Spending or saving ?: Piñera’s dilemma with the rise in the price of copper

“La Moneda” must decide whether the extra income from the rise in the price of the metal will be used to boost the recovery OR to ease the fiscal coffers.

In 2005, copper, for the first time in history, exceeded US $ 2 a pound. It was the beginning of the super cycle of commodities that lasted for just over 10 years and that delivered considerable resources to the State. Resources that have now been used to contain the economic crisis caused by covid-19. And, when in the middle of what is expected to be a recovery that will take time, once again the price of copper is skyrocketing, surpassing US $ 3.5 a pound (the long-term reference price used in the 2021 budget was US $ 2.88). Although there are discrepancies among experts about how long the current boom will last, there is a coincidence that at least for the next year the price will remain high. This is an injection of resources that presents a dilemma for La Moneda: should the higher revenue be used to boost the recovery or save and contain the growth of the fiscal debt?

Reasons for the hike

The factors driving the price of copper are several.

In the short term, explains Juan Carlos Guajardo, Executive Director of Plusmining, the stimulus packages have influenced, which have led investors to buy commodities, together with the low supply and higher demand from China, a country that, due to its strong economic recovery, adds a focus on internal development.

Long-term elements add up. The development of renewable energy and electromobility will lead to an increase in the demand for copper. But, in the opinion of Claudio Valencia, CEO of 1st Quartile Mining, we must be cautious. “Do not think that a super cycle is coming,” he warns. He says that although there are variables that show a high price, a greater supply could be generated in the coming years, limiting the rise.

Regardless of how long the copper lasts above US $ 3.5, the projections for 2021 and 2022 speak of a high price and that is synonymous with greater resources for the State. Ten cents of higher average annual prices imply about US $ 250 million in higher tax revenues, explains Hermann González, a researcher at Clapes UC. “The price has fluctuated around US $ 3.5 a pound and, if it were to stay at that level next year, it would generate US $ 1.5 billion in higher revenues. In the scenario projected by the Central Bank (US $ 3.2), the highest income would be between US $ 750 and US $ 800 million ”, he adds.

“It will be an injection of resources for the State,” says Guajardo. “But we have to know how to handle them,” he warns. And a high copper price is no longer as powerful an injection as it was in the boom years. “The cost of producing is not the same as before. The enormous profits that the mining companies had in the boom cycle are not going to be repeated with similar prices now, ”warns Patricio Meller, a researcher at Cieplan. And the profits are what define how much the State collects.

Spend or save?

With more resources for the treasury, President Piñera faces a dilemma: take advantage of those resources to spend more and finish promoting the recovery or, rather, take those resources as a way to contain the debt. Economists who passed through Teatinos 120 and advisers to presidential candidates, who will have to face this dilemma in the elaboration of their government programs, differ on what should be done with the injection of resources.

Rafael Aldunate, part of the group of 16 economists summoned by the Government on behalf of RN, when Mario Desbordes was president of the party, believes that it is necessary to focus on the fact that the debt as a percentage of GDP does not exceed 45% in 2024. “Al pace we are going will be difficult, “he admits. This, due to the increase in public spending and social demands. “A vital factor is to recover the dollar reserves that we had from the Copper Stabilization Fund,” says Aldunate.

Hermann González agrees, who believes that the 2021 Budget is expansive and flexible enough to react to contingencies, so it should not increase spending. “In the event that additional resources arrive, they would allow us to reduce the fiscal deficit,” he says.

For the former Minister of Finance, Rodrigo Valdés, there are two clear limits on the use of resources that come from copper. “(The Government) has to apply the fiscal rule that it announced. Part of the increase in copper prices will be spent. Another part will be saved, which will allow the deficit to be reduced ”, he says. And to that is added the ceiling of US $ 12,000 million agreed between the Government and the opposition. “It must be respected, unless we have major news that warrants changing, again, the fiscal rule,” he adds.

“Copper has the advantage that it generates less debt pressure,” says Alejandro Micco, former Undersecretary of Finance. But he does not believe that the US $ 12 billion limit is still in effect. “You have to make a bigger effort,” he says. “The situation has been bad for a longer period than expected. Employment has not recovered as in other countries. It is worth injecting resources to recover employment with incentives for hiring and public works, especially local ones ”.

“Without a doubt, the resources that come from copper must be used to stimulate the economy,” says Álvaro García, former minister of Segegob and advisor to Heraldo Muñoz, who will participate in the PPD primary. “The pandemic has been prolonged and the possibility that it will continue is greater than when the US $ 12 billion was calculated. It cannot continue to happen that people finance the cost of the pandemic with their savings, “he adds. He says that he doesn’t think the level of debt is relevant now. “It is a medium to long-term challenge and can only be solved with a tax reform,” he says.

Fernando Carmona, a member of the central committee of the PC and advisor to the party’s presidential candidate, Daniel Jadue, has the same vision. “All the reports from international organizations say that the debt in Chile is low. The country should borrow more now to address the crisis and there is room for cheap debt, “he adds. He believes that a debt ceiling is around 50% of GDP.
“If we also have a high copper price, it is good news, we have temporary resources for an increase in temporary spending.” Carmona believes that the US $ 12 billion fund should be increased and that this is not the time to think about the fiscal rule. “Seeking to comply with the fiscal rule in one of the main crises in history is a bit absurd, it is not realizing the problem we have,” he warns.

Source: La Segunda

Translated with Google Translator