Boston, MA -- (SBWIRE) -- 03/14/2013 -- Core Views

Despite interest rate futures pricing in a rate hike in 2013, we maintain our view that the Banco Central de Chile (BCC) will cut its monetary policy rate from 5.00% to 4.50% this year. While we acknowledge that risks to this view are growing, we continue to believe inflation fears will prove overstated as Chilean economic activity weakens over the next several quarters.

We expect that Chile's fiscal position to remain broadly stable over the next few years. While weaker copper export growth and a slight spending increase will see smaller operating surpluses, leading to net budget deficits of 0.1% and 0.8% of GDP in 2013 and 2014 respectively, Chile's external public debt burden remains low enough to absorb this additional spending with ease.

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A cyclical upswing in the Chinese economy has buoyed metals prices and seen the Chilean peso approach long-term resistance. We believe fundamentals will keep the peso near this level for much of Q213, but expect the potential for central bank intervention to keep the currency from appreciating much beyond its current levels, with the peso averaging CLP472.00/US$ over the short term.

We believe Chile's external account position is undergoing a multiyear period of rebalancing, as weaker external demand owing to a slowing Chinese economy results in the current account deficit widening to 2.8% of GDP in 2013 from our estimate of 2.5% of GDP in 2012. We maintain that favourable investor sentiment, sizeable international assets, and substantial foreign reserves will keep the balance of payments position relatively stable over the forecast period.

Chile's ruling Coalicion por el Cambio (CPC) has settled on two potential candidates for the November-December 2013 presidential election, and we believe that either could mount a strong campaign. While the entry of highly regarded former president Michelle Bachelet or the already declared third-party campaign of Marco Enriquez- Ominami could complicate the CPC's efforts, we doubt that the election will lead to elevated political risk or significantly alter Chile's fairly orthodox policy course.

Major Forecast Changes

An uptick in Chinese economic activity led to a surge in Chilean economic activity in Q412 that we believe will continue through H113. As a result, we have raised our estimate for 2012 real GDP growth from 5.1% to 5.3% and our forecast for 2013 growth from 4.0% to 4.2%. However, we continue to believe that the next several years will see Chilean real GDP growth trend lower as Chinese copper demand growth remains sluggish, weighing on Chilean exports and investment.

Key Risks To Outlook

Upside Risks To Real GDP Growth Outlook: Despite weakening copper exports, if private consumption growth should remain strong, real GDP growth could exceed our real GDP growth forecast of 4.2% in 2013 and 4.6% in 2014.

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