ALEJANDRO MICCO A Undersecretary of Finance Macroeconomic Outlook

ALEJANDRO MICCO A. Undersecretary of Finance Macroeconomic Outlook BALAS April 07 th 2017 1

MINISTERIO DE HACIENDA. GOBIERNO DE CHILE Outline 1. Macroeconomic Framework 2. Fiscal Policy 3. Productivity and Potential Growth

MINISTERIO DE HACIENDA. GOBIERNO DE CHILE Outline 1. Macroeconomic Framework 2. Fiscal Policy 3. Productivity and Potential Growth

MINISTERIO DE HACIENDA. GOBIERNO DE CHILE Chile at a glance 1990 2015 756. 626 Total Surface area (sq. Km) Population (million people) 13, 2 17, 8 GDP (US$ billion) 32, 6 240, 2 GDP per capita PPP (US$) 5. 847 23. 460 GDP Growth 3, 40% 2, 1% GDP Growth forecast 2016 1. 25 - 2. 15% Poverty (% of population) 38, 6 14, 4 Gini coefficient 0, 56 0, 49 Source: Central Bank, IMF, National Statistic Office , Ministry of Social Development. 4

MINISTERIO DE HACIENDA. GOBIERNO DE CHILE Chile an Open Economy Trade Agreements: : 25 – 64 countries – 86% of world GDP NAFTA – EU – China – Japan – TPP 5

MINISTERIO DE HACIENDA. GOBIERNO DE CHILE Chile an Open Economy Double Taxation Avoidance Agreements (DTAA ) 79% 6

MINISTERIO DE HACIENDA. GOBIERNO DE CHILE Chile a Sound Economy • Independent Central Bank • Inflation Targeting • Fiscal Rule • Structural Income • Independent Committees defines LT GDP growth and LT Price of copper • Sound Regulatory System Global Competitiveness Index (Rank 2015) • Soundness of banks: 11 / 144 • Regulation of securities exchanges 23 / 144 • Financial market development 19 / 144

MINISTERIO DE HACIENDA. GOBIERNO DE CHILE GDP Growth - Exports (Yo. Y, percentage) 20. 0 15. 0 10. 0 5. 0 0. 0 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016 -5. 0 -10. 0 GDP Source: Central Bank of Chile EXP 8

MINISTERIO DE HACIENDA. GOBIERNO DE CHILE International Backdrop Price of Commodities and Copper (Index 2005=100, USD/lb) 250 5 200 4 150 3 100 2 50 1 0 0 Jan. 02 Jan. 03 Jan. 04 Jan. 05 Jan. 06 Jan. 07 Jan. 08 Jan. 09 Jan. 10 Jan. 11 Jan. 12 Jan. 13 Jan. 14 Jan. 15 Jan. 16 Jan. 17 Commodities Source: Central Bank of Chile and IFM Price of Copper (right axis) 9

MINISTERIO DE HACIENDA. GOBIERNO DE CHILE International Backrop World trade growth Commercial Policy G 20 members (Yo. Y rolling quarter, percentage) (Number of actions affecting trade) 20 400 15 350 10 300 5 250 0 200 -5 150 -10 100 -15 50 -20 2002 0 2004 2006 2008 2010 2012 2014 2016 2009 2010 2011 2012 Liberalizers Fuente: WTO, Global Trade Alert, CEPR Note: Global Trade Alert provides real-time information on state measures taken that are likely to affect foreign trade. In addition, it identifies trading partners likely to be harmed by these measures. 2013 2014 2015 2016 Protectionists 10

MINISTERIO DE HACIENDA. GOBIERNO DE CHILE GDP and imports of chilean trading partners (real Yo. Y, percentage) 20 15 10 5 1 20 5 16 * 20 14 20 13 20 12 20 11 20 10 20 09 20 08 20 07 20 06 20 05 20 04 20 03 20 02 20 01 20 00 20 99 19 98 19 97 96 19 -5 19 19 95 0 -15 GDP Imports Source: WTO, World Bank y Bloomberg. Nota: 2016 estimated with actual data up to the third quarter. Chinese imports estimated on the basis of nominal data. 11

MINISTERIO DE HACIENDA. GOBIERNO DE CHILE External Adjustment Real exchange rate Current account deficit (Pesos of February 2016) (Percentage of GDP) 780 760 740 720 700 680 660 640 620 600 580 2002 2004 TCR 2006 2008 2010 Promedio 2002 -2016 2012 2014 2016 Promedio 2006 -2016 Source: Central Bank of Chile and central banks of each country. 12

MINISTERIO DE HACIENDA. GOBIERNO DE CHILE Monetary Policy, Inflation and Exchange Rate 13

