Chile’s Current-Account Crisis Overshadows Peso Intervention

Chile’s record current account deficit will keep the peso under pressure long after the central bank’s $25 billion intervention program is done and dusted, Bloomberg News reported. The deficit swelled to 8.5% of gross domestic product in the second quarter, the highest for at least two decades. That was roughly triple the year-earlier figure and represented $6.6 billion leaving the country in just three months. Not only is that rate of outflow unprecedented this century, it also comes at the worst possible moment as financing costs rise worldwide. With commodity prices subdued amid the threat of a global recession, the only way for Chile to narrow that gap without allowing the peso to slump is by slashing demand, and that means a recession -- potentially a deep one. “The deficit has reached levels that raise alarm bells,” said Sergio Lehmann, chief economist at Banco de Credito e Inversiones in Santiago. “Excessive spending in 2021, along with a significant reduction in household savings has led to a dangerous widening of the deficit, which should be corrected with urgency.” Read more.