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MINISTRY OF FINANCE
How to Reform and be Re-elected?
Chile’s Experience and
Future Challenges
Rodrigo Álvarez Zenteno
Undersecretary of Finance of Chile
Presentation Overview
MINISTRY OF FINANCE
 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?
The current economic scenario
MINISTRY OF FINANCE
• 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
Quarterly Economic Growth
Highest growth
rate in the last
5 years
(GDP, annual % change)
8
6.6
7.0
6
4.6
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4
4.6
3.4
2.1
2
1.6
0.2
0
-1.4
-2
-2.1
-4
-4.5
-6
08.I
08.II
08.III
Source: Central Bank of Chile
08.IV
09.I
09.II
09.III
09.IV
10.I
10.II
10.III
5
Monthly Economic Activity: Highly Dynamic
Highest monthly
growth rate
since July 1996
(IMACEC, annual % change)
10
Immediate
effect of the
earthquake
8
7.5
6.9
7.4
6.7
5.4
6
4
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2
0
-2
-2.2
-4
Source: Central Bank of Chile
Sep/10
Jul/10
May/10
Mar/10
Jan/10
Nov/09
Sep/09
Jul/09
May/09
Mar/09
Jan/09
Nov/08
Sep/08
Jul/08
May/08
Mar/08
Jan/08
-6
Strong Employment Creation
(annual employment growth, thousands, mobile quarters, May-Aug
2010)
700
Employment creation since January-March: 164.780
626.6
600
500
415.3
400
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300
200
100
0
-100
-200
Jul
May
Mar
Jan-10
Nov
Sep
Jul
May
Mar
Jan-09
Nov
Sep
Jul
May
Mar
Jan-08
Nov
Sep
Jul
May
Mar
Jan-07
Nov
Sep
Jul
May
Mar
Jan-06
Labor Force
Employment
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.
Source: INE
Inflation
(% change dec/dec)
10.0
7.8
8.0
7.1
6.0
4.5
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Average 2000-2009: 3.3%
3.9
3.7
4.0
3.2
2.8
2.6
2.6
2.4
2.0
1.1
0.0
-1.4
-2.0
2011 (f)
2010 (f)
2009
2008
2007
2006
2005
2004
2003
2002
2001
2000
Source: Central Bank of Chile, Monetary Policy Report, September 2010
Inflation: Total and Long range
(Variación % en 12 meses, septiembre)
12
Inflación Septiembre: 0.4%
10
Inflación en 12 meses: 1.9%
8
Inflación Acumulada 2010: 2.7%
6
MINISTRY OF FINANCE
4
2
1.9
1.5
0
-0.5
-2
IPC
Fuente: INE
IPC X
IPC X1
Jul
Abr
Ene-10
Oct
Jul
Abr
Ene-09
Oct
Jul
Abr
Ene-08
Oct
Jul
Abr
Ene-07
Oct
Jul
Abr
Ene-06
Oct
Jul
Abr
Ene-05
-4
0
Source: Eurostat, OECD, IMF and DIPRES
Greece
Ireland
United Kingdom
United States
Spain
Portugal
Iceland
Japan
France
Slovak Republic
Poland
Czech Republic
Italy
Finland
Chile
Belgium
Netherlands
Hungary
Austria
Luxembourg
Denmark
Germany
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Sweden
Fiscal Deficit During Global Recession
(Central Government, % of GDP, 2009)
16
14
12
10
8
6
4
2
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 About Chile: an Economic background
 Chile’s Reform
 How to be Re-elected?
