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Chile Government Unveils Stimulus Package as Economy Slumps

John Quigley and Philip Sanders
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Chile Government Unveils Stimulus Package as Economy Slumps

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Chile’s government announced a $5.5 billion stimulus package as the economy contracted at the fastest pace since at least 1996 following weeks of riots and protests.

The spending program will help create 100,000 jobs next year, Finance Minister Ignacio Briones said at a press conference from the presidential palace late Monday. President Sebastian Pinera followed up on Tuesday with a plan to make a 100,000-peso ($125) one-time payment to 1.3 million families.

“These measures are on the whole transitory and designed to create jobs both directly and indirectly through public investment and support for smaller companies,” Briones said.

The announcement came hours after the central bank reported that the Imacec index, a proxy for gross domestic product, tumbled 5.4% in October from the month before. Violent protests that broke out on Oct. 18 have forced the closure of shops, paralyzed much of the public transport system and led many people to cut short their working hours. Business confidence has nosedived, while retail sales slumped 12.1% in October from the year earlier, the statistics agency said Tuesday.

What is remarkable is that October’s Imacec decline was even bigger than the 4.1% drop in March 2010 that followed an earthquake and tsunami which devastated much of the center-south of the country. The quake was the sixth biggest ever recorded in the world, killed more than 500 people and knocked out electricity to 93% of the population.

“The collapse of economic activity in the second half of October was in the order of 10%,” Sebastian Cerda, head of research at Econsult Capital, told the Pauta Bloomberg radio show. “This is much worse than the collapse after the earthquake.”

Fiscal Cost

Digging Chile out of this mess won’t come cheaply. Government spending will rise 9.8% next year, the biggest increase in a decade, pushing the fiscal deficit to 4.4% of gross domestic product.

The fiscal debt won’t stabilize until 2024 at about 38% of GDP, Briones said.

“There is a great effort being made, not only by the government, but also by the opposition,” the minister told Infinita radio Tuesday. “A lot has been done, and that marks a change in direction.”

Monday’s announcement came with a quid pro quo. Interior Minister Gonzalo Blumel called on everyone to categorically condemn the recent violence, pledged more police on the streets and backed the security forces despite allegations of human rights violations.

The spending package will only work if the violence stops, he said.

Chile’s central bank has brought forward its next monetary policy decision by two days to Dec. 4 to provide “timely information” about the economy following weeks of unrest.

Chile Brings Forward Rate Decision as Social Unrest Hits Economy

Interest-rate swaps currently show less than 50% chance of another rate cut, after the central bank lowered its key policy rate to 1.75% in prior months.

No Bounce Back

Despite the human and physical cost of the 2010 earthquake, the economy bounded back in April as the country started to rebuild. That is unlikely to be the case now.

“The reality is that we are going to have two quarter of consecutive declines,” Cerda said.

October’s month-on-month decline in the Imacec was the biggest since at least 1996, while the year-on-year drop of 3.4% was the largest in a decade.

The central bank cited declines in manufacturing as well as a range of services including education, transportation, restaurants and hotels. Excluding mining, economic activity fell 4% in October from a year prior, also the biggest decline on record.

(Updates with family bonus payment in the second paragraph)

--With assistance from Javiera Baeza and Rafael Mendes.

To contact the reporters on this story: John Quigley in Lima at jquigley8@bloomberg.net;Philip Sanders in Santiago at psanders@bloomberg.net

To contact the editors responsible for this story: Walter Brandimarte at wbrandimarte@bloomberg.net, Matthew Malinowski, James Attwood

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