MINISTERIO DE HACIENDA. GOBIERNO DE CHILE Real Exchange Rate (local currency/dollar, index january 2015=100) Source: Central banks of each country 14

MINISTERIO DE HACIENDA. GOBIERNO DE CHILE Non-mining GDP Chile and Peru (Real Yo. Y, percentage) 10 8 6 4 2 0 -2 2009 2010 2011 2012 Chile Source: Central Bank of Chile, INEI Perú 2013 2014 2015 2016 Perú 15

MINISTERIO DE HACIENDA. GOBIERNO DE CHILE Outline 1. Macroeconomic Framework 2. Fiscal Policy 3. Productivity and Potential Growth

MINISTERIO DE HACIENDA. GOBIERNO DE CHILE Fundamental principles of fiscal policy • Permanent expenditures must be financed with permanent incomes • Social policy • Tax Revenues • Efficient –Focalized- and Transparent spending • Fiscal Responsibility law (2007) • Transparency law (2016)

MINISTERIO DE HACIENDA. GOBIERNO DE CHILE Fiscal Balance Central Government Balance (% GDP) 10 8 6 4 2 0 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 -2. 2 -2 -2. 8 -1. 1 -1. 9 -4 -6 Real Balance Fuente: Budget Office Balance without Tax Reform 18

MINISTERIO DE HACIENDA. GOBIERNO DE CHILE Tax Reform 2014 and Fiscal Balance Additional Collection • The Law N° 20. 780 of the Tax Reform (september 2014) and the Law N° 20. 899 Simplifications of the Tax Reform (february 2016) has the following objetives: (% of GDP) 3. 50% 3. 02% 3. 00% 2. 29% 2. 50% 1. 82% 2. 00% 1. 50% 0. 94% 1. 00% Ø Increase the tax burden by 3% of GDP, to finance permanent expenses with new permanent revenues. Ø Advance on tax equity by improving income distribution. Ø Introduce more efficient savings and investment incentives. Ø Reduce evasion and avoidance. 0. 50% 0. 29% 0. 00% 2014 2015 2016 2017 Taxes rate according to regime 29% 27. 00% 25. 50% 25% 24. 00% 23% 21% 2018 25. 00% 22. 50% 25. 00% 21. 00% 19% 17% 15% 2014 2015 2016 Semi integrado 2017 2018 Integrado 2019 19

MINISTERIO DE HACIENDA. GOBIERNO DE CHILE Fiscal Revenues Fiscal revenues (Percentage of GDP) 25 20 4. 2 4. 4 3. 0 15 3. 4 3. 0 2. 1 3. 2 1. 9 3. 1 0. 3 1. 3 0. 3 3. 2 2. 9 10 2011 15. 5 14. 2 Non-Mining tax revenue Source: Budget Office 2012 2013 16. 1 15. 7 Other revenue 2014 15. 6 Mining revenue 2015 16. 4 Note: Others Provisional tax, donations, property income, operating income, others income and sale of fixed assets 2016 17. 2 Capital registry 20

MINISTERIO DE HACIENDA. GOBIERNO DE CHILE Net tax revenue of the Central Government 2016 % total Real Yo. Y (%) 1. Income Taxes 39, 4% -5, 8% Private mining 0, 0% -99, 1% Others Taxpayers 39, 4% 5, 7% 2. Value Added Tax 48, 5% 2, 1% 3. Taxes on specific products 8, 7% 2, 1% Tobacco and cigarettes 3, 5% -1, 1% Fuels 5, 2% 4, 2% Rights of extraction of the fishing law 0, 0% 12, 6% 4. Stamp tax 1, 6% 62, 8% 5. Taxes of international trade 1, 1% -13, 4% 6. Others 0, 7% 168, 5% 100, 0% 0, 9% TOTAL TAX REVENUE Fuente: Budget Office 21

MINISTERIO DE HACIENDA. GOBIERNO DE CHILE Forecast Net Tax Revenue Budget Law 2017 (millons of pesos 2017 and % Yo. Y) Collection Forecast 2017 1. Income Taxes 12. 325. 069 Private Mining 630. 613 % Yo. Y 2017/ 2016 7, 7 235, 3 Others Taxpayers 11. 694. 457 -1, 8 2. Value Added Tax 14. 938. 993 4, 0 3. Taxes on specific products 2. 747. 409 3, 2 Tobacco and cigarettes 1. 058. 069 0, 3 Fuels 1. 679. 658 5, 1 9. 681 3, 5 4. Stamp Tax 542. 566 0, 2 5. Taxes of international trade 353. 501 6, 5 6. Others -62. 037 -119, 4 Rights of extraction of the fishing law TOTAL TAX REVENUE Fuente: Budget Office 30. 845. 501 4, 0 22

