Presidential and congressional elections due in December are dominating the political scene. The ruling centre-left Concertación coalition will benefit in the elections from strong economic growth and from the popularity of the current president, Ricardo Lagos. The most likely Concertación candidate, Michelle Bachelet, is currently well ahead of the opposition Alianza candidate, Joaquín Lavín, in opinion polls. Legislative activity will slow as congressmen focus on re-election, but despite this the Economist Intelligence Unit expects macroeconomic management to remain essentially sound. After reaching 6.1% in 2004 on the back of improving terms of trade, GDP growth will slow gradually to 4.9% in 2006 as monetary policy is tightened and the external environment becomes less favourable. Monetary tightening will contain inflationary pressures, keeping 12-month inflation close to the mid-point of the 2-4% target range set by the Banco Central de Chile (the Central Bank) in the forecast period. The stability of the peso is set to be underpinned by continued growth in export earnings and sustained foreign direct investment inflows. The current account will move into deficit by 2006.
Key changes from last month
Ms Bachelet’s lead in the race to gain the Concertación presidential nomination remains wide. A primary is due in July, but there is a chance that Ms Bachelet’s rival, Soledad Alvear, will withdraw before then.
Economic policy outlook
The mining royalty is progressing through Congress. Its implementation is likely in the first half of 2005.
We have revised upwards our international oil-price forecast for 2005, to US$46 per barrel; the rise will heighten inflationary pressures.
SOURCE: EIU/ INFO-e