen in 2005 (+20%). In the aftermath of excessive investment and production capacity expansion, Chinese producers will continue to push output onto the international market, in our view. Our updated forecasts incorporate further expansion in China’s trade surplus, to US$144 billion this year, and US$170 billion in 2007. The current account surplus is expected to remain above 7% of GDP this year and next.
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Building the Buffer
Jul 18, 2006
Luis Arcentales (New York) and Daniel Volberg (New York)
In almost lockstep for nearly two years now, Chile’s central bank has been hiking overnight rates at a pace similar to the Fed’s. Now, with overnight rates at 5.25%, and with new signs that the economy may not be growing as fast as once thought during the second half of 2006, Chile’s central bank is sending a signal that it is largely finished. But there are at least two differences between the economies of Chile and the US as the end of the rate-hiking cycle approaches: Chile is running a current account surplus that could reach 2.7% of GDP this year, while its public sector is set to produce a historic budget surplus of more than 6% of GDP. Admittedly, the importance of copper in both Chile’s balance of payments and fiscal accounts explains much of the differences with the US economy. Still, the ability of the Chilean authorities to set aside the significant copper windfall rather than use it to boost current expenditures sets Chile apart in Latin America and, for that matter, distinguishes it from most developed nations as well. With growing uncertainty over how the geopolitical flashpoints will play out in the coming weeks and months, Chile’s strong fiscal and balance-of-payments positions should act as a significant buffer against potential financial market gyrations. There is little doubt that if the globe slows, Chile’s terms of trade will turn and its economy will slow. But the risk of a more dramatic downturn akin to what was seen in the aftermath of the Asia crisis — when Chile was forced to unwind a current account deficit which had reached 6% of GDP — appears highly unlikely. Reading the monetary tea leaves. While the decision by Chile’s central bank to hike rates by 25bp on July 13 was widely expected, the meeting’s communiqué contained at least two valuable signals. First, authorities introduced a phrase aimed at toning down their call for a “considerable” acceleration in economic growth during the second half of the year. Second, while the communiqué left the door open for further action going forward, it took a distinctively dovish tilt by acknowledging the increasingly data-dependent nature of future hikes. Moreover, the authorities introduced the likelihood of even “less frequent” moves ahead, underscoring the limited upside risk to the target interest rate beyond the one last 25bp hike we expect during 2006. The statement from the July 13 monetary policy meeting contained a fair amount of changes which, in our view, constituted a heavy hint that the tightening cycle is largely over. This is not to say that the statement in any way deviated from the strategy of “paused” normalization going forward. But with global uncertainties increasing, domestic growth moderating and inflationary pressures seemingly in check, authorities provided themselves with enough flexibility to avoid further hikes if needed without risk to their credibility by signaling that the timing of future moves was data-dependent. The language used to describe the economic environment was toned down. In May’s Monetary Policy Report, the central bank’s baseline scenario called for a “considerable” growth pick-up in the second half of the year. By highlighting the risks to this call, the communiqué paves the way, in our view, for the central bank to trim its 2006 growth estimates for the second time this year — from the current 5-6% range — when it releases its next Monetary Policy Report in September. The characterization of employment growth, moreover, shifted to “relatively vigorous” from running at an “elevated” clip in the June communiqué. Though this minor change might be in response to the recent release of the first assessment of the impact of the employment survey’s new sample by Chile’s Statistical Institute (INE), our sense is that it complements the evidence that the economy is likely to expand at a rate closer to the lower bound of the central bank’s range this year. The central bank’s inflation prognosis remained generally benign. The impact of higher energy quotes has accounted for most of the damage to headline inflation and should postpone its convergence towards the 3.0% target; by contrast, core measures remain broadly tamed. With the energy shock apparently failing to contaminate broader prices, both inflation expectations as well as our measure of 10-year break-even inflation have remained well anchored near the 3% central target. We calculate break-even inflation by comparing 10-year real (inflation-linked) bonds with their closest nominal counterpart — in this case the 2015 BCP bond. The fiscal buffer The greatest uncertainty in Chile, however, lies on the fiscal front. Given how beneficial for Chile the institutionalization of fiscal discipline via the structural budget surplus rule has been, this might seem odd. But with copper prices likely to stay higher for longer, the windfall could translate into very generous expenditures next year. We are not arguing that the authorities are about to turn the fiscal spigot wide open. Instead, we suspect that when the results from consultation currently underway with independent experts regarding the 2007 budget are unveiled in the coming weeks, the current long-term copper estimate of 99 cents per pound will be revised higher. Thus, depending on the magnitude of this budget adjustment, Chile could receive a significant boost to demand from the fiscal front in the absence of changes to the current tax structure. More expansionary fiscal policy could prompt the central bank to tighten further. With crude prices rising to record highs and with the economy still running near potential (likely near the 5% level), an additional fiscal boost is hardly what monetary authorities would like to see. But if the globe begins to slow and copper prices retreat, today’s large fiscal surplus — which has generated a great deal of political noise for a new administration that has faced a nationwide student strike — might provide just the type of buffer that Chile could need to face a period of slower global growth. Bottom line Ultimately, it may be wrong to question whether Chile can sustain growth rates near 6% over the medium term. Instead, Chile’s success should be measured by its ability to better deal with a global slowdown and, in that regard, Chile’s continuous commitment to saving its copper windfall is encouraging. But it is just where Chile has been the most successful, namely in running counter-cyclical fiscal policy, that the risk of misusing the current abundance lies. Chile needs to take advantage of today’s abundance to invest in its future — from education to infrastructure and energy — as part of a cohesive strategy that leads to a boost in its competitiveness. That would provide the ultimate buffer.
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