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TO RUEHC/SECSTATE WASHDC IMMEDIATE 3966
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UNCLAS SANTIAGO 001011
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STATE PLEASE PASS TO FEDERAL RESERVE TOM CONNORS
TREASURY FOR SSENICH
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E.O. 12958: N/A
TAGS: ECON EFIN ETRD EINV ECIN PGOV PREL CI
SUBJECT: CHILE: ECONOMIC HIGHLIGHTS WEEK OF NOVEMBER 10
REFS: SANTIAGO 989 AND PREVIOUS
1. SUMMARY: This continues a series of regular updates on major
developments in Chile's economy since the acceleration of global
financial turmoil. By week's end, November 14, there was a slight
decrease in copper prices and relative stability in the exchange
rate and stock market. Fitch Ratings reduced Chile's credit rating
to "stable." The Central Bank maintained interest rates at their
current level, revised many economic projections downward, and
injected more liquidity in the banking system. Private pension
funds reported further losses. Consumer confidence fell. Figures
were released on mergers and acquisitions. Chile fell in the
rankings for the "Paying Taxes 2009" report. END SUMMARY.
Copper Prices Decrease
----------------------
2. Copper prices on the London Metals Exchange decreased November
14, closing the week at $1.68/pound, down almost 2% from their close
on November 7.
Chilean Peso Remains Relatively Stable
--------------------------------------
3. On November 14, the exchange rate closed at 637 Chilean Pesos to
1 U.S. Dollar (practically the same level as its close on November
7).
A Stable Week For The Stock Market
----------------------------------
4. The IPSA closed at 2550.91 points on November 14, down less than
1% on the close of November 7.
Fitch Reduces Chile's Credit Rating to "Stable"
--------------------------------------------- --
5. On November 10, Fitch Ratings announced a change in Chile's
credit rating, from "positive" to "stable." Chile's long-term
foreign currency Issuer Default Rating (IDR) was set at "A" and its
long-term local currency IDR was set at "A+" ("AAA" is Fitch's top
rating). Fitch justified the decision noting a global recession
would disproportionately impact Chile's small economy and the
decline in commodity prices would hurt its external liquidity
position. Fitch believed Chile's macroeconomic policies, fiscal
management, and flexible exchange rate would help it absorb shocks.
Central Bank Keeps Rates Steady, Revises Forecast
--------------------------------------------- ----
6. In its monthly meeting, November 13, the Board of the Central
Bank of Chile decided to maintain the monetary policy interest rate
at 8.25% annually (unchanged from the previous two months). The
Central Bank also committed to reduce inflation to 3% over the
policy horizon. In October, inflation was high (0.9% for the month,
9.9% annualized) and various measures of core inflation remained
elevated. Wage dynamics continue to be in line with historical
patterns and medium-term inflation expectations have fallen.
7. The Central Bank also unexpectedly revised its key economic
projections downward for 2009. GDP growth was forecast at 4% - 4.5%
in 2008 (down from 4.5% - 5%) and between 2% and 3% in 2009 (down
from 3.5% - 4.5%). The price of copper was projected at an annual
average of $1.65/pound for 2009 (down significantly from
$3.10/pound). Inflation was predicted to fall to 4% in 2009 (down
from the previous projection of 4.9%).
Central Bank Offers More Liquidity
----------------------------------
8. On November 11, the Central Bank, acting as Fiscal Agent for the
Ministry of Finance, announced another step designed to inject more
liquidity in the country's banking system. The Bank began a
seasonal surplus investment program in U.S. dollars through auction
of 91-day deposits in winning institutions. The process was opened
to all banking institutions or branches of international banks
operating in Chile. On November 12, the Central Bank opened the
bidding process for the first $350 million. Local banks acquired
94.8% of the total amount offered, or $332 million, at LIBOR + 327
basis points. There will be a second auction on November 19 for
$350 million.
Private Pension Funds See Further Losses
----------------------------------------
9. The global financial turmoil took its toll on Chile's private
pension fund system in October. The riskiest "A Fund," which
invests primarily in equities, lost 21.3% of its value (after a loss
in September). The pension fund system as whole was valued at more
than $69 billion at the end of October, almost a 27% decline from
its value in September.
Consumer Confidence Drops
-------------------------
10. In a monthly poll, the Chilean firm Adimark-GfK measures public
perceptions of the economy on an index. In their findings for
October, consumer confidence dipped significantly. On a scale of 1
- 100 (100 being the best), Chilean consumer confidence rang in at
34.5, its lowest point on the index since early 2002. Chilean
perceptions of the economic situation facing businesses also hit its
lowest point since mid-2003. Similarly, perceptions of future
unemployment were at a six-year low (meaning those surveyed are
expecting a marked increase in unemployment).
Mergers and Acquisitions Reported
---------------------------------
11. According to a report issued by Ernst and Young Consulting
Company, mergers and acquisitions in Chile totaled $5.1 billion from
January to October 2008 (with some 42 transactions). Transactions
in the mining, energy and transportation sectors represented 70% of
the total.
Chile Falls In "Paying Taxes" Ranking
-------------------------------------
12. Pricewaterhouse Coopers and the World Bank have published their
"Paying Taxes 2009" report, which analyzes national tax regimes and
the ease of paying taxes in each country. Chile fell from number 34
(last year) to 41 on the list (the U.S. was ranked number 46).
According to the report, the total tax rate for businesses in Chile
is approximately 26%, and they spend about 316 hours in a year
preparing taxes. The study is a significant component in the World
Bank's "Doing Business" report.
SIMONS