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MINISTRY OF FINANCE
How to Reform and be Re-elected?
Chile’s Experience and Future Challenges
Rodrigo Álvarez ZentenoUndersecretary of Finance of Chile
MINISTRY OF FINANCE
Presentation Overview
About Chile: an Economic background Chile’s Reform How to be Re-elected?
MINISTRY OF FINANCE
About Chile: an Economic background Chile’s Reform How to be Re-elected?
MINISTRY OF FINANCE
The current economic scenario • Population: 17,1 MM (2010 estimate)• GDP 2009:
• Total: US$164 bn• Per capita (current dollars): US$9.525• Per capita (PPP): US$14.341
• Human Development Index 2007: 0,878 (high, rank: 44/182, 1st in Latin America)
• Life expectancy at birth (years): 78,5 • Adult literacy rate (% aged 15 and above):
96,5
MINISTRY OF FINANCE
5
Quarterly Economic Growth
Source: Central Bank of Chile
Highest growth rate in the last 5
years
MINISTRY OF FINANCE
Monthly Economic Activity: Highly Dynamic
Source: Central Bank of Chile
Immediate effect of
the earthquake
Highest monthly
growth rate since July
1996
MINISTRY OF FINANCE
Strong Employment Creation
Source: INE
Since mobile quarter January-March 2010 data are based on the New National Employment Survey. Due to the conceptual differences between the new survey and the older one, data can not be spliced.
Employment creation since January-March: 164.780
MINISTRY OF FINANCE
Inflation
Source: Central Bank of Chile, Monetary Policy Report, September 2010
4.5
1.1
2.4
3.7
7.8
7.1
-1.4
3.9
3.2
2.62.8
2.6
-2.0
0.0
2.0
4.0
6.0
8.0
10.0
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010 (f)
2011 (f)
(% change dec/dec)
Average 2000-2009: 3.3%
MINISTRY OF FINANCE
(Variación % en 12 meses, septiembre)
1.9
1.5
-0.5
-4
-2
0
2
4
6
8
10
12E
ne-
05
Ab
r
Jul
Oct
En
e-06
Ab
r
Jul
Oct
En
e-07
Ab
r
Jul
Oct
En
e-08
Ab
r
Jul
Oct
En
e-09
Ab
r
Jul
Oct
En
e-10
Ab
r
Jul
IPC IPC X IPC X1
Inflation: Total and Long range
Fuente: INE
Inflación Septiembre: 0.4%
Inflación en 12 meses: 1.9%
Inflación Acumulada 2010: 2.7%
MINISTRY OF FINANCE
Fiscal Deficit During Global Recession
Source: Eurostat, OECD, IMF and DIPRES
(Central Government, % of GDP, 2009)
0
2
4
6
8
10
12
14
16S
we
de
n
Ge
rma
ny
De
nm
ark
Lu
xem
bo
urg
Au
stria
Hu
ng
ary
Ne
the
rlan
ds
Be
lgiu
m
Ch
ile
Fin
lan
d
Italy
Cze
ch R
ep
ub
lic
Po
lan
d
Slo
vak
Re
pu
blic
Fra
nce
Jap
an
Ice
lan
d
Po
rtu
ga
l
Sp
ain
Un
ited
Sta
tes
Un
ited
Kin
gd
om
Ire
lan
d
Gre
ece
MINISTRY OF FINANCE
About Chile: an Economic background Chile’s Reform How to be Re-elected?
MINISTRY OF FINANCE
The “old” Reform • A huge first step to reform our economy was
given on the 80´s 90´s, when an extensive program of privatizations and State modernization. During the last 20 years there was stability and development.
• As a result we have a solid and healthy Public Finance
• All is reflected in today’s Chile’s economic performance…
MINISTRY OF FINANCE
Chile´s Declining Macroeconomic Volatility
Source: Own elaboration based on Central Bank of Chile
(average of four-quarter trailing standard deviation of GDP growth)
0
0.5
1
1.5
2
2.5
3
3.5
4
1981-1990 1991-2000 2001-2009
MINISTRY OF FINANCE
Chile´s Very Favorable International Credit Conditions
Source: JP Morgan and Bloomberg
(Sovereign spread, July 12)
1198
767725
239 223 220 205 198 191 165 138 102
-9 -43-200
0
200
400
600
800
1000
1200
1400
Ve
ne
zue
la
Arg
en
tin
a
Gre
ec
e
Po
rtu
ga
l
Bra
zil
Ire
lan
d
Co
lom
bia
Me
xic
o
Pe
ru
Sp
ain
Ch
ile
Ita
ly
Fra
nc
e
Ge
rma
ny
MINISTRY OF FINANCE
Public Debt Burden: A Comparison
Source: Eurostat, OECD, IMF and DIPRES
(Gross Central Government Debt, % of GDP, 2009)
0
20
40
60
80
100
120
140
160
180
200C
hile
Lu
xem
bo
urg
No
rwa
y
Cze
ch R
ep
ub
lic
Slo
vak
Re
pu
blic
De
nm
ark
Sw
ed
en
Fin
lan
d
Ge
rma
ny
Sp
ain
Po
lan
d
Un
ited
Sta
tes
Ne
the
rlan
ds
Au
stria
Ire
lan
d
Un
ited
Kin
gd
om
Fra
nce
Hu
ng
ary
Po
rtu
ga
l
Ice
lan
d
Be
lgiu
m
Italy
Gre
ece
Jap
an
MINISTRY OF FINANCE
The Government of Chile: A Net Creditor
Source: DIPRES
(Central Government Debt, % of GDP)
-24
-18
-12
-6
0
6
12
18
24
30
36
42
48
19
90
19
91
19
92
19
93
19
94
19
95
19
96
19
97
19
98
19
99
20
00
20
01
20
02
20
03
20
04
20
05
20
06
20
07
20
08
20
09
Gross Net
MINISTRY OF FINANCE
Chile’s Economic and Social Stabilization Fund (Sovereign Fund)
Source: DIPRES
(billion dollars)
14.0
20.2
11.3
0
5
10
15
20
25
2007 2008 2009
July 2010: 11.1
MINISTRY OF FINANCE
The Budget: Structural Balance Rule • The SBR isolates the impact of the
economic cycle on public finances• The SBR commits to a balanced budget
