February 20, 2014 / 6:52 PM / 4 years ago

Chile finance minister says recent peso depreciation 'healthy'

SANTIAGO (Reuters) - A recent weakening of Chile’s peso currency is “healthy,” and the copper exporter’s economy is among the best-placed among the emerging markets to face a withdrawal of stimulus by the U.S. Federal Reserve, Finance Minister Felipe Larrain said in an interview on Thursday.

Chile's Finance Minister Felipe Larrain attends an interview with Reuters in London, September 11, 2013. REUTERS/Simon Newman

Chile, along with other emerging market economies, has seen the value of its currency depreciate significantly against the dollar in recent weeks.

It has fallen over 5 percent against the dollar so far in 2014, compared to a fall of 9 percent in all of last year.

Reduced bond buying by the Fed, which has led to fears of liquidity drying up for emerging markets, as well as a slide in the price of copper last year have weighed on the peso, Larrain said.

“We regard this as a healthy depreciation of the currency because it restores and improves the competitiveness of our export sector and (encourages) efficient import substitution,” he told Reuters in an interview at the Finance Ministry in downtown Santiago.

“This is a free-floating rate determined according to market forces,” he said.

While Chile was “not immune” to the effects of Fed withdrawal, Larrain noted that it was in a good position.

“I’m very confident that this economy has the strength to absorb the tapering better than most countries,” he said. “We have a very strong economy and we have very strong fundamentals, strong institutions, good fiscal numbers, but of course we’re part of this world economy.”

Chile’s current account deficit, which the central bank estimates will be 3.2 percent of gross domestic product in 2013 and 3.7 percent in 2014, has been identified as a chink in the economy’s armor by some economists.

But the deficit will probably fall this year, Larrain said.

“If we have a deceleration of investment ... well that’s going to result in a lower current account deficit. All the rest being equal, a deceleration of investment results in this so I would doubt that this (3.7 percent) would be the number, it probably would be less,” he said.

The central bank has said in recent months that deceleration in investment in Chile has been stronger than initially expected, weighing on economic growth.

END OF TERM NEARING

Larrain’s term as finance minister has almost come to an end with Alberto Arenas, chosen by incoming President-elect Michelle Bachelet, due to replace him on March 11.

Surrounded by moving boxes, a smiling and relaxed Larrain, who has a doctorate in economics from Harvard, said he was looking forward to returning to the less constrained atmosphere of academia.

Chile’s Finance Ministry only releases growth predictions twice a year, but Larrain hinted that were he to give an estimate now, it would probably be different than his forecast in September of 4.5 percent growth in 2013 and 4.9 percent in 2014.

“I probably will do it (adjust growth forecasts) when I’m in a different position, but not as finance minister. We adjust twice a year, that’s the official thing.”

“We did it in September, at a moment when everyone was forecasting 4.5. The world economy was going to do better,” he added.

Chile’s economic activity grew at its slowest pace in 2-1/2 years in December, bringing output growth for full-year 2013 to 4.0 percent. That compares to economic growth of 5.6 percent in 2012.

One of Larrain’s “dearest” projects has been a new law to encourage foreign investment in Chile’s fixed-income markets. The law seeks to simplify regulations and grant tax breaks to international investors.

Larrain believes that take-up among investors will be fast and that foreign participation in Chile’s fixed-income market, currently around 1 percent, “will go in the direction of equities,” where foreigners own around 35 percent of local shares.

The bill has been passed into law, but final administrative tasks mean that it has not yet come into effect. Larrain said he was hopeful that would happen before the end of February.

“Of course we want to do it before we leave,” he said.

Editing by Kieran Murray, Andrew Hay and G Crosse

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