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Cablegate: Scenesetter for Codel Engel

VZCZCXYZ0002
PP RUEHWEB

DE RUEHSG #0971/01 3032017
ZNR UUUUU ZZH
P 292017Z OCT 08
FM AMEMBASSY SANTIAGO
TO RUEHC/SECSTATE WASHDC PRIORITY 3895
INFO RUEHAC/AMEMBASSY ASUNCION PRIORITY 3602
RUEHBO/AMEMBASSY BOGOTA PRIORITY 2150
RUEHBR/AMEMBASSY BRASILIA PRIORITY 0507
RUEHBU/AMEMBASSY BUENOS AIRES PRIORITY 1113
RUEHCV/AMEMBASSY CARACAS PRIORITY 1825
RUEHGE/AMEMBASSY GEORGETOWN PRIORITY 0080
RUEHLP/AMEMBASSY LA PAZ OCT 6009
RUEHPE/AMEMBASSY LIMA PRIORITY 5775
RUEHMN/AMEMBASSY MONTEVIDEO PRIORITY 4082
RUEHPO/AMEMBASSY PARAMARIBO PRIORITY 0032
RUEHQT/AMEMBASSY QUITO PRIORITY 1959

UNCLAS SANTIAGO 000971

SENSITIVE
SIPDIS

STATE FOR H--JULIE BULGRIN

E.O. 12958: N/A
TAGS: PGOV ECON PREL ENRG CI
SUBJECT: SCENESETTER FOR CODEL ENGEL

Summary
-------

1. (SBU) The Embassy looks forward to your visit to
Santiago, which will be seen as supporting our shared vision
of strong democratic institutions; market-based,
trade-oriented economies; and solid cooperation on issues
ranging from energy to education to defense. You will be
arriving in Chile just after nationwide municipal elections
set the stage for the 2009 presidential election season.
Several political parties are expected to decide on
candidates in the coming weeks. President Michelle Bachelet
is constitutionally precluded from seeking a second term and,
although personally popular and seen as performing well on
the international stage, has struggled with domestic
political problems, including a perceived failure to
implement an ambitious social agenda. Economically, Chile is
beginning to feel the effects of the global financial crisis,
although the country is entering this difficult period with a
strong economy and sound policies. Chile faces an energy
crisis which has slowed economic growth but spurred
significant U.S-Chile collaboration on energy policies. End
summary.

Concertacion: Still in Power after 18 Years
---------------------------------------------

2. (U) Chile's center-left coalition government, the Concert
of Parties for Democracy, or Concertacion, has been in power
continuously since the end of Pinochet's military
dictatorship in 1990. The election of current president
Michelle Bachelet in December 2005 was heralded as historic.
Bachelet is Chile's first female president, a single mother
and agnostic in a country with strong conservative Catholic
roots, and a survivor of torture during the Pinochet regime.
While Bachelet started her presidency with soaring popularity
and high expectations, a series of domestic problems--from
large student protests to the expensive failed reform of
public transportation in the capital--have kept her approval
ratings in the 40s for most of her term. Three cabinet
shuffles, an energy crisis, the whiff of corruption in
several ministries, increasing concerns over the disenchanted
indigenous Mapuche minority, and the loss of her working
majority in Congress, have all contributed to potential
"Concertacion fatigue" on the part of the electorate. On the
other hand, polls show that the Chilean public is
disillusioned with both of the political coalitions, not only
with the ruling group.

3. (U) Nationwide elections for municipal offices, which
were held on October 26, are widely seen as a bellwether of
the national political mood. They delivered mixed results.
The center-right coalition, Alianza, made significant gains
in the number of mayoral posts it holds, exceeding the number
held by Concertacion for the first time in two decades and
capturing the most important municipal position in the
country: mayor of Santiago. However, in the city council
races, which are seen as a more reliable indicator of party
strength, Alianza failed to significantly close the 10 point
lead Concertacion enjoyed after the last municipal election.

