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El Jaguar

25 October 2019 by jbchevrel

We are seeing is Chile’s worst social unrest in decades. So far more relevant to copper (Chile was >1/3 global market) than CDS. Today Chile ports restarted operations after 2 days of pause. It is fair to say the longer the riots the bigger the negative impact to GDP. The consensus view for now is that the unrest will have an only temporary effect on growth. But if the unrest persists, analysts estimate that it could drag growth down -0.3/-0.5% after 1y. On top of the length of the conflict, its transmission to expectations and demand are also at play. But this kind of impact seems unlikely to drag investment growth and consumption growth notably below 3%, especially in the context of monetary stimulus. Indeed, the consensus is now for another -25bp rate cut in Dec19. That would take the policy rate to 1.5%, adding to the YTD existing -125bp of cuts since Jun19, the last move having been this Wednesday (-25bp). The central bank clearly said the current developments will have an impact on the economy and warranty further accommodation. So we could see rates there end up at +1% or even below if things go more sour. The growth side of the equation therefore seems buffered by monetary policy. But a resolution to this social upheaval might imply additional social spending, on the fiscal side of the equation. A weakening Chile’s fiscal position will be worth monitoring. The measures announced by Pres Pinera are seen as bumping budget deficit by 0.2-0.3% GDP, and the unrest has shown not many signs of slowing down yet. Being from France, I could hardly say that increasing fiscal spending while taking profit from negative real rates is a bad thing to do. But in Chile, that could hurt policy credibility, as the fiscal authorities had committed to a reduction of the deficit -0.2% GDP / year to finish at -1% (still deficit) GDP in 2022 – for reference they crossed -2% bar in 2018 (-1.6%). Bottom line, not a big deal for CDS because Chile’s debt’s strong fundamentals remain, but the situation is worth monitoring. Today Chile 5y CDS closes wider (+2bp) at 38bp while the CDX EM s32 is tighter -4bp.