The “old” Reform
MINISTRY OF FINANCE
• 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…
Chile´s Declining Macroeconomic Volatility
(average of four-quarter trailing standard deviation of GDP growth)
4
3.5
3
MINISTRY OF FINANCE
2.5
2
1.5
1
0.5
0
1981-1990
1991-2000
Source: Own elaboration based on Central Bank of Chile
2001-2009
Chile´s Very Favorable International
Credit Conditions
(Sovereign spread, July 12)
1400
1198
1200
1000
767
800
MINISTRY OF FINANCE
725
600
400
239
223
220
205
198
200
191
165
138
102
-9
-43
France
Germany
0
Source: JP Morgan and Bloomberg
Italy
Chile
Spain
Peru
Mexico
Colombia
Ireland
Brazil
Portugal
Greece
Argentina
Venezuela
-200
Source: Eurostat, OECD, IMF and DIPRES
0
Japan
Greece
Italy
Belgium
Iceland
Portugal
Hungary
France
United Kingdom
Ireland
Austria
Netherlands
United States
Poland
Spain
Germany
Finland
Sweden
Denmark
Slovak Republic
Czech Republic
Norway
Luxembourg
Chile
Public Debt Burden: A Comparison
(Gross Central Government Debt, % of GDP, 2009)
200
180
160
140
MINISTRY OF FINANCE
120
100
80
60
40
20
The Government of Chile:
A Net Creditor
(Central Government Debt, % of GDP)
48
42
36
30
24
MINISTRY OF FINANCE
18
12
6
0
-6
-12
-18
-24
2009
2008
2007
2006
2005
2004
2003
Net
2002
2001
Source: DIPRES
2000
1999
1998
1997
1996
1995
1994
1993
1992
1991
1990
Gross
Chile’s Economic and Social Stabilization
Fund (Sovereign Fund)
(billion dollars)
25
July 2010: 11.1
20.2
20
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15
14.0
11.3
10
5
0
2007
Source: DIPRES
2008
2009
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
MINISTRY OF FINANCE
• 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
Central Government Balance 1987-2009
(% of GDP)
10
8
After the
Structural
Balance Rule
Before the
Structural
Balance Rule
6
4
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2
0
-2
-4
-6
2009
2008
2007
2006
2005
Structural Balance
2004
2003
2002
2001
2000
1999
Source: DIPRES
1998
1997
1996
1995
1994
1993
1992
1991
1990
1989
1988
1987
Effective Balance
The “new” Reform
MINISTRY OF FINANCE
• 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
Modernization of the State
• Human Resources (Senior Public
Management (ADP) and Civil Service)
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• Evaluate new services to be
incorporated Review advertising and
requirements for applications to
increase turnout in contests
21
Reforming Chilean Administration
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• New State comission for the reform of
Public Administration.
• Delivery Unit to fulfill the Government
compromises
• New agency for the revision of Public
Policies
22
Strong reforms on Analisys:
Reform of the Corporate Governance for Public
Companies
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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
Bicentennial Market Capital Reform
Tax
MINISTRY OF FINANCE
Risks and
Financial
Stability
Institutional reform
Consumer
protection
Transparency and
information
Markets and new
financial models
Middle class and Small and middle Companies
Tax Incentives for R&D
•
MINISTRY OF FINANCE
•
•
•
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
25
MINISTRY OF FINANCE
 About Chile: an Economic background
 Chile’s Reform
 How to be Re-elected?
Chile choose to change
MINISTRY OF FINANCE
• 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.
GOVERNMENT PROGRAM
2010-2014
MINISTRY OF FINANCE
• 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
RECOVERY OF THE CAPACITY OF GROWTH
AND JOB CREATION OF CHILE
• Recover investment
 Accelerated depreciation
 Tax incentives for small businesses
 Reduce costs of bureaucracy
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• 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
Basic Principles
• Financing the government program does not
require tax increases
MINISTRY OF FINANCE
• A temporary tax increase is only needed to
finance about one third of the
reconstruction effort
Resources Needed for the Government
Program
Government Program: US$9.3 bn
Investment Incentives
5.3%
Others
6.8%
Poverty Alleviation
21.1%
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Fight to Crime and
Drug Dealing
5.3%
SMBs Support
27.6%
Health Improvement
10.1%
Quality of education
23.9%
Chile’s Road to Development by 2018
(GDP per capita, PPP)
45000
40000
35000
30000
MINISTRY OF FINANCE
By 2018
25000
22000
By 2028
20000
15000
14.341
10000
5000
Growing at 6%
Growing at 3%
US$ 22.000
2030
2029
2028
2027
2026
2025
2024
2023
2022
2021
2020
2019
2018
2017
2016
2015
2014
2013
2012
2011
2010
2009
0
High Economic Growth Expected in 2011
6.5
2009: -1.5%
6.0
6
5.8
5.7
5.5
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5
4.8
4.7
4.5
4.5
4
3.5
IMF
Consensus Forecast
2010
Source: IMF, Consensus Forecast and Central Bank of Chile
2011
Monthly Survey Expectations,
Central Bank of Chile
MINISTRY OF FINANCE
How to Reform and be Re-elected?
Chile’s Experience and
Future Challenges
Rodrigo Álvarez Zenteno
Undersecretary of Finance of Chile