Chile on the International Stage
--------------------------------

4. (SBU) Despite domestic political missteps, Bachelet
performs well on the international stage and has contributed
to Chile's rising international stature. In September, she
convened a summit of UNASUR, the nascent South American
political union, which helped to defuse, at least
temporarily, the crisis in Bolivia and prevented the meeting
from degenerating into an anti-American forum. Chile serves
as UNASUR's president pro tempore; has the largest group of
Latin American peacekeepers in Haiti; and is generally
active, if behind the scenes, in regional multilateral fora.
Chile and the U.S. see eye to eye on many regional and
international issues, but Bachelet has made it clear that
Chile does not blindly follow where the U.S. leads. In
recent comments during the UN General Assembly, Bachelet said
that the U.S. and Chile were "political friends, but not
unconditional friends" and criticized the U.S. for its role
in precipitating the financial crisis.

5. (SBU) There are some tensions between Chile and its
neighbors Peru and Bolivia over territorial disputes stemming
from the 19th century War of the Pacific. In January, Peru
submitted a case to the International Court of Justice in the
Hague asking for a decision on a new maritime border with
Chile. For its part, Bolivia would like to regain direct
access to the sea. Nonetheless, all parties are committed to
a peaceful resolution of these issues and Chile has said that
it is committed to strengthening relations with both
countries. Relations between Chile and Venezuela are often
frosty, with Chileans objecting to Chavez's grandstanding and
arrogance --particularly when he tried to take credit for
Bachelet's September meeting on Bolivia or when his outbursts
stole the limelight at the November 2007 Ibero-American
Summit in Santiago.

All Eyes on the Presidential Race
---------------------------------

6. (U) With the municipal elections over, all eyes are on
Chile's presidential election set for December 2009.
Sebastian Pinera of the opposition National Renewal party
leads the polls, with nearly 60% of Chileans predicting that
he will be the next president, according to a recent survey.
While this certainly reflects discontent with the current
government, these high ratings likely also reflect the fact
that parties belonging to the progressive Concertacion
coalition and the other conservative party have yet to
coalesce around a candidate. The other member of the Alianza
coalition, the Democratic Union (UDI), may put forward
Senator Evelyn Matthei, Senator Hernan Larrain, or former
Santiago mayor and two time presidential contender Joaquin
Lavin as its candidate. A plethora of Concertacion
candidates have been vying for their coalition's nomination,
including Soledad Alvear, Senator and President of the
Christian Democrat Party; Jose Miguel Insulza, the
Secretary-General of the Organization of American States and
a member of the Socialist Party; former president Ricardo
Lagos, a member of both the Socialist Party and the Party for
Democracy; and former president Eduardo Frei, a member of the
Christian Democrat party.

Chile's Strong Economy Put to Test by Financial Crisis
--------------------------------------------- ---------

7. (U) Chile is fortunate to be in a strong economic position
as the global financial crisis unfolds. The country
maintains a budget surplus; has relatively low debt; and has
over USD $21 billion in offshore sovereign wealth funds, much
of it from record copper revenues. Poverty has dropped from
40% of the national population in 1990 to 14% in 2006.
Nonetheless, the consensus among Chilean economists is that a
global economic downturn is inevitable and will have a
significant effect on Chile. Economic growth will likely
slow to 3-4% or less in 2009; trade is likely to decline; and
domestic economic activity will decrease, creating higher
unemployment. Despite high worldwide commodity prices,
economic growth in 2007 was limited to 5.1% and will likely
decrease to 3-4% in 2008.

8. (U) A dramatic decline in copper prices, a potential
economic slow-down, and an accompanying rise in unemployment
top the list of Chilean economic concerns. Copper accounted
for 64% of Chile's exports in 2007, and the price has fallen
50% in the last 100 days (although experts predict prices
will recover in 2009). The financial crisis has affected
liquidity in the Chilean banking system, making it harder for
some companies to maintain access to capital. There are
initial signs of lower demand for Chilean exports. These
factors have caused many companies to reduce investment
plans, cut costs, and begin laying off workers.
Unemployment, which was 7.1% in 2007, is expected to be
between 7.8% and 8.0% in 2008, and some predict it may rise
by an additional 0.5% to 2% in 2009. Other economic worries
include recent high inflation (9.2% in September), high
levels of consumer indebtedness, and low business confidence.

