Chile Plows Billions Into the Economy as Virus Threat Mounts

(Bloomberg) -- Chile’s government is pouring money into the economy, ditching its hard-won reputation for fiscal prudence as it tackles the dual impact of the coronavirus outbreak and months of social unrest.

President Sebastian Pinera announced an $11.75 billion stimulus package Thursday, the biggest in Chile’s history, as authorities close the borders, schools and universities to slow the spread of the disease. The package is equivalent to 4.7% of gross domestic product and will widen an already burgeoning fiscal deficit.

“It’s a robust plan to face very complex circumstances,” Pinera said in a televised speech. “The funds will allow the creation of jobs, protect existing ones and boost the income of those that are being affected the most.”

Chile joins a wave of fiscal stimulus measures worldwide as the global economy reels under the impact of the pandemic. Brazil has announced plans to spend an additional $30 billion and the U.S. is working on a $1.3 trillion plan. But with millions increasingly confined to home, any stimulus package will take months to have affect.

Social Unrest

Chile had 342 confirmed cases of coronavirus as of Wednesday, the most in Latin America after Brazil. There were 103 new infections registered yesterday alone, though there are no fatalities as yet.

Adding to Chile’s problems, the pandemic comes on top of disruption caused by months of social unrest.

The government announced plans late last year to spend an additional $5.5 billion after months of rioting led the economy to contract 2.1% in the fourth quarter from the year earlier. As a result, the fiscal deficit was forecast to reach 4.5% of GDP this year, the highest in more than a decade, even before today’s announcement.

Increased spending and lower tax revenue could now push the shortfall to as high as 7% of GDP, said Alejandro Fernandez, an economist at consultancy firm Gemines. That would be the biggest in at least 30 years. Fitch Ratings gave a negative outlook to Chile’s A rating on March 12.

Health-Care Spending

The fiscal package includes measures to boost health spending using a special clause in the constitution that allows the government to reallocate as much as 2% of the fiscal budget, Pinera said.

“A plan like this was absolutely necessary,” said Carolina Grunwald, chief economist at Banchile Inversiones. “It will certainly give breathing space for the people and the markets.”

The government will also allocate $2 billion to a special unemployment insurance fund, as well as the deferral of tax payments for companies that have annual sales of less than $12 million. State-owned Bancoestado will receive a capital injection of $500 million to fund loans to people and SMEs.

“Our goal is that a temporary shock, such as Covid-19, doesn’t have permanent effects on the economy,” Finance Minister Ignacio Briones said.

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