Rodrigo Valdés, finance minister
Rodrigo Valdés, finance minister

Chile’s economic recovery is faltering as business confidence is undermined by President Michelle Bachelet’s reform programme and a political crisis triggered by corruption scandals.

The government announced an abrupt downward revision in economic growth estimates to 2.5 per cent for 2015 on Monday, having initially predicted 3.6 per cent in this year’s budget. Growth of 1.9 per cent in 2014 was the lowest since the global financial crisis erupted.

“The good news is that we are reacting as a country, putting growth back at the centre of the agenda,” said Rodrigo Valdés, the finance minister, in an interview with the Financial Times. He argued that Chile’s economy has turned the corner after implementing a significant macroeconomic adjustment to clear the way for stronger growth.

“Without growth it will be impossible to implement the reform programme,” said Mr Valdés, whose appointment in a cabinet reshuffle in May was seen as an attempt to restore confidence in the economy of the world’s top copper producer which has also been hit by falling commodity prices.

Ms Bachelet’s reform programme, which is aimed at tackling inequality by improving access to quality education, has suffered as attention has been diverted by several corruption scandals this year. One of the biggest victims has been Ms Bachelet herself, after her own son caused an uproar for allegedly abusing his privileged position to secure a bank loan.

That only quickened the slide in Ms Bachelet’s popularity, which has also been hit by discontent over Chile’s sluggish economy. Her approval ratings reached a new low of 27 per cent in June according to local pollster Adimark, after declining from 54 per cent at the beginning of her second presidential term over a year ago.

Mr Valdés admitted that the political crisis has taken a toll on the economy, but played down fears that Chile’s economic woes might in turn hold back Ms Bachelet’s ambitious reform agenda.

“Chile has a tradition of being sensible. We will be capable of taking the necessary decisions to escape this [vicious] circle, in which politics contaminate economics, and economics contaminate politics,” he said.

A key step in that process is improving relations with the business sector, which was a vocal critic of a big rise in corporate taxes last year to fund increased spending on education. Businesses have also been deeply unnerved by plans to initiate a constitutional reform process in September, as well as a labour reform bill being discussed by the senate that would give greater power to trade unions.

“We need to strengthen dialogue to understand each other better,” said Mr Valdés, a respected MIT-educated economist who has worked at the International Monetary Fund. “Through dialogue it will be possible to boost confidence,” he added.

The picture on this article replaces an earlier, incorrect, photo.

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