Chile: A Trade Liberalization Leader
-------------------------------------

9. (U) Chile has been a global leader in trade
liberalization for the past 20 years. It boasts trade
agreements with 60 countries. A new FTA with Australia will
come into effect in January 2009, and the country is
currently negotiating FTAs with Thailand, Malaysia, and
Turkey. Chile supports an FTA of the Asia-Pacific. As a
member of the P-4 (Trans-Pacific Partnership Agreement),
Chile strongly supported USTR Susan Schwab's September
announcement that the U.S. will explore joining this
arrangement in 2009.

The U.S. and Chile: Strong and Increasing Trade
--------------------------------------------- ---

10. (U) The U.S. is Chile's largest trading partner, and
Chile is our fifth largest trading partner in Latin America.
Overall bilateral trade has grown by 170% during the four
years that the U.S.-Chile FTA has been in place, reaching USD
17 billion in 2007. Chile's top three exports to the U.S. in
2007 were copper (39%), fruit (11%), and seafood (11%). The
top three U.S. exports to Chile were non-crude oil (24%),
machinery (21%), and cars (10%). Chilean exports to the U.S.
dropped 5.5% in the first 9 months of 2008. In September,
Chile ran its first trade deficit in six years, with imports
rising 48% compared to September 2007, whereas exports only
increased 1%. Nevertheless, Chile is still forecast to
maintain a total trade surplus of USD $16.3 billion in 2008.

11. (SBU) Despite this success, some economic sticking
points between the U.S. and Chile remain. Chile is on the
Special 301 Priority Watchlist for its poor performance in
protecting intellectual property, including copyrights,
trademarks, pharmaceutical patents, and proprietary clinical
trials. In October, the Chilean Senate took a positive step
by passing the Patent Cooperation Treaty. However, Chile
still has a long way to go in its IPR protections, including
approving a draft copyright law (now before Congress) and
improving enforcement mechanisms. For its part, Chile is
concerned about negative U.S. press reports related to
sanitary conditions in the salmon industry (the second
leading export sector, after copper). Negotiations over the
timing of Chilean grape exports to the U.S. seem to be headed
toward a resolution acceptable to producers in both countries.

Facing a Serious Energy Crisis
------------------------------

12. (SBU) Chile continues to face a serious energy crisis
which, at least in the shorter-term, is being addressed by
industry making adjustments to accommodate fluctuating
hydroelectric generation and reduced natural gas supplies.
Uncertainty about how Chile will meet the projected 12,000 MW
it needs over the next 10 years, however, is having a
negative impact on the country's economic growth and
investment prospects. The country's electricity matrix is
dominated by hydropower and thermal plants with limited spare
capacity. However, last year record low water levels forced
hydropower plants to operate at minimum capacity and
Argentina has reduced exports of natural gas to the bare
minimum needed for residential use, forcing the entire
thermal infrastructure to rely more heavily on expensive
diesel and to consider increasing use of coal. Chile is
attempting to increase its hydroelectric generation and
building liquid natural gas (LNG) terminals, but natural gas
supplies will still be subject to fluctuations in price and
availability (and growing demand from China), as well as the
need to increase capacity to transport it to the center of
the country from terminals. Moreover, due to resistance from
environmentalists and growing public concerns, the future of
a large hydroelectric project in Patagonia is very much in
question. Although President Bachelet has promised not to
introduce nuclear power during her administration, a national
debate over nuclear generated power is very much underway.
The National Energy Commission is currently studying the
issue and several presidential candidates are pro-nuclear.

13. (SBU) The GOC clearly recognizes the need to reduce
energy consumption, increase energy efficiency, and explore
the full range of energy sources, including renewables and
nuclear. The situation is complicated by the fact that
although Chile has a Minister of Energy, Marcelo Tokman,
responsibility for energy policy is currently distributed
among several government agencies and the formation of a
Ministry of Energy is still under discussion and is unlikely
to be resolved until next year. President Bachelet, and
nearly every minister with whom the Ambassador has met since
his arrival, have emphasized that Chile welcomes increased
bilateral energy cooperation with the U.S. across the board.
As the GOC struggles to develop a coherent energy policy, we
are working with U.S. agencies and the Chilean Ministry of
Energy to increase bilateral cooperation in four target
areas: renewable energy; nuclear power for electricity
generation; energy policy formation; and energy efficiency.
SIMONS

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