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Boston, MA -- (SBWire) -- 08/27/2013 --We continue to expect that 2013 will see a shift in the Chilean economy, and we forecast real GDP growth to fall from 5.6% in 2012 to just 4.3% this year and average 4.2% from 2014-2017, below consensus estimates. This slowdown in growth is attributable to decelerating economic activity in China, which over the next several years will result in weakening real demand for Chilean copper exports and reduced investment into the country's mining sector.

Declining external demand for Chilean mining exports has already seen a shift into current account shortfalls, which we expect to remain in place over our 10-year forecast period. Weakening Chinese demand for copper and an already disappointing performance in Q113 mean that we see the current account shortfall widening to 3.7% of GDP in 2013, up from 3.5% in 2012.

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We expect the Banco Central de Chile (BCC) will begin monetary easing in H213, cutting rates from 5.00% to 4.50% by end-2013 and 4.00% by end-2014, as a slowing Chinese economy weighs on Chile's exports and drags on GDP. We believe low consumer price inflation gives the BCC plenty of room to cut, and see both supply- and demand-side price pressure remaining subdued over the medium term.

With the return of former president Michelle Bachelet as its standard bearer, we expect the Concertacion de Partidos por la Democracia (CPD) to win Chile's upcoming presidential election in November, paving the way for a return of a centre-left government. We anticipate income distribution and education to feature prominently throughout the election campaign.

Although we broadly expect Chile to remain a model of fiscal rectitude in Latin America over the next several years, we expect spending increases to exceed revenue growth over the medium term on account of the expected election of a centre-left government. While we maintain our forecast for a slight increase in Chile's nominal budget surplus to 0.5% of GDP in 2013, from an estimated 0.4% in 2012, we have revised down our forecasts beyond this year, with our view now being that the budget balance will move into the red in 2014 and 2015.

Major Forecast Changes

While we have long forecast that a sell-off in Latin American FX would materialise during H213 given slowing demand from China, the fact that this development began to take shape in May has led us to revise down our 2013 exchange rate forecast. We now forecast the currency to average CLP484.00/US$ this year, from CLP477.50/ US$ previously, but maintain our forecast for an average exchange rate of CLP492.00/US$ for 2014.

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