(zero deficit) when• The economy grows at its potential rate• Copper price is at its long-term level
• In practice, this means • Saving during economic booms, when
extraordinary revenues are received• Dissaving in downturns, when fiscal revenue
drops
MINISTRY OF FINANCE
(% of GDP)
-6
-4
-2
0
2
4
6
8
10
19
87
19
88
19
89
19
90
19
91
19
92
19
93
19
94
19
95
19
96
19
97
19
98
19
99
20
00
20
01
20
02
20
03
20
04
20
05
20
06
20
07
20
08
20
09
Effective Balance Structural Balance
Central Government Balance 1987-2009
Before the Structural
Balance Rule
After the Structural
Balance Rule
Source: DIPRES
MINISTRY OF FINANCE
The “new” Reform
• The overall Chile’s experience in crisis situation is positive
• The world face us with new challenges• Preventive measures should be considered
within political reform schemes
MINISTRY OF FINANCE
21
Modernization of the State
• Human Resources (Senior Public Management (ADP) and Civil Service)
• Evaluate new services to be incorporated Review advertising and requirements for applications to increase turnout in contests
MINISTRY OF FINANCE
22
Reforming Chilean Administration
• New State comission for the reform of Public Administration.
• Delivery Unit to fulfill the Government compromises
• New agency for the revision of Public Policies
MINISTRY OF FINANCE
Strong reforms on Analisys:
Reform of the Corporate Governance for Public Companies
Reform of the Corporate Governance for Private Companies
Reform of the Regulatory Agencies: Financial, Banking, Capital Market
Strong Policy in The International Arena.We will continue the negociations regarding free
trade agreements and tax treaties
MINISTRY OF FINANCE
Bicentennial Market Capital Reform
Institutional reform
Middle class and Small and middle Companies
Transparency and information
Risks and Financial Stability
Tax
Markets and new financial models
Consumer protection
MINISTRY OF FINANCE
25
Tax Incentives for R&D
• Tax incentive which allows companies to use 35% of expenditure in R&D (extramural) in contracts with research centers registered as a tax credit (established 2008)
• Only generated 19 contracts totaling US$ 1,5MM
• Will create an additional tax incentive for private investment in R&D conducted within the enterprise (intramural)
• Will extend the limit of investment tax credit for extramural R&D
MINISTRY OF FINANCE
About Chile: an Economic background Chile’s Reform How to be Re-elected?
MINISTRY OF FINANCE
Chile choose to change
• From 1990 until 2010 a center-left coalition governs.
• People wants a new political performance, “a new way of govern”
• President Sebastián Piñera, assumed his position on 11 march 2010.
MINISTRY OF FINANCE
GOVERNMENT PROGRAM 2010-2014
• Grow at 6% average annual rate• Create 200.000 jobs annually (2010-2014)• Increase investment (Gross Fixed Capital
Formation) from 21% of GDP (2009) to 28% of GDP in 2014
• Eliminate extreme poverty by 2014• Lay the ground to become a developed country by
2018
MINISTRY OF FINANCE
RECOVERY OF THE CAPACITY OF GROWTH AND JOB CREATION OF CHILE
• Recover investment Accelerated depreciation Tax incentives for small businesses Reduce costs of bureaucracy
• Increase employment Incentives to hire Emergency jobs National training plan Adaptability of the workforce Protection of labor rights
• Improve productivity Promotion of science and technology Promotion of innovation and entrepreneurship Modernization of the state
MINISTRY OF FINANCE
Basic Principles
• Financing the government program does not require tax increases
• A temporary tax increase is only needed to finance about one third of the reconstruction effort
MINISTRY OF FINANCE
Poverty Alleviation21.1%
Investment Incentives5.3%
Others6.8%
Quality of education23.9%
Fight to Crime and Drug Dealing
5.3%
Health Improvement10.1%
SMBs Support27.6%
Resources Needed for the Government Program
Government Program: US$9.3 bn
MINISTRY OF FINANCE
Chile’s Road to Development by 2018(GDP per capita, PPP)
0
5000
10000
15000
20000
25000
30000
35000
40000
4500020
09
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
2021
2022
2023
2024
2025
2026
2027
2028
2029
2030
Growing at 6% Growing at 3% US$ 22.000
By 2028By 2018
14.341
22000
MINISTRY OF FINANCE
High Economic Growth Expected in 2011
Source: IMF, Consensus Forecast and Central Bank of Chile
4.7
4.5
4.8
6.0
5.75.8
3.5
4
4.5
5
5.5
6
6.5
I M F Consensus Forecast Monthly Survey Expectations,Central Bank of Chile
2010 2011
2009: -1.5%
MINISTRY OF FINANCE
How to Reform and be Re-elected?
Chile’s Experience and Future Challenges
Rodrigo Álvarez ZentenoUndersecretary of Finance of Chile