April 14 (Bloomberg) -- Chile may turn to its sovereign wealth funds to finance the expansion of its state-owned copper company Codelco as metal prices and economic growth approach four-year lows and the budget deficit widens.
Gross domestic product will expand about 3.5 percent this year, Deputy Finance Minister Alejandro Micco said in an interview April 11, the first estimate by President Michelle Bachelet’s month-old government. As growth slows, the cyclically-adjusted budget gap will widen to 1 percent of GDP this year, from 0.7 percent in 2013, central bank chief Rodrigo Vergara said in a prepared statement at the Spring Meeting of the International Monetary Fund, which Micco attended.
“This government believes in a stronger Codelco, which requires more investments,” Micco said in Washington. “If it didn’t want to go to the market to raise money, we could do it with our sovereign funds.”
The comments are the strongest signal since Bachelet assumed power that she will back Codelco’s investment program that requires more than $20 billion to increase output by about 10 percent this decade, ensuring Codelco’s title as the world’s biggest copper miner. Without the investments, output would fall by more than half, Chief Executive Officer Thomas Keller said in an April 7 interview.
Codelco, based in Santiago, invested more than $4 billion in each of the past two years under the previous administration of President Sebastian Pinera, using a mixture of bonds and reinvested profit.
Chile’s offshore wealth funds held $23 billion at the end of February, according to the Finance Ministry’s website.
Micco said the government is committed to carrying out Codelco’s large-scale investments at the Chuquicamata and El Teniente mines, both of which are more than a century old. Bachelet and Finance Minister Alberto Arenas have until June 30 to approve or revise Codelco’s investment plan, which is submitted by the board each March.
Copper futures have fallen 11 percent this year with the contract for May delivery closing at $3.0415 per pound on Friday on the Comex in New York. Prices reached $2.877 on March 19, the lowest since July 2010.
Keller, a former managing partner for Latin America at Toronto-based Brookfield Asset Management Inc., publicly criticized Codelco’s funding constraints last year as he battled to obtain financing to carry out the projects.
Chile’s GDP expanded 2.7 percent in the fourth quarter from the year earlier, the slowest pace in almost four years, as a weaker outlook for China damped an investment boom in Chile’s copper industry. Central bank Governor Vergara said in Washington on April 1 that China and not the U.S. Federal Reserve’s tapering was a risk to Chile.
“We are thinking of growth of about 3.5 percent” this year, Micco said. Still, “this economy is going from less to more.”
Plans to implement instantaneous depreciation on capital goods for a period of 12 months for large companies would encourage companies to bring forward investments that had been planned for the next three years, he said.
The previous government had estimated growth for this year of 4.9 percent and has blamed Bachelet’s proposals to raise taxes by 3 percentage points of GDP for a slowdown in investment.
Finance Minister Arenas has said that the 4.9 percent forecast is too high, without giving his own estimate. The central bank is forecasting growth of 3 percent to 4 percent.
The government could change some details of the tax proposal it sent to Congress earlier this month without altering the substance of the bill, Micco said. The plan to increase tax income by 3 percentage points of GDP is not debatable, he said.
“Can things be changed? Yes, a few issues have arisen,” Micco said. “Change the amount to be raised? No.”
Among the proposals that could be revised are the increased powers for the tax authorities, he said.
Inflation that accelerated to 3.5 percent in the year through March, the fastest pace in two years, was due to external shocks and did not represent a concern, Micco said. Inflation has accelerated from 1.5 percent in October following a 9.3 percent depreciation of the peso against the dollar in the past six months.
Still, analysts are forecasting that inflation will end the year at 3 percent, the mid-point of the 2 percent to 4 percent target range, according to the median estimate of analysts surveyed by Bloomberg.
“Inflation has not become un-anchored,” Micco said. “The economy is clearly growing below potential.”