MINISTERIO DE HACIENDA. GOBIERNO DE CHILE Structural Consolidation (% of GDP) 0. 0% 2016 2017 2018 2019 2020 -0. 2% -0. 4% -0. 6% -0. 8% -1. 0% -1. 2% -1. 3% -1. 4% -1. 5% -1. 6% -1. 8% -1. 7% Note: Excludes extraordinary revenues from capital registry in 2015 and 2016. Source: Budget Office. 23

MINISTERIO DE HACIENDA. GOBIERNO DE CHILE Outline 1. Macroeconomic Framework 2. Fiscal Policy 3. Productivity and Potential Growth

MINISTERIO DE HACIENDA. GOBIERNO DE CHILE Productivity Enhancing Policies Productive diversification and innovation Energy policy State efficiency Better financing Education Infrastructure development and logistics Productivity Market competitiveness 25

MINISTERIO DE HACIENDA. GOBIERNO DE CHILE News Opportunities 26

MINISTERIO DE HACIENDA. GOBIERNO DE CHILE Global Trade in Goods and Services 45000000 6000000 40000000 5000000 30000000 4000000 25000000 3000000 20000000 15000000 2000000 1000000 5000000 0 19 95 19 96 19 97 19 98 19 99 20 00 20 01 20 02 20 03 20 04 20 05 20 06 20 07 20 08 20 09 20 10 20 11 20 12 20 13 20 14 20 15 20 16 * 0 Comercio de Bienes Comercio Otros Servicios Comerciales (eje derecho) 27

MINISTERIO DE HACIENDA. GOBIERNO DE CHILE Export of Services • Trade in goods have been flat post the 2008 crises • Trade in services have been increasing • In particular others services • Chile has comparative advantages

MINISTERIO DE HACIENDA. GOBIERNO DE CHILE Export of Services • Time Zone • Chile has comparative advantages • The highest educational coverage and quality in LAC. • • First in LAC in PISA ranking –Lecture, Math. , Sciences- 2 top ten Universities in LAC • The highest coverage of (No) Double Taxation Agreements. 62%-80% of world GDP. • The first or second best technological infrastructure in LAC (Uruguay)

MINISTERIO DE HACIENDA. GOBIERNO DE CHILE Education Enrolment ratio – pre escolar education (%) Performance of secondary students (PISA mean scores, 2015) 550 500 450 400 350 300 250 200 OECD Reading Chile Mathematics Latin America Science Note: The enrolment rate is expressed as a percentage of the official school-age population corresponding to the same level of education. The population used is between 0 and 4 years. Source: UNESCO Institute for Statistics and OCDE, PISA 2015. 30

MINISTERIO DE HACIENDA. GOBIERNO DE CHILE Education Public cost of the educational reform (Percentage of GDP) 1. 2 1 0. 8 0. 6 0. 4 0. 2 0 2015 2016 2017 Pre-School Primary-Secondary Education Tertiary Educational Career Source: Budget Office 31

MINISTERIO DE HACIENDA. GOBIERNO DE CHILE Education Public expenditure on pre-escolar education per child (Annual average, thousands pesos of 2016) • New institutions for quality and mandatory certification for establishments. • 19. 000 new vacancies created until now and goal of 76. 000 to 2018. 700 600 500 400 300 200 100 0 2006 -2009 2010 -2013 2014 -2017 Note: Average per child calculated on the population between 0 and 4 years. Source: Budget Office and INE. 32

MINISTERIO DE HACIENDA. GOBIERNO DE CHILE Education Public expenditure on educational career (Percentage of GDP) 1. 2 • Effectiveness in classroom depends on attract the best people to teach and encourage their improvements. • To improve salaries and working conditions that recognize work outside the classroom. 1. 0 0. 8 0. 6 0. 4 0. 2 0. 0 2015 2016 Source: Budget Office 2017 2018 2019 Régimen 33

MINISTERIO DE HACIENDA. GOBIERNO DE CHILE Education Advances in Tertiary Education and boost Technical Education Coverage: • • 15 New Technical Centers Two new regional universities, O’Higgins and Aysén. Financing • 220. 000 students without fees and 140. 000 students with scholarship “Nuevo Milenio” for 2017, ensuring access to tertiary education to the 50% most vulnerable of the population. Nota: Number of beneficiaries corresponds to the last estimate of allocations according to MINEDUC. 34

ALEJANDRO MICCO A. Undersecretary of Finance Thank you April 07 th 2017 35