After the Chilean current account went from a surplus of 2.6% of GDP to a deficit of 3% in less than two years, the rapid deterioration in the country’s current account balance has attracted much attention, becoming the main focus of recent policy debates. In light of this recent concern shared by policymakers, author George Lei of Nomura asks whether the deficit should represent such a worry given that external vulnerabilities could destabilize the economy, and examines whether the deficit could be adequately financed. Lei points out that the current account imbalance is being driven by strong domestic investment, particularly capital goods, owing to the boom in construction. For now, he concludes that the deficit itself does not signify a huge cause for concern, but points out that this shortfall does expose a key internal vulnerability of Chile’s economy, that of excessive investment growth (particularly in construction) from which experiences in the US, Spain and Ireland indicate a hard landing